0000763907us-gaap:ReclassificationOutOfAccumulatedOtherComprehensiveIncomeMemberfunc:AccumulatedNetUnrealizedInvestmentGainLossHeldToMaturityMember2020-07-012020-09-30

Table of Contents

UNITED STATES

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

FORM 10-Q

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

        For quarterly period ended September 30, 20202021

£    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'sRegistrant’s telephone number, including area code)

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

Title of each class

Trading Symbols

Trading Symbols

Name of each exchange on which registered

Common Stock

FUNC

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 R  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 R   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 

Large AcceleratedNon-Accelerated filer £

Accelerated Filer R

Non Accelerated filer £

Smaller Reporting Company R

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 R

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 6,988,9986,177,941 shares of common stock, par value $.01 per share, as of October 31, 20202021.

.


INDEX TO QUARTERLY REPORT

FIRST UNITED CORPORATION


2


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

First United Corporation and Subsidiaries

FIRST UNITED CORPORATION

Consolidated Statement of Financial Condition

(In thousands, except per share data)data - Unaudited)

    

September 30,
2021

    

December 31,
2020

Assets

Cash and due from banks

$

129,062

$

146,673

Interest bearing deposits in banks

5,876

2,759

Cash and cash equivalents

134,938

149,432

Investment securities – available for sale (at fair value)

235,564

226,885

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

61,979

68,263

Restricted investment in bank stock, at cost

1,029

4,468

Loans held for sale

348

3,546

Loans

1,161,868

1,167,812

Unearned fees

(1,171)

(1,730)

Allowance for loan losses

(16,906)

(16,486)

Net loans

1,143,791

1,149,596

Premises and equipment, net

35,213

36,863

Goodwill

11,004

11,004

Bank owned life insurance

44,851

43,974

Deferred tax assets

7,946

7,972

Other real estate owned, net

6,663

9,386

Operating lease asset

2,331

2,408

Accrued interest receivable and other assets

22,899

19,617

Total Assets

$

1,708,556

$

1,733,414

Liabilities and Shareholders’ Equity

Liabilities:

Non-interest bearing deposits

$

491,441

$

420,427

Interest bearing deposits

953,053

1,001,939

Total deposits

1,444,494

1,422,366

Short-term borrowings

72,396

49,160

Long-term borrowings

30,929

100,929

Operating lease liability

2,854

2,958

Accrued interest payable and other liabilities

23,103

26,044

Dividends payable

993

910

Total Liabilities

1,574,769

1,602,367

Shareholders’ Equity:

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

66

70

Surplus

23,522

30,149

Retained earnings

138,931

129,691

Accumulated other comprehensive loss

(28,732)

(28,863)

Total Shareholders’ Equity

133,787

131,047

Total Liabilities and Shareholders’ Equity

$

1,708,556

$

1,733,414

September 30,
2020

December 31,
2019

(Unaudited)

Assets

Cash and due from banks

$

152,460

$

48,512

Interest bearing deposits in banks

3,146

1,467

Cash and cash equivalents

155,606

49,979

Investment securities – available for sale (at fair value)

153,161

131,305

Investment securities – held to maturity (fair value $76,370 at September 30, 2020 and $100,656 at December 31, 2019)

69,221

93,979

Restricted investment in bank stock, at cost

4,468

4,415

Loans held for sale (at fair value)

5,211

1,749

Loans

1,192,345

1,050,369

Unearned fees

(2,900)

(687)

Allowance for loan losses

(16,189)

(12,537)

Net loans

1,173,256

1,037,145

Premises and equipment, net

37,418

38,710

Goodwill

11,004

11,004

Bank owned life insurance

43,682

43,449

Deferred tax assets

7,404

7,441

Other real estate owned, net

3,787

4,127

Operating lease asset

2,445

2,661

Accrued interest receivable and other assets

19,244

16,063

Total Assets

$

1,685,907

$

1,442,027

Liabilities and Shareholders’ Equity

Liabilities:

Non-interest bearing deposits

$

419,935

$

294,649

Interest bearing deposits

957,349

847,382

Total deposits

1,377,284

1,142,031

Short-term borrowings

52,589

48,728

Long-term borrowings

100,929

100,929

Operating lease liability

3,011

3,239

Accrued interest payable and other liabilities

20,947

20,235

Dividends payable

910

925

Total Liabilities

1,555,670

1,316,087

Shareholders’ Equity:

Common Stock – par value $0.01 per share;
Authorized 25,000,000 shares; issued and outstanding
6,988,998 shares at September 30, 2020 and 7,110,022 at December 31, 2019

70

71

Surplus

29,975

32,359

Retained earnings

126,043

119,481

Accumulated other comprehensive loss

(25,851)

(25,971)

Total Shareholders’ Equity

130,237

125,940

Total Liabilities and Shareholders’ Equity

$

1,685,907

$

1,442,027

See accompanying notes to the consolidated financial statements

3



First United Corporation and Subsidiaries

FIRST UNITED CORPORATION

Consolidated Statement of Operations

(In thousands, except per share data)

Nine Months Ended

September 30,

2020

2019

(Unaudited)

Interest income

Interest and fees on loans

$

39,192

$

37,215

Interest on investment securities

Taxable

3,612

4,333

Exempt from federal income tax

809

771

Total investment income

4,421

5,104

Other

360

764

Total interest income

43,973

43,083

Interest expense

Interest on deposits

4,997

5,800

Interest on short-term borrowings

68

158

Interest on long-term borrowings

2,463

2,656

Total interest expense

7,528

8,614

Net interest income

36,445

34,469

Provision for loan losses

4,981

669

Net interest income after provision for loan losses

31,464

33,800

Other operating income

Net gains

2,011

185

Service charges on deposit accounts

1,439

1,652

Other service charges

517

607

Trust department

5,355

5,345

Debit card income

2,052

1,955

Bank owned life insurance

961

1,970

Brokerage commissions

713

646

Other

374

369

Total other income

11,411

12,544

Total other operating income

13,422

12,729

Other operating expenses

Salaries and employee benefits

16,244

18,644

FDIC premiums

404

337

Equipment

2,871

2,775

Occupancy

2,200

2,112

Data processing

3,155

2,979

Marketing

405

274

Professional services

2,506

776

Contract labor

480

502

Line rentals

654

641

Other real estate owned

3

1,266

Investor relations

1,160

146

Other

2,890

3,225

Total other operating expenses

32,972

33,677

Income before income tax expense

11,914

12,852

Provision for income tax expense

2,629

2,605

Net Income

$

9,285

$

10,247

Basic net income per share

$

1.32

$

1.44

Diluted net income per share

$

1.32

$

1.44

Weighted average number of basic shares outstanding

7,008

7,098

Weighted average number of diluted shares outstanding

7,019

7,098

Dividends declared per common share

$

0.39

$

0.31

Nine Months Ended

September 30,

    

2021

    

2020

(Unaudited)

Interest income

Interest and fees on loans

$

39,496

$

39,192

Interest on investment securities

Taxable

2,864

3,612

Exempt from federal income tax

809

809

Total investment income

3,673

4,421

Other

239

360

Total interest income

43,408

43,973

Interest expense

Interest on deposits

2,877

4,997

Interest on short-term borrowings

67

68

Interest on long-term borrowings

1,840

2,463

Total interest expense

4,784

7,528

Net interest income

38,624

36,445

Provision for loan losses

68

4,981

Net interest income after provision for loan losses

38,556

31,464

Other operating income

Net gains on investments, available for sale

154

622

Net gains on investments, held to maturity

(54)

60

Gains on sale of residential mortgage loans

996

1,480

Gains/(losses) on disposal of fixed assets

16

(151)

Net gains

1,112

2,011

Other Income

Service charges on deposit accounts

1,292

1,439

Other service charges

664

517

Trust department

6,441

5,355

Debit card income

2,623

2,052

Bank owned life insurance

877

961

Brokerage commissions

854

713

Other

835

374

Total other income

13,586

11,411

Total other operating income

14,698

13,422

Other operating expenses

Salaries and employee benefits

16,214

16,244

FDIC premiums

575

404

Equipment

2,837

2,871

Occupancy

2,102

2,200

Data processing

2,420

3,155

Marketing

408

405

Professional services

3,276

2,506

Contract labor

486

480

Line rentals

606

654

Other real estate owned

(460)

3

Investor relations

546

1,160

Settlement expense

3,300

FHLB prepayment penalty

2,368

Other

2,308

2,890

Total other operating expenses

36,986

32,972

Income before income tax expense

16,268

11,914

Provision for income tax expense

4,047

2,629

Net Income

$

12,221

$

9,285

Basic net income per share

$

1.81

$

1.32

Diluted net income per share

$

1.81

$

1.32

Weighted average number of basic shares outstanding

6,741

7,008

Weighted average number of diluted shares outstanding

6,746

7,019

Dividends declared per common share

$

0.45

$

0.39

See accompanying notes to the consolidated financial statements


4


FIRST UNITED CORPORATIONFirst United Corporation and Subsidiaries

Consolidated Statement of Operations

(In thousands, except per share data)

Three Months Ended

September 30,

    

2021

    

2020

(Unaudited)

Interest income

Interest and fees on loans

$

13,667

$

12,940

Interest on investment securities

Taxable

880

960

Exempt from federal income tax

266

276

Total investment income

1,146

1,236

Other

97

77

Total interest income

14,910

14,253

Interest expense

Interest on deposits

732

1,515

Interest on short-term borrowings

17

19

Interest on long-term borrowings

536

817

Total interest expense

1,285

2,351

Net interest income

13,625

11,902

Provision for loan losses

(597)

160

Net interest income after provision for loan losses

14,222

11,742

Other operating income

Net gains on investments, available for sale

575

Net gains on investments, held to maturity

(54)

Gains on sale of residential mortgage loans

136

734

Gains on disposal of fixed assets

(133)

Net gains

82

1,176

Other Income

Service charges on deposit accounts

475

447

Other service charges

232

195

Trust department

2,166

1,871

Debit card income

900

738

Bank owned life insurance

298

373

Brokerage commissions

229

234

Other

223

120

Total other income

4,523

3,978

Total other operating income

4,605

5,154

Other operating expenses

Salaries and employee benefits

5,719

5,378

FDIC premiums

209

201

Equipment

1,032

978

Occupancy

684

707

Data processing

819

1,130

Marketing

129

122

Professional services

615

602

Contract labor

153

180

Line rentals

123

216

Other real estate owned

150

6

Investor relations

116

54

FHLB prepayment penalty

2,368

Other

910

966

Total other operating expenses

13,027

10,540

Income before income tax expense

5,800

6,356

Provision for income tax expense

1,412

1,396

Net Income

$

4,388

$

4,960

Basic net income per common share

$

0.66

$

0.70

Diluted net income per common share

$

0.66

$

0.70

Weighted average number of basic shares outstanding

6,617

6,988

Weighted average number of diluted shares outstanding

6,624

6,993

Dividends declared per common share

$

0.15

$

0.13

Three Months Ended

September 30,

2020

2019

(Unaudited)

Interest income

Interest and fees on loans

$

12,940

$

12,529

Interest on investment securities

Taxable

960

1,416

Exempt from federal income tax

276

249

Total investment income

1,236

1,665

Other

77

406

Total interest income

14,253

14,600

Interest expense

Interest on deposits

1,515

2,064

Interest on short-term borrowings

19

27

Interest on long-term borrowings

817

913

Total interest expense

2,351

3,004

Net interest income

11,902

11,596

Provision for loan losses

160

(13)

Net interest income after provision for loan losses

11,742

11,609

Other operating income

Net gains

1,176

89

Service charges on deposit accounts

447

578

Other service charges

195

225

Trust department

1,871

1,798

Debit card income

738

679

Bank owned life insurance

373

1,379

Brokerage commissions

234

205

Other

120

115

Total other income

3,978

4,979

Total other operating income

5,154

5,068

Other operating expenses

Salaries and employee benefits

5,378

6,280

FDIC premiums

201

43

Equipment

978

956

Occupancy

707

694

Data processing

1,130

984

Marketing

122

110

Professional services

602

254

Contract labor

180

171

Line rentals

216

226

Other real estate owned

6

337

Investor relations

54

36

Other

966

1,155

Total other operating expenses

10,540

11,246

Income before income tax expense

6,356

5,431

Provision for income tax expense

1,396

938

Net Income

$

4,960

$

4,493

Basic net income per common share

$

0.70

$

0.63

Diluted net income per common share

$

0.70

$

0.63

Weighted average number of basic shares outstanding

6,988

7,107

Weighted average number of diluted shares outstanding

6,993

7,107

Dividends declared per common share

$

0.13

$

0.13

See accompanying notes to the consolidated financial statements

5


FIRST UNITED CORPORATIONFirst United Corporation and Subsidiaries

Consolidated Statement of Comprehensive Income

(In thousands)

Nine Months Ended

September 30,

2020

2019

Comprehensive Income (in thousands)

(Unaudited)

Net Income

$

9,285

$

10,247

Other comprehensive income, net of tax and reclassification adjustments:

Net unrealized losses on investments with OTTI

(1,025)

(1,131)

Net unrealized gains on all other AFS securities

1,336

2,884

Net unrealized gains on HTM securities

548

178

Net unrealized losses on cash flow hedges

(972)

(1,040)

Net unrealized gains on pension

131

2,957

Net unrealized gains on SERP

102

62

Other comprehensive income, net of tax

120

3,910

Comprehensive income

$

9,405

$

14,157

Nine Months Ended

September 30,

2021

2020

Comprehensive Income

(Unaudited)

Net Income

$

12,221

$

9,285

Other comprehensive income, net of tax and reclassification adjustments:

Net unrealized gains/(losses) on investments with OTTI

2,286

(1,025)

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

(3,799)

1,336

Net unrealized gains on HTM securities

110

548

Net unrealized gains/(losses) on cash flow hedges

450

(972)

Net unrealized gains on pension

919

131

Net unrealized gains on SERP

165

102

Other comprehensive income, net of tax

131

120

Comprehensive income

$

12,352

$

9,405

Three Months Ended

September 30,

    

2021

    

2020

Comprehensive Income (in thousands)

(Unaudited)

Net Income

$

4,388

$

4,960

Other comprehensive income, net of tax and reclassification adjustments:

Net unrealized gains on investments with OTTI

513

481

Net unrealized losses on all other AFS securities

(518)

(656)

Net unrealized gains on HTM securities

31

54

Net unrealized gains on cash flow hedges

79

72

Net unrealized (losses)/gains on pension

(424)

1,647

Net unrealized gains on SERP

55

34

Other comprehensive (loss)/income, net of tax

(264)

1,632

Comprehensive income

$

4,124

$

6,592

Three Months Ended

September 30,

2020

2019

Comprehensive Income (in thousands)

(Unaudited)

Net Income

$

4,960

$

4,493

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

Net unrealized gains/(losses) on investments with OTTI

481

(857)

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

(656)

402

Net unrealized gains on HTM securities

54

60

Net unrealized gains/(losses) on cash flow hedges

72

(239)

Net unrealized gains on pension

1,647

121

Net unrealized gains on SERP

34

20

Other comprehensive income/(loss), net of tax

1,632

(493)

Comprehensive income

$

6,592

$

4,000

See accompanying notes to the consolidated financial statements


6


FIRST UNITED CORPORATIONFirst United Corporation and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity

(In thousands, except per share data)

Common
Stock

Surplus

Retained
Earnings

Accumulated
Other
Comprehensive
Loss

Total
Shareholders'
Equity

Balance at January 1, 2020

$

71

$

32,359

$

119,481

$

(25,971)

$

125,940

Net income

1,755

1,755

Other comprehensive loss

(5,632)

(5,632)

Stock based compensation

98

98

Common stock issued - 2,167 shares

52

52

Stock repurchase - 145,219 shares

(1)

(2,753)

(2,754)

Common stock dividend declared -
$0.13 per share

(910)

(910)

Balance at March 31, 2020

$

70

$

29,756

$

120,326

$

(31,603)

$

118,549

Net income

2,570

2,570

Other comprehensive income

4,120

4,120

Stock based compensation

71

71

Common stock issued - 3,465 shares

47

47

Common stock dividend declared -
$0.13 per share

(904)

(904)

Balance at June 30, 2020

$

70

$

29,874

$

121,992

$

(27,483)

$

124,453

Net income

4,960

4,960

Other comprehensive income

1,632

1,632

Stock based compensation

52

52

Common stock issued - 4,245 shares

49

49

Common stock dividend declared -
$0.13 per share

(909)

(909)

Balance at September 30, 2020

$

70

$

29,975

$

126,043

$

(25,851)

$

130,237

    

Common
Stock

    

Surplus

    

Retained
Earnings

    

Accumulated
Other
Comprehensive
Loss

    

Total
Shareholders'
Equity

Balance at January 1, 2021

$

70

$

30,149

$

129,691

$

(28,863)

$

131,047

Net income

3,430

3,430

Other comprehensive loss

(4,335)

(4,335)

Stock based compensation

50

50

Common stock issued - 2,956 shares

46

46

Common stock dividend declared - $0.15 per share

(1,049)

(1,049)

Balance at March 31, 2021

$

70

$

30,245

$

132,072

$

(33,198)

$

129,189

Net income

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

See accompanying notes to the consolidated financial statements


7


First United Corporation and Subsidiaries

FIRST UNITED CORPORATION

Consolidated Statement of Changes in Shareholders’ Equity

(In thousands, except per share data)

    

Common
Stock

    

Surplus

    

Retained
Earnings

    

Accumulated
Other
Comprehensive
Loss

    

Total
Shareholders'
Equity

Balance at January 1, 2020

$

71

$

32,359

$

119,481

$

(25,971)

$

125,940

Net income

1,755

1,755

Other comprehensive loss

(5,632)

(5,632)

Stock based compensation

98

98

Common stock issued - 2,167 shares

52

52

Stock repurchase - 145,291 shares

(1)

(2,753)

(2,754)

Common stock dividend declared - $0.13 per share

(910)

(910)

Balance at March 31, 2020

$

70

$

29,756

$

120,326

$

(31,603)

$

118,549

Net income

2,570

2,570

Other comprehensive income

4,120

4,120

Stock based compensation

71

71

Common stock issued - 3,465 shares

47

47

Common stock dividend declared - $0.13 per share

(904)

(904)

Balance at June 30, 2020

$

70

$

29,874

$

121,992

$

(27,483)

$

124,453

Net income

4,960

4,960

Other comprehensive income

1,632

1,632

Stock based compensation

52

52

Common stock issued - 4,245 shares

49

49

Common stock dividend declared -
$0.13 per share

(909)

(909)

Balance at September 30, 2020

$

70

$

29,975

$

126,043

$

(25,851)

$

130,237

Common
Stock

Surplus

Retained
Earnings

Accumulated
Other
Comprehensive
Loss

Total
Shareholders'
Equity

Balance at January 1, 2019

$

71

$

31,921

$

109,477

$

(24,403)

$

117,066

Net income

3,151

3,151

Other comprehensive income

2,715

2,715

Stock based compensation

67

67

Common stock issued - 2,355 shares

39

39

Common stock dividend declared -
$0.09 per share

(639)

(639)

Balance at March 31, 2019

$

71

$

32,027

$

111,989

$

(21,688)

$

122,399

Net income

2,602

2,602

Other comprehensive income

1,688

1,688

Stock based compensation

67

67

Common stock issued - 2,147 shares

39

39

Common stock dividend declared -
$0.09 per share

(640)

(640)

Balance at June 30, 2019

$

71

$

32,133

$

113,951

$

(20,000)

$

126,155

Net income

4,493

4,493

Other comprehensive loss

(493)

(493)

Stock based compensation

66

66

Common stock issued - 1,891 shares

38

38

Common stock dividend declared -
$0.13 per share

(920)

(920)

Balance at September 30, 2019

$

71

$

32,237

$

117,524

$

(20,493)

$

129,339

See accompanying notes to the consolidated financial statements


8


FIRST UNITED CORPORATIONFirst United Corporation and Subsidiaries

Consolidated Statement of Cash Flows

(In thousands)

Nine Months Ended

September 30,

2020

2019

(Unaudited)

Operating activities

Net income

$

9,285 

$

10,247 

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

Provision for loan losses

4,981 

669 

Depreciation

2,463 

2,318 

Stock compensation

221 

200 

Gains on sales of other real estate owned

(93)

(62)

Write-downs of other real estate owned

102 

1,140 

Originations of loans held for sale

(54,039)

(11,006)

Proceeds from sale of loans held for sale

52,057 

11,073 

Gains from sale of loans held for sale

(1,480)

(87)

Losses on disposal of fixed assets

151 

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

212 

(5)

Net amortization of investment securities discounts and premiums- HTM

225 

53 

Gains on sales/calls of investment securities – AFS

(622)

(1)

Gain on calls of investment securities – HTM

(60)

Bank owned life insurance

(961)

(1,970)

Amortization of deferred loan fees

(1,908)

(611)

Amortization of operating lease asset

216 

206 

Increase in accrued interest receivable and other assets

(2,624)

(6,652)

Deferred tax expense

1,481 

Operating lease liability

(228)

(213)

Decrease in accrued interest payable and other liabilities

(96)

(691)

Net cash provided by operating activities

7,802

6,093 

Investing activities

Proceeds from maturities/calls of investment securities - AFS

40,572 

7,677 

Proceeds from maturities/calls of investment securities - HTM

43,226 

5,560 

Proceeds from sales of investment securities - AFS

30,831 

12,046 

Purchases of investment securities - AFS

(92,440)

(14,744)

Purchases of investment securities - HTM

(18,633)

(8,207)

Proceeds from sales of other real estate owned

514 

1,415 

Proceeds from BOLI death benefit

728 

2,125 

Net (increase)/decrease in restricted stock

(53)

979 

Net (increase)/decrease in loans

(139,367)

10,700 

Purchases of premises and equipment

(1,322)

(2,830)

Net cash (used in)/provided by investing activities

(135,944)

14,721 

Financing activities

Net increase in deposits

235,253 

69,260 

Issuance of common stock

148 

116 

Cash dividends on common stock

(2,739)

(2,199)

Net increase/(decrease) in short-term borrowings

3,861 

(27,362)

Stock repurchase

(2,754)

Net cash provided by financing activities

233,769

39,815 

Increase in cash and cash equivalents

105,627 

60,629 

Cash and cash equivalents at beginning of the year

49,979 

23,541 

Cash and cash equivalents at end of period

$

155,606 

$

84,170 

Supplemental information

Interest paid

$

7,610 

$

8,550 

Taxes paid

$

625 

$

891 

Non-cash investing activities:

Transfers from loans to other real estate owned

$

183 

$

616 

Recognition of operating lease right-of-use assets

$

$

2,730 

Recognition of operating lease liabilities

$

$

3,317 

Nine Months Ended

September 30,

    

2021

    

2020

(Unaudited)

Operating activities

Net income

$

12,221

$

9,285

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

Provision for loan losses

68

4,981

Depreciation

2,453

2,463

Stock based compensation

445

221

Gains on sales of other real estate owned

(594)

(93)

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

(160)

102

Originations of loans held for sale

(23,618)

(54,039)

Proceeds from sale of loans held for sale

27,758

52,057

Gains from sale of loans held for sale

(942)

(1,480)

(Gains)/losses on disposal of fixed assets

(16)

151

Net amortization of investment securities discounts and premiums- AFS

790

212

Net amortization of investment securities discounts and premiums- HTM

276

225

Gains on sales/calls of investment securities – AFS

(154)

(622)

Losses/(gains) on investment securities – HTM

54

(60)

Earnings on Bank owned life insurance

(877)

(961)

Amortization of deferred loan fees

(3,228)

(1,908)

Operating lease asset

77

216

Increase in accrued interest receivable and other assets

(1,638)

(2,624)

Deferred tax (benefit)/expense

(48)

Operating lease liability

(104)

(228)

Increase in accrued interest payable and other liabilities

(2,326)

(96)

Net cash provided by operating activities

10,437

7,802

Investing activities

Proceeds from maturities/calls of investment securities - AFS

40,045

40,572

Proceeds from maturities/calls of investment securities - HTM

12,286

43,226

Proceeds from sales of investment securities - AFS

13,687

30,831

Purchases of investment securities - AFS

(65,101)

(92,440)

Purchases of investment securities - HTM

(6,332)

(18,633)

Proceeds from sales of other real estate owned

3,477

514

Proceeds from disposal of fixed assets

39

728

Net decrease/(increase) in restricted stock

3,439

(53)

Net decrease/(increase) in loans

67,908

(139,367)

Purchases of loans

(58,943)

Purchases of premises and equipment

(826)

(1,322)

Net cash provided by/(used in) investing activities

9,679

(135,944)

Financing activities

Net increase in deposits

22,128

235,253

Issuance of common stock

103

148

Cash dividends on common stock

(2,898)

(2,739)

Net increase in short-term borrowings

23,236

3,861

Stock repurchase

(7,179)

(2,754)

Net decrease in long-term borrowings

(70,000)

Net cash (used in)/provided by financing activities

(34,610)

233,769

(Decrease)/increase in cash and cash equivalents

(14,494)

105,627

Cash and cash equivalents at beginning of the year

149,432

49,979

Cash and cash equivalents at end of period

$

134,938

$

155,606

Supplemental information

Interest paid

$

5,033

$

7,610

Taxes paid

$

4,637

$

625

Non-cash investing activities:

Transfers from loans to other real estate owned

$

$

183

See accompanying notes to the consolidated financial statements

9


FIRST UNITED CORPORATION

NoteS to Consolidated Financial StatementsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 – Basis of Presentation

The accompanying unaudited consolidated financial statements of First United Corporation and its consolidated subsidiaries, including First United Bank & Trust (the “Bank”), have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, as required by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 270, Interim Reporting, and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all the information and footnotes required for annual financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation, consisting of normal recurring items, have been included. Certain prior period balances have been reclassified to conform to the current period presentation. Operating results for the ninethree and threenine month periods ended September 30, 20202021 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, 2019.2020.

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, 20202021 for items that should potentially be recognized or disclosed in these financial statements.

Note 2 – Significant EventCOVID-19

On March 11, 2020,The COVID-19 pandemic has adversely impacted our business and financial results and that of many of our customers, and the World Health Organization declared a pandemic as a resultultimate impact will depend on future developments, which are highly uncertain, cannot be predicted, and are largely outside of our control, including the global spread of the coronavirus, commonly referred to as COVID-19. The spread of the disease quickly accelerated in the United Statesscope and to date, all 50 states have reported cases. The U.S. and state governments reacted to the pandemic by issuing shelter at home orders and requiring that non-essential businesses be closed to prevent spread of the virus. The health crisis quickly turned into a financial crisis resulting in guidance and mandates regarding foreclosures and repossessions and accounting and regulatory changes designed to encourage banks to work with customers suffering detrimental financial impact.

As a resultduration of the pandemic effectingand actions taken by governmental authorities in response to the statespandemic. The COVID-19 pandemic has created extensive disruptions to the global and localU.S. economies and to the lives of individuals throughout the world. Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including closures of businesses and schools, fiscal and monetary stimulus, and legislation designed to deliver financial aid and other relief. While the scope, duration, and full effects of COVID-19 are not fully known, the pandemic and the efforts to contain it have disrupted global economic activity, adversely affected the functioning of financial markets, in which it operates,impacted market interest rates, increased economic and market uncertainty, and disrupted trade and supply chains.

Congress, the Corporation successfully implemented its Business Continuity Plan withPresident, and the goalBoard of protectingGovernors of the health, safety and financial well-being of its associates and customers. As part of its planFederal Reserve System (the “Federal Reserve”) have taken several actions designed to protectcushion the financial well-being of its customers,economic fallout. Most notably, the Corporation chose to participate and educate its customers on the government sponsored plans established to provide financial assistance to businesses.

The U.S. Government’s Coronavirus Aid, Relief and Economic Security Act (“(the “CARES Act”), a $2 trillion legislative package, was signed into law at the end of March 2020. The goal of the CARES Act”Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors, such as by providing funds for loans under the Paycheck Protection Program (the “PPP”) establishedadministered by the Small Business Administration (“SBA”(the “SBA”) Paycheck Protection Program (“PPP”) which provides small businesses with resources to maintain payroll, hire back employees who may have been laid off, and to cover applicable overhead expenses. We continued to provide access to the PPP and process applications until the window closed on August 8, 2020. These loans are 100% guaranteed by the SBA, have up to a two year or five year maturity, provide for a nine month deferral period, and have an interest rate of 1%. These loans may be forgiven, in whole or in part, by the SBA if the borrower meets certain conditions, including by using at least 60% of the loan proceeds for payroll costs. The SBA also established processing fees from 1% to 5%, depending on the loan amount. We anticipate receiving approximately $3.5 million in deferred loan fees.

In April 2020, the Bank established eligibility to participate in the Paycheck Protection Program Liquidity Facility (“PPPLF”) which was established by Congress and administered by the Federal Reserve Bank. This facility uses the SBA guaranteed PPP loans as collateral, offering 100% collateral coverage with no recourse to the Bank. The majority of the PPP loan disbursements have been to internal, non-interest-bearing accounts awaiting use by borrowers. During the second quarter of 2020, we did not access this facility. We will continue to monitor our liquidity position and determine appropriate timing to utilize these funds.

During the second quarter of 2020, the Bank was approved to participate in the Main Street Lending Program established by the Federal Reserve. This program supports lending to small and medium-sized businesses and non-profit organizations that were in sound financial condition before the onset of the COVID-19 pandemic.

The CARES Act, enacted on March 27, 2020, provides that, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 pandemic declared by the President of the United States under the National Emergencies Act terminates, the Company may elect to suspend GAAP for loan modifications related to the pandemic that would otherwise be categorized as troubled debt restructurings and suspend any

10


determination of a loan modified as a result of the effects of the pandemic as being a troubled debt restructuring, including impairment for accounting purposes.

In response to the COVID-19 pandemic, the Company developed a set of guidelines to provide relief to qualified commercial, mortgage and consumer loans customers. These guidelines, as permitted by Section 4013 of the CARES Act, provide“Temporary Relief from Troubled Debt Restructurings,” provides banks the option to temporarily suspend certain requirements under U.S. GAAP related to trouble debt restructurings (“TDRs”) for defermenta limited period of time to account for the effects of COVID-19. Additionally, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”) was enacted on December 27, 2020 and provided for a second round of PPP loans. The PPP Extension Act of 2021, which was enacted on March 30, 2021, extended the PPP application deadline to May 31, 2021 and provided the SBA with additional time to process applications through June 30, 2021.  Also, the Consolidated Appropriations Act (the “CAA”) passed on December 27, 2020, which, among other things, extended the provisions of Section 4013 of the CARES Act to January 1, 2022. The Federal Reserve’s actions have included cutting the federal funds rate 150 basis points and targeting a 0 to 25 basis point rate. In addition to the general impact of the COVID-19 pandemic, certain loan paymentsprovisions of upthe CARES Act as well as other legislative and regulatory relief efforts are expected to 180 dayshave a material impact on the Corporation’s operations.  

10

During the first nine months of 2021, we continued to provide relief to qualified commercial, mortgage and consumer loan customers. Initial deferrals of 90 days were granted to qualifiedassist our business customers with the optionPPP loan forgiveness process and to request a second deferral for anoriginate additional 90 days.

LoansPPP loans through the third round of funding. We remained diligent in active modification status declined significantly duringprotecting our associates and customers from the lingering effects of the pandemic, delaying opening our lobbies until April 1, 2021.  During the third quarter, we made the decision to reclose our lobbies as businesses startedCOVID cases increased in most of our markets and staffing was at reduced levels.  Many of our sales and support employees continue to open back up and begin to returnwork remotely as we have adjusted to a more normal operatinghybrid work environment.  We continuehave continued to have communication withmonitor our borrowers as there is still some uncertainty asmarket areas, maintaining travel protocols and utilizing safety precautions while continuing to how long the pandemic will last.provide full banking services to our customers.

Paycheck Protection Program

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

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

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

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

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

COVID Modifications

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

As of October 15, 2021, modified loans not treated as TDRs consisted of 11 commercial loans relating to real estate rental, food services and health care sectors and one mortgage and commercial loan, portfolios, including a breakdown by industry, andwith an aggregate balance of $9.9 million.  These loans are scheduled to return to contractual payment terms within the percentage of the portfolio that has been modified through October 30, 2020 as a result of COVID-19. For comparative purposes, modifications reported through July 31, 2020 are included.next quarter.

Total Loans at 9/30/20 (*)

Active COVID Modifications at 10/30/20

Active COVID Modifications through 7/31/20

Industry Category

# of Loans (**)

Balance (000s)

Balance as % of Total Portfolio

# of Loans

Balance (000s)

Balance as % of Total Portfolio

# of Loans

Balance (000s)

Balance as % of Category

RE/Rental/Leasing - Non-Owner Occupied

90

$

124,370

11.9%

$

0.0%

25

$

53,664

44.4%

RE/Rental/Leasing - All Other

320

100,358

9.6%

2

141

0.1%

43

23,562

25.2%

Construction - Developers

20

57,977

5.6%

0.0%

1

2,975

5.2%

Accommodations

33

47,857

4.6%

6

13,519

28.2%

12

33,246

70.0%

Services

207

45,926

4.4%

0.0%

26

15,539

34.9%

Health Care/Social Assistance

60

34,048

3.3%

0.0%

16

8,564

25.9%

RE/Rental/Leasing - Multifamily

107

32,204

3.1%

0.0%

24

11,447

36.9%

RE/Rental/Leasing - Developers

39

25,840

2.5%

0.0%

3

6,773

23.3%

Manufacturing

50

25,519

2.4%

0.0%

7

10,710

41.6%

Construction - All Other

268

24,199

2.3%

5

396

1.6%

19

3,142

12.2%

Prof/Scientific/Technical

108

19,820

1.9%

0.0%

25

7,521

34.1%

Trade

109

16,890

1.6%

0.0%

5

1,405

9.1%

Transportation/Warehousing

226

15,979

1.5%

0.0%

5

235

1.6%

Food Service

32

11,110

1.1%

0.0%

0.0%

Public Administration

46

10,536

1.0%

1.9%

11

3,003

31.6%

Entertainment/Recreation

24

8,341

0.8%

1

284

3.4%

6

2,626

36.3%

Agriculture

52

4,595

0.4%

0.0%

2

508

11.0%

Energy

12

1,645

0.2%

0.0%

0.0%

Total Commercial

1,803

$

607,214

58.2%

14

$

14,340

2.4%

230

$

184,920

31.1%

Total Residential Mortgage

2,157

334,185

32.0%

16

4,508

1.2%

93

26,089

7.6%

Total Consumer

6,508

102,091

9.8%

12

403

0.5%

60

3,444

3.3%

Total Loans at September 30, 2020

10,468

$

1,043,490

100.0%

42

$

19,251

1.8%

383

$

214,453

20.6%

(*) Excluding 1,174 PPP loans totaling $148.9 million, 1.6% including PPP loans

(**) Including active loans/lines with no outstanding balance

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”). At September 30, 2020,2021, there were RSUs relating to 5,0707,073 time-vested shares of common stock outstanding. There were 0 anti-dilutive shares at September 30, 2021 or 2020.

11


The following tables set forth the calculation of basic and diluted earnings per common share for the nine and three monthmonths periods ended September 30, 20202021 and 2019:2020:

Nine months ended September 30,

2021

2020

    

    

Average

    

Per Share

    

    

Average

    

Per Share

(in thousands, except for per share amount)

Income

Shares

Amount

Income

Shares

Amount

Basic Earnings Per Share:

Net income

$

12,221

6,741

$

1.81

$

9,285

7,008

$

1.32

Diluted Earnings Per Share:

Net income

$

12,221

6,746

$

1.81

$

9,285

7,019

$

1.32

Three months ended September 30,

2021

2020

Average

Per Share

Average

Per Share

(in thousands, except for per share amount)

Income

Shares

Amount

Income

Shares

Amount

Basic Earnings Per Share:

Net income

$

4,388

6,617

$

0.66

$

4,960

6,988

$

0.70

Diluted Earnings Per Share:

Net income

$

4,388

6,624

$

0.66

$

4,960

6,993

$

0.70

Nine months ended September 30,

2020

2019

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

$

9,285

7,008

$

1.32

$

10,247

7,098

$

1.44

Diluted Earnings Per Share:

Net income

$

9,285

7,019

$

1.32

$

10,247

7,098

$

1.44

Three months ended September 30,

2020

2019

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

$

4,960

6,988

$

0.70

$

4,493

7,107

$

0.63

Diluted Earnings Per Share:

Net income

$

4,960

6,993

$

0.70

$

4,493

7,107

$

0.63

12

Note 4 – Net GainsInvestments

The following table summarizes the gain/(loss) activity for the nine and three month periods ended September 30, 2020 and 2019:

Nine Months Ended

Three Months Ended

September 30,

September 30,

(in thousands)

2020

2019

2020

2019

Net gains/(losses):

Available-for-sale securities:

Realized gains

$

622

$

74

$

575

$

1

Realized losses

(73)

Held-to-maturity securities:

Realized gains

60

Gains on sale of residential mortgage loans

1,480

87

734

42

Losses on disposal of fixed assets

(151)

(4)

(133)

(3)

Net gains

$

2,011

$

84

$

1,176

$

40

12


Note 5 – Investments

The following table shows a comparison of amortized cost and fair values of investment securities at September 30, 20202021 and December 31, 2019:2020:

(in thousands)

    

Amortized
Cost

    

Gross
Unrealized
Gains

    

Gross
Unrealized
Losses

    

Fair
Value

    

OTTI
in AOCL

September 30, 2021

Available for Sale:

U.S. government agencies

$

55,527

$

235

$

2,028

$

53,734

$

Residential mortgage-backed agencies

30,936

21

603

30,354

Commercial mortgage-backed agencies

55,980

224

695

55,509

Collateralized mortgage obligations

70,766

104

1,791

69,079

Obligations of states and political subdivisions

9,402

394

9,796

Collateralized debt obligations

18,586

95

1,589

17,092

(715)

Total available for sale

$

241,197

$

1,073

$

6,706

$

235,564

$

(715)

Held to Maturity:

Residential mortgage-backed agencies

$

32,113

$

882

$

394

$

32,601

$

Commercial mortgage-backed agencies

9,697

335

10,032

Obligations of states and political subdivisions

20,169

8,905

29,074

Total held to maturity

$

61,979

$

10,122

$

394

$

71,707

$

December 31, 2020

Available for Sale:

U.S. government agencies

$

75,856

$

899

$

322

$

76,433

$

Residential mortgage-backed agencies

22,999

100

22,899

Commercial mortgage-backed agencies

32,549

529

36

33,042

Collateralized mortgage obligations

70,372

266

1

70,637

Obligations of states and political subdivisions

10,144

470

10,614

Collateralized debt obligations

18,544

5,284

13,260

(3,839)

Total available for sale

$

230,464

$

2,164

$

5,743

$

226,885

$

(3,839)

Held to Maturity:

Residential mortgage-backed agencies

$

34,597

$

1,173

$

38

$

35,732

$

Commercial mortgage-backed agencies

11,716

587

12,303

Collateralized mortgage obligations

1,348

58

1,406

Obligations of states and political subdivisions

20,602

7,569

28,171

Total held to maturity

$

68,263

$

9,387

$

38

$

77,612

$

(in thousands)

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

OTTI
in AOCL

September 30, 2020

Available for Sale:

U.S. government agencies

$

65,942

$

959

$

30

$

66,871

$

Residential mortgage-backed agencies

13,037

219

93

13,163

Commercial mortgage-backed agencies

33,566

608

14

34,160

Collateralized mortgage obligations

15,226

392

15,618

Obligations of states and political subdivisions

10,159

430

10,589

Collateralized debt obligations

18,525

5,765

12,760

(4,235)

Total available for sale

$

156,455

$

2,608

$

5,902

$

153,161

$

(4,235)

Held to Maturity:

Residential mortgage-backed agencies

$

34,868

$

1,157

$

$

36,025

$

Commercial mortgage-backed agencies

11,773

615

12,388

Collateralized mortgage obligations

1,821

98

1,919

Obligations of states and political subdivisions

20,759

5,279

26,038

Total held to maturity

$

69,221

$

7,149

$

$

76,370

$

December 31, 2019

Available for Sale:

U.S. government agencies

$

39,987

$

$

93

$

39,894

$

Residential mortgage-backed agencies

4,917

17

4,900

Commercial mortgage-backed agencies

27,634

222

92

27,764

Collateralized mortgage obligations

29,903

129

109

29,923

Obligations of states and political subdivisions

14,124

346

14,470

Collateralized debt obligations

18,443

4,089

14,354

(2,835)

Total available for sale

$

135,008

$

697

$

4,400

$

131,305

$

(2,835)

Held to Maturity:

U.S. government agencies

$

16,164

$

659

$

$

16,823

$

Residential mortgage-backed agencies

42,939

469

155

43,253

Commercial mortgage-backed agencies

15,521

344

15,865

Collateralized mortgage obligations

3,140

3

3,143

Obligations of states and political subdivisions

16,215

5,357

21,572

Total held to maturity

$

93,979

$

6,832

$

155

$

100,656

$


13


Nine Months Ended

Three Months Ended

September 30,

September 30,

(in thousands)

2020

2019

2020

2019

Proceeds

$

30,831

$

12,046

$

29,751

$

6,669

Realized gains

622

74

575

1

Realized losses

73

The following table shows the Corporation’s investment securities with gross unrealized losses and fair values at September 30, 20202021 and December 31, 2019,2020, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position:

Less than 12 months

12 months or more

(in thousands)

    

Fair
Value

    

Unrealized
Losses

    

Number of
Investments

    

Fair
Value

    

Unrealized
Losses

    

Number of
Investments

September 30, 2021

Available for Sale:

U.S. government agencies

$

$

$

34,325

$

2,028

6

Residential mortgage-backed agencies

20,582

603

2

Commercial mortgage-backed agencies

41,647

480

5

7,725

215

1

Collateralized mortgage obligations

65,329

1,791

8

Collateralized debt obligations

10,397

1,589

5

Total available for sale

$

127,558

$

2,874

15

$

52,447

$

3,832

12

Held to Maturity:

Residential mortgage-backed agencies

8,500

394

3

Total held to maturity

$

8,500

$

394

3

$

$

December 31, 2020

Available for Sale:

U.S. government agencies

$

39,611

$

322

7

$

$

Residential mortgage-backed agencies

22,899

100

2

Commercial mortgage-backed agencies

16,034

36

1

Collateralized mortgage obligations

39,628

1

4

Collateralized debt obligations

13,260

5,284

9

Total available for sale

$

118,172

$

459

14

$

13,260

$

5,284

9

Held to Maturity:

Residential mortgage-backed agencies

$

2,973

$

38

1

$

$

Total held to maturity

$

2,973

$

38

1

$

$

Less than 12 months

12 months or more

(in thousands)

Fair
Value

Unrealized
Losses

Number of
Investments

Fair
Value

Unrealized
Losses

Number of
Investments

September 30, 2020

Available for Sale:

U.S. government agencies

$

16,420

$

30

4

$

$

Residential mortgage-backed agencies

8,512

93

3

Commercial mortgage-backed agencies

16,109

14

1

Collateralized debt obligations

12,760

5,765

9

Total available for sale

$

41,041

$

137

8

$

12,760

$

5,765

9

December 31, 2019

Available for Sale:

U.S. government agencies

$

24,907

$

80

3

$

14,987

$

13

3

Residential mortgage-backed agencies

4,900

17

1

Commercial mortgage-backed agencies

4,623

37

2

5,793

55

3

Collateralized mortgage obligations

35,472

109

1

Collateralized debt obligations

14,354

4,089

9

Total available for sale

$

34,430

$

134

6

$

70,606

$

4,266

16

Held to Maturity:

Residential mortgage-backed agencies

$

2,722

$

6

3

$

9,486

$

149

12

Total held to maturity

$

2,722

$

6

3

$

9,486

$

149

12

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

Management believes that the valuation of certain securities is a critical accounting policy that requires significant estimates in preparation of the Corporation’s consolidated financial statements. Management utilizes an independent third party to prepare both the impairment valuations and fair value determinations for the Corporation’s collateralized debt obligation (“CDO”) portfolio consisting of pooled trust preferred securities. See Note 87 for a discussion of the methodology used by management to determine the fair values of these securities. Based upon a review of credit quality and the cash flow tests performed by the independent third party, management determined that there were no securities that had credit-related non-cash OTTI charges during the first nine months of 20202021 or 2019.2020.

14

The Corporation does not believebelieves that the investment securities that were in an unrealized loss position at September 30, 20202021 do not represent other-than-temporary impairment. The Corporation does not intend to sell, nor is it anticipated that the Corporation wouldwill be required to sell, any of its impaired investment securities at a loss.

14


The following tables present a cumulative roll-forward of the amount of non-cash OTTI charges related to credit losses whichthat have been recognized in earnings for the trust preferred securities held in the CDO portfolio held and not intended to be sold forduring the nine and three month periods ended September 30, 2021 and 2020 and 2019:that the Corporation does not intend to sell:

Nine Months Ended

September 30,

(in thousands)

    

2021

    

2020

Balance of credit-related OTTI at January 1

$

2,244

$

2,446

Reduction for increases in cash flows expected to be collected

(151)

(151)

Balance of credit-related OTTI at September 30

$

2,093

$

2,295

Three Months Ended

September 30,

(in thousands)

2021

2020

Balance of credit-related OTTI at July 1

$

2,143

$

2,345

Reduction for increases in cash flows expected to be collected

(50)

(50)

Balance of credit-related OTTI at September 30

$

2,093

$

2,295

Nine Months Ended

September 30,

(in thousands)

2020

2019

Balance of credit-related OTTI at January 1

$

2,446

$

2,646

Reduction for increases in cash flows expected to be collected

(151)

(149)

Balance of credit-related OTTI at September 30

$

2,295

$

2,497

Three Months Ended

September 30,

(in thousands)

2020

2019

Balance of credit-related OTTI at July 1

$

2,345

$

2,547

Reduction for increases in cash flows expected to be collected

(50)

(50)

Balance of credit-related OTTI at September 30

$

2,295

$

2,497

The amortized cost and estimated fair value of securities by contractual maturity at September 30, 20202021 are shown in the following table. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

September 30, 2021

(in thousands)

    

Amortized
Cost

    

Fair
Value

Contractual Maturity

Available for Sale:

Due after one year through five years

$

4,404

$

4,466

Due after five years through ten years

10,057

10,198

Due after ten years

69,054

65,958

83,515

80,622

Residential mortgage-backed agencies

30,936

30,354

Commercial mortgage-backed agencies

55,980

55,509

Collateralized mortgage obligations

70,766

69,079

Total available for sale

$

241,197

$

235,564

Held to Maturity:

Due after ten years

$

20,169

$

29,074

Residential mortgage-backed agencies

32,113

32,601

Commercial mortgage-backed agencies

9,697

10,032

Collateralized mortgage obligations

Total held to maturity

$

61,979

$

71,707

September 30, 2020

(in thousands)

Amortized
Cost

Fair
Value

Contractual Maturity

Available for Sale:

Due after one year through five years

$

4,434

$

4,555

Due after five years through ten years

24,821

25,745

Due after ten years

65,371

59,920

94,626

90,220

Residential mortgage-backed agencies

13,037

13,163

Commercial mortgage-backed agencies

33,566

34,160

Collateralized mortgage obligations

15,226

15,618

Total available for sale

$

156,455

$

153,161

Held to Maturity:

Due after ten years

$

20,759

$

26,038

Residential mortgage-backed agencies

34,868

36,025

Commercial mortgage-backed agencies

11,773

12,388

Collateralized mortgage obligations

1,821

1,919

Total held to maturity

$

69,221

$

76,370

15


Note 65 – Loans and Related Allowance for Loan Losses

The following table summarizes the primary segments of the loan portfolio at September 30, 20202021 and December 31, 2019:2020:

(in thousands)

    

Commercial
Real Estate

    

Acquisition
and
Development

    

Commercial
and
Industrial

    

Residential
Mortgage

    

Consumer

    

Total

September 30, 2021

Individually evaluated for impairment

$

7,343

$

842

$

$

2,985

$

18

$

11,188

Collectively evaluated for impairment

364,442

131,414

195,758

402,900

56,166

1,150,680

Total loans

$

371,785

$

132,256

$

195,758

$

405,885

$

56,184

$

1,161,868

December 31, 2020

Individually evaluated for impairment

$

3,330

$

842

$

$

3,185

$

102

$

7,459

Collectively evaluated for impairment

365,846

116,119

266,745

375,985

35,658

1,160,353

Total loans

$

369,176

$

116,961

$

266,745

$

379,170

$

35,760

$

1,167,812

(in thousands)

Commercial
Real Estate

Acquisition
and
Development

Commercial
and
Industrial

Residential
Mortgage

Consumer

Total

September 30, 2020

Individually evaluated for impairment

$

3,380

$

7,932

$

$

3,170

$

31

$

14,513

Collectively evaluated for impairment

$

349,892

$

119,367

$

277,723

$

395,539

$

35,311

$

1,177,832

Total loans

$

353,272

$

127,299

$

277,723

$

398,709

$

35,342

$

1,192,345

December 31, 2019

Individually evaluated for impairment

$

3,179

$

8,570

$

30

$

3,391

$

4

$

15,174

Collectively evaluated for impairment

$

332,325

$

109,320

$

122,322

$

435,033

$

36,195

$

1,035,195

Total loans

$

335,504

$

117,890

$

122,352

$

438,424

$

36,199

$

1,050,369

The increase in the commercial and industrial portfolio in the table above includes $148.9$30.3 million and $114.0 million of PPP loans at September 30, 2021 and December 31, 2020, respectively, which are 100% guaranteed by the SBA, and 0 allowance for loan loss (“ALL”) has been assigned to them.

The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention and Substandard within the internal risk rating system at September 30, 20202021 and December 31, 2019:2020:

(in thousands)

    

Pass

    

Special
Mention

    

Substandard

    

Total

September 30, 2021

Commercial real estate

Non owner-occupied

$

172,977

$

13,054

$

6,209

$

192,240

All other CRE

171,556

1,407

6,582

179,545

Acquisition and development

1-4 family residential construction

20,321

20,321

All other A&D

111,496

439

111,935

Commercial and industrial

178,724

6,087

10,947

195,758

Residential mortgage

Residential mortgage - term

338,745

6,282

345,027

Residential mortgage - home equity

60,141

717

60,858

Consumer

56,056

128

56,184

Total

$

1,110,016

$

20,548

$

31,304

$

1,161,868

December 31, 2020

Commercial real estate

Non owner-occupied

$

178,670

$

5,526

$

6,322

$

190,518

All other CRE

166,504

5,664

6,490

178,658

Acquisition and development

1-4 family residential construction

18,920

18,920

All other A&D

97,648

17

376

98,041

Commercial and industrial

245,185

8,867

12,693

266,745

Residential mortgage

Residential mortgage - term

309,177

283

6,117

315,577

Residential mortgage - home equity

62,804

789

63,593

Consumer

35,648

3

109

35,760

Total

$

1,114,556

$

20,360

$

32,896

$

1,167,812

(in thousands)

Pass

Special
Mention

Substandard

Total

September 30, 2020

Commercial real estate

Non owner-occupied

$

165,472

$

9,204

$

1,772

$

176,448

All other CRE

166,899

3,358

6,567

176,824

Acquisition and development

1-4 family residential construction

21,684

21,684

All other A&D

98,057

17

7,541

105,615

Commercial and industrial

260,294

5,005

12,424

277,723

Residential mortgage

Residential mortgage - term

328,232

287

6,157

334,676

Residential mortgage - home equity

63,100

933

64,033

Consumer

35,226

3

113

35,342

Total

$

1,138,964

$

17,874

$

35,507

$

1,192,345

December 31, 2019

Commercial real estate

Non owner-occupied

$

164,584

$

2,765

$

1,864

$

169,213

All other CRE

157,407

6,556

2,328

166,291

Acquisition and development

1-4 family residential construction

10,781

10,781

All other A&D

98,823

18

8,268

107,109

Commercial and industrial

116,221

2,896

3,235

122,352

Residential mortgage

Residential mortgage - term

364,150

59

5,597

369,806

Residential mortgage - home equity

67,143

139

1,336

68,618

Consumer

36,047

4

148

36,199

Total

$

1,015,156

$

12,437

$

22,776

$

1,050,369

The increase of $12.7 million in the substandard category from December 31, 2019 to September 30, 2020 was primarily due to 2 large relationships in the “All other CRE” and “Commercial and Industrial” categories.  These loans are current and well collateralized and are not considered impaired.  They were classified as substandard due to a reduction in cash flows and a slight deterioration in the borrower’s balance sheet.  The increase in the special mention category is due to the addition of 3 hotel loans totaling $6.5 million in the non-owner occupied category as business continues to be a reduced capacity thereby reducing cash flows. The increase in the commercial and industrial category is related to 1 medical profession loan.  


16


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, 20202021 and December 31, 2019:2020:

(in thousands)

    

Current

    

30-59 Days
Past Due

    

60-89 Days
Past Due

    

90 Days+
Past Due

    

Total Past
Due and
Accruing

    

Non-
Accrual

    

Total Loans

September 30, 2021

Commercial real estate

Non owner-occupied

$

187,770

$

$

$

$

$

4,470

$

192,240

All other CRE

178,880

118

118

547

179,545

Acquisition and development

1-4 family residential construction

20,321

20,321

All other A&D

111,540

395

111,935

Commercial and industrial

195,383

375

375

195,758

Residential mortgage

Residential mortgage - term

342,242

76

975

154

1,205

1,580

345,027

Residential mortgage - home equity

60,149

213

65

278

431

60,858

Consumer

55,794

304

33

35

372

18

56,184

Total

$

1,152,079

$

1,086

$

1,073

$

189

$

2,348

$

7,441

$

1,161,868

December 31, 2020

Commercial real estate

Non owner-occupied

$

190,510

$

$

$

$

$

8

$

190,518

All other CRE

177,360

408

408

890

178,658

Acquisition and development

1-4 family residential construction

18,920

18,920

All other A&D

97,660

5

10

15

366

98,041

Commercial and industrial

266,708

37

37

266,745

Residential mortgage

Residential mortgage - term

312,500

63

670

710

1,443

1,634

315,577

Residential mortgage - home equity

63,036

80

63

143

414

63,593

Consumer

35,473

230

26

4

260

27

35,760

Total

$

1,162,167

$

823

$

759

$

724

$

2,306

$

3,339

$

1,167,812

(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, 2020

Commercial real estate

Non owner-occupied

$

176,439

$

$

$

$

$

9

$

176,448

All other CRE

175,906

918

176,824

Acquisition and development

1-4 family residential construction

21,684

21,684

All other A&D

98,157

11

11

7,447

105,615

Commercial and industrial

271,012

6,711

6,711

277,723

Residential mortgage

Residential mortgage - term

331,474

65

951

726

1,742

1,460

334,676

Residential mortgage - home equity

63,435

43

76

119

479

64,033

Consumer

35,218

58

35

93

31

35,342

Total

$

1,173,325

$

6,877

$

986

$

813

$

8,676

$

10,344

$

1,192,345

December 31, 2019

Commercial real estate

Non owner-occupied

$

169,180

$

$

$

$

$

33

$

169,213

All other CRE

165,289

355

355

647

166,291

Acquisition and development

1-4 family residential construction

10,781

10,781

All other A&D

98,916

135

135

8,058

107,109

Commercial and industrial

122,050

272

272

30

122,352

Residential mortgage

Residential mortgage - term

366,882

267

967

471

1,705

1,219

369,806

Residential mortgage - home equity

67,121

288

286

65

639

858

68,618

Consumer

35,834

261

46

54

361

4

36,199

Total

$

1,036,053

$

1,088

$

1,654

$

725

$

3,467

$

10,849

$

1,050,369

The current status of commercial and industrial loans includes $30.3 million and $114.0 million of PPP loans at September 30, 2020 includes $148.9 million of PPP loans.

Non-accrual loans totaled $10.3 million at September 30, 2020, compared to $10.8 million at2021 and December 31, 2019. The decrease in non-accrual balances at September 30, 2020, was primarily due to the charge-off of $1.1 million of a specific allocation attributable to the $8.3 million A&D participation loan that was added to non-accrual loans in the first quarter of 2019.  The property collateralizing the loan was acquired at foreclosure in November 2020 and was added to OREO at a carrying value of $7.2 million. During the third quarter of 2020, a purchase agreement for a parcel of acreage within the development was signed with a large warehouse franchise with an anticipated closing date in December 2020. This loan is serviced by another lender. A new appraisal is in process; however, based on the sales contract price, management re-evaluated the reserve and determined that $1.1 million of the $2.4 million specific allocation be charged off and the remaining $1.3 million reversed. Due to the continued uncertainty in the market surrounding the pandemic and increases in allowance qualitative factors, the $1.3 million was re-allocated to the collectively determined portion of the allowance. We anticipate a reduction to the OREO balance of approximately $2.0 million once the sale of the parcel is consummated (anticipated in December 2020).  respectively.

Non-accrual loans that have been subject to partial charge-offs totaled $7.3$0.5 million at September 30, 20202021 and $0.2$0.4 million at December 31, 2019.2020.  Loans secured by 1-4 family residential real estate properties in the process of foreclosure were $0.3 million and $0.1totaled $0.2 million at September 30, 20202021 and $0.4 million at December 31, 2019, respectively. All foreclosure2020.  Foreclosure and repossession activity has beenactivities were temporarily suspended as a result of COVID-19. The foreclosure process onCOVID-19 but resumed during the A&D participation loan, as noted above, was imminent priorthird quarter 2021. Management continues to conform to federal and state mandates relative to the onset of the pandemic.foreclosure processes for both Federal Backed and Non-Federal Backed mortgages.  As a percentage of the loan portfolio, accruing loans past due 30 days or more increaseddecreased to 0.73%0.20%, including PPP loans, or 0.83%0.21% excluding PPP loans, compared to 0.67%0.20% at September 30, 2019. This increase is related to 1 credit totaling $6.7 million which was due to a delay in the preparation of a forbearance agreement.December 31, 2020. 

17

The following table summarizes the primary segments of the ALL at September 30, 20202021 and December 31, 2019,2020, segregated by the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment:

(in thousands)

    

Commercial
Real Estate

    

Acquisition
and
Development

    

Commercial
and
Industrial

    

Residential
Mortgage

    

Consumer

    

Unallocated

    

Total

September 30, 2021

Individually evaluated
for impairment

$

187

$

$

$

16

$

2

$

$

205

Collectively evaluated
for impairment

$

6,539

$

2,910

$

2,400

$

3,582

$

840

$

430

$

16,701

Total ALL

$

6,726

$

2,910

$

2,400

$

3,598

$

842

$

430

$

16,906

December 31, 2020

Individually evaluated
for impairment

$

4

$

13

$

$

40

$

$

$

57

Collectively evaluated
for impairment

$

5,539

$

2,326

$

2,584

$

5,110

$

370

$

500

$

16,429

Total ALL

$

5,543

$

2,339

$

2,584

$

5,150

$

370

$

500

$

16,486

(in thousands)

Commercial
Real Estate

Acquisition
and
Development

Commercial
and
Industrial

Residential
Mortgage

Consumer

Unallocated

Total

September 30, 2020

Individually evaluated
for impairment

$

5

$

42

$

$

25

$

$

$

72

Collectively evaluated
for impairment

$

5,289

$

2,381

$

2,184

$

5,382

$

381

$

500

$

16,117

Total ALL

$

5,294

$

2,423

$

2,184

$

5,407

$

381

$

500

$

16,189

December 31, 2019

Individually evaluated
for impairment

$

9

$

2,142

$

$

22

$

$

$

2,173

Collectively evaluated
for impairment

$

2,873

$

1,532

$

1,341

$

3,806

$

312

$

500

$

10,364

Total ALL

$

2,882

$

3,674

$

1,341

$

3,828

$

312

$

500

$

12,537

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

18


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, 20202021 and December 31, 2019:2020:

Impaired Loans with
Specific Allowance

Impaired
Loans with
No Specific
Allowance

Total Impaired Loans

(in thousands)

    

Recorded
Investment

    

Related
Allowances

    

Recorded
Investment

    

Recorded
Investment (1)

    

Unpaid
Principal
Balance

September 30, 2021

Commercial real estate

Non owner-occupied

$

1,715

$

187

$

2,863

$

4,578

$

4,578

All other CRE

2,765

2,765

2,765

Acquisition and development

1-4 family residential construction

245

245

245

All other A&D

597

597

1,806

Commercial and industrial

2,214

Residential mortgage

Residential mortgage – term

261

10

2,293

2,554

2,615

Residential mortgage – home equity

46

6

385

431

450

Consumer

18

2

18

20

Total impaired loans

$

2,040

$

205

$

9,148

$

11,188

$

14,693

December 31, 2020

Commercial real estate

Non owner-occupied

$

111

$

4

$

8

$

119

$

119

All other CRE

3,211

3,211

3,211

Acquisition and development

1-4 family residential construction

266

266

266

All other A&D

276

13

300

576

1,724

Commercial and industrial

2,214

Residential mortgage

Residential mortgage – term

936

34

1,910

2,846

3,031

Residential mortgage – home equity

76

6

339

415

447

Consumer

26

26

51

Total impaired loans

$

1,399

$

57

$

6,060

$

7,459

$

11,063

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

Impaired Loans with
Specific Allowance

Impaired
Loans with
No Specific
Allowance

Total Impaired Loans

(in thousands)

Recorded
Investment

Related
Allowances

Recorded
Investment

Recorded
Investment

Unpaid
Principal
Balance

September 30, 2020

Commercial real estate

Non owner-occupied

$

113

$

5

$

9

$

122

$

8,127

All other CRE

3,258

3,258

3,258

Acquisition and development

1-4 family residential construction

272

272

272

All other A&D

392

42

7,268

7,660

8,812

Commercial and industrial

2,214

Residential mortgage

Residential mortgage – term

744

25

1,947

2,691

2,862

Residential mortgage – home equity

479

479

493

Consumer

31

31

56

Total impaired loans

$

1,280

$

72

$

13,233

$

14,513

$

26,094

December 31, 2019

Commercial real estate

Non owner-occupied

$

116

$

9

$

33

$

149

$

8,224

All other CRE

3,030

3,030

3,030

Acquisition and development

1-4 family residential construction

291

291

291

All other A&D

8,219

2,142

60

8,279

8,340

Commercial and industrial

30

30

2,266

Residential mortgage

Residential mortgage – term

865

22

1,668

2,533

2,724

Residential mortgage – home equity

858

858

986

Consumer

4

4

4

Total impaired loans

$

9,200

$

2,173

$

5,974

$

15,174

$

25,865


19


The following tables present the activity in the ALL for the nine and three month periods ended September 30, 20202021 and 2019:2020:

(in thousands)

    

Commercial
Real Estate

    

Acquisition
and
Development

    

Commercial
and
Industrial

    

Residential
Mortgage

    

Consumer

    

Unallocated

    

Total

ALL balance at January 1, 2021

$

5,543

$

2,339

$

2,584

$

5,150

$

370

$

500

$

16,486

Charge-offs

(85)

(141)

(266)

(492)

Recoveries

172

511

49

112

844

Provision

1,183

484

(695)

(1,460)

626

(70)

68

ALL balance at September 30, 2021

$

6,726

$

2,910

$

2,400

$

3,598

$

842

$

430

$

16,906

ALL balance at January 1, 2020

$

2,882

$

3,674

$

1,341

$

3,828

$

312

$

500

$

12,537

Charge-offs

(1,144)

(232)

(108)

(274)

(1,758)

Recoveries

69

29

149

66

116

429

Provision

2,343

(136)

926

1,621

227

4,981

ALL balance at September 30, 2020

$

5,294

$

2,423

$

2,184

$

5,407

$

381

$

500

$

16,189

(in thousands)

Commercial
Real Estate

Acquisition
and
Development

Commercial
and
Industrial

Residential
Mortgage

Consumer

Unallocated

Total

ALL balance at July 1, 2021

$

5,675

$

2,500

$

2,944

$

4,859

$

590

$

500

$

17,068

Charge-offs

(4)

(59)

(91)

(154)

Recoveries

62

473

20

34

589

Provision

1,051

352

(1,017)

(1,222)

309

(70)

(597)

ALL balance at September 30, 2021

$

6,726

$

2,910

$

2,400

$

3,598

$

842

$

430

$

16,906

ALL balance at July 1, 2020

$

4,527

$

4,498

$

1,997

$

5,106

$

386

$

500

$

17,014

Charge-offs

(1,113)

(10)

(51)

(1,174)

Recoveries

3

7

133

18

28

189

Provision

764

(969)

54

293

18

160

ALL balance at September 30, 2020

$

5,294

$

2,423

$

2,184

$

5,407

$

381

$

500

$

16,189

(in thousands)

Commercial
Real Estate

Acquisition
and
Development

Commercial
and
Industrial

Residential
Mortgage

Consumer

Unallocated

Total

ALL balance at January 1, 2020

$

2,882

$

3,674

$

1,341

$

3,828

$

312

$

500

$

12,537

Charge-offs

(1,144)

(232)

(108)

(274)

(1,758)

Recoveries

69

29

149

66

116

429

Provision

2,343

(136)

926

1,621

227

4,981

ALL balance at September 30, 2020

$

5,294

$

2,423

$

2,184

$

5,407

$

381

$

500

$

16,189

ALL balance at January 1, 2019

$

2,780

$

1,721

$

1,187

$

4,544

$

315

$

500

$

11,047

Charge-offs

(29)

(75)

(86)

(212)

(402)

Recoveries

67

132

77

259

122

657

Provision

(162)

1,556

6

(818)

87

669

ALL balance at September 30, 2019

$

2,685

$

3,380

$

1,195

$

3,899

$

312

$

500

$

11,971

(in thousands)

Commercial
Real Estate

Acquisition
and
Development

Commercial
and
Industrial

Residential
Mortgage

Consumer

Unallocated

Total

ALL balance at July 1, 2020

$

4,527

$

4,498

$

1,997

$

5,106

$

386

$

500

$

17,014

Charge-offs

(1,113)

(10)

(51)

(1,174)

Recoveries

3

7

133

18

28

189

Provision

764

(969)

54

293

18

160

ALL balance at September 30, 2020

$

5,294

$

2,423

$

2,184

$

5,407

$

381

$

500

$

16,189

ALL balance at July 1, 2019

$

2,735

$

3,294

$

1,147

$

3,981

$

319

$

500

$

11,976

Charge-offs

(70)

(76)

(146)

Recoveries

37

21

1

64

31

154

Provision

(87)

65

117

(146)

38

(13)

ALL balance at September 30, 2019

$

2,685

$

3,380

$

1,195

$

3,899

$

312

$

500

$

11,971

The ALL 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 ALL that is representative of the risk found in the components of the portfolio at any given date.

20


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

Nine months ended

For the year ended

Nine months ended

September 30, 2021

December 31, 2020

September 30, 2020

(in thousands)

    

Average
investment

    

Interest income
recognized on
an accrual basis

    

Interest income
recognized on
a cash basis

Average
investment

Average
investment

    

Interest income
recognized on
an accrual basis

    

Interest income
recognized on
a cash basis

Commercial real estate

Non owner-occupied

$

3,518

$

9

$

$

131

$

134

$

6

$

All other CRE

2,984

95

3,203

3,201

109

Acquisition and development

1-4 family residential construction

256

9

278

282

9

All other A&D

599

9

6,709

8,243

9

1

Commercial and industrial

16

16

Residential mortgage

Residential mortgage – term

2,642

56

5

2,593

2,531

62

Residential mortgage – home equity

449

604

651

3

Consumer

17

20

18

Total

$

10,465

$

178

$

5

$

13,554

$

15,076

$

195

$

4

Three months ended

Three months ended

September 30, 2021

September 30, 2020

(in thousands)

Average
investment

Interest income
recognized on
an accrual basis

Interest income
recognized on
a cash basis

Average
investment

Interest income
recognized on
an accrual basis

Interest income
recognized on
a cash basis

Commercial real estate

Non owner-occupied

$

4,631

$

3

$

$

127

$

3

$

All other CRE

2,787

26

3,278

36

Acquisition and development

1-4 family residential construction

249

3

276

3

All other A&D

602

3

8,158

3

Commercial and industrial

18

Residential mortgage

Residential mortgage – term

2,500

17

2,565

19

Residential mortgage – home equity

451

474

Consumer

9

33

Total

$

11,229

$

52

$

$

14,929

$

64

$

Nine months ended

Nine months ended

September 30, 2020

September 30, 2019

(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

$

134

$

6

$

$

241

$

9

$

All other CRE

3,201

109

4,644

113

68

Acquisition and development

1-4 family residential construction

282

9

232

10

All other A&D

8,243

9

1

6,062

12

Commercial and industrial

16

25

Residential mortgage

Residential mortgage – term

2,531

62

3,082

75

10

Residential mortgage – home equity

651

3

873

4

Consumer

18

12

Total

$

15,076

$

195

$

4

$

15,171

$

219

$

82

Three months ended

Three months ended

September 30, 2020

September 30, 2019

(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

$

127

$

3

$

$

201

$

3

$

All other CRE

3,278

36

4,773

37

68

Acquisition and development

1-4 family residential construction

276

3

152

1

All other A&D

8,158

3

8,085

6

Commercial and industrial

18

27

Residential mortgage

Residential mortgage – term

2,565

19

2,701

22

Residential mortgage – home equity

474

928

2

Consumer

33

7

Total

$

14,929

$

64

$

$

16,874

$

69

$

70

The Bank modifies loan terms in the normal course of business. Among other reasons, modifications might be made in an effort to retain the loan relationship, to remain competitive in the current interest rate environment and/or to re-amortize or extend the loan’s term to better match the loan’s payment stream with the borrower’s cash flow. A modified loan is considered to be a TDR when the modification occurs in connection with a determination by the Bank has determined that the borrower is troubled (i.e., experiencing financial difficulties). TheIn deciding whether to modify a loan, the Bank evaluates the probability that the borrower will be in payment default on any of its debt obligations in the foreseeable future without modification. To make this determination, the Bank performs a global financial review of the borrower and loan guarantors to assess their current abilityabilities to meet their financial obligations.

21

Section 4013 of the CARES Act allows financial institutions to suspend application of certain current TDRs accounting guidance under ASC 310-40 for loan modifications related to the COVID-19 pandemic made between March 1, 2020 and the earlier of December 31, 2020January 1, 2022 or 60 days after the end of the COVID-19 national emergency, provided certain criteria are met. This relief can be applied to loan modifications for borrowers that were not more than 30 days past due as of December 31, 2019 and to loan modifications that defer or delay the payment of principal or interest, or change the interest rate on the loan.loan and that were not more than 30 days past due as of December 31, 2019. In April 2020, federal and state banking regulators issued the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus to provide further interpretation of when a borrower is experiencing financial difficulty, specifically indicating that if the modification is either short-term (e.g.(i.e., up to nine months) or mandated by a federal or state government in response to the COVID-19 pandemic, the borrower is not experiencing financial difficulty under ASC 310-40. The Corporation continues to

21


prudently work with borrowers negatively impacted by the COVID-19 pandemic while managing credit risks and recognizing appropriate allowance for credit losses on its loan portfolio. See Note 2 to the financial statements included elsewhere in this report for additional information.

There were 14 and 15 loans totaling $4.0$3.8 million and $4.2$4.0 million respectively, that were classified as TDRs at September 30, 20202021 and December 31, 2019,2020, respectively.  The following tables present the volume and recorded investment in TDRs at the times they were modified, by class and type of modification that occurred during the periods indicated:

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

$

Temporary Rate
Modification

Extension of Maturity

Modification of Payment
and Other Terms

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

Number of
Contracts

Recorded
Investment

Number of
Contracts

Recorded
Investment

Number of
Contracts

Recorded
Investment

Nine months ended September 30, 2020

Commercial real estate

Non owner-occupied

$

$

$

$

$

$

All other CRE

1

2,226

1

2,226

Acquisition and development

1-4 family residential construction

All other A&D

2

430

2

430

Commercial and industrial

Residential mortgage

Residential mortgage – term

1

46

2

457

3

356

1

46

2

457

3

356

Residential mortgage – home equity

Consumer

Total

1

$

46

4

$

887

4

$

2,582

1

$

46

4

$

887

4

$

2,582

22

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, 2019

Commercial real estate

Non owner-occupied

$

$

$

All other CRE

Acquisition and development

1-4 family residential construction

All other A&D

1

227

Commercial and industrial

Residential mortgage

Residential mortgage – term

1

149

1

243

Residential mortgage – home equity

Consumer

Total

1

$

149

$

2

$

470

During the nine monthsmonth period ended September 30, 2021, there were 0 new TDRs and 3 existing TDRs that had reached their modification maturity date and was re-modified. The Bank had 0 significant commitments to lend additional funds to TDRs.

During the nine month period ended September 30, 2020, there were 0 new TDRs but 9 existing TDRs that had reached their modification maturity dates were re-modified.  These re-modificationsmodifications did not impact the ALL.  During the nine months ended September 30, 2021 and 2020, there were 0 payment defaults.

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

Temporary Rate
Modification

Extension of Maturity

Modification of Payment
and Other Terms

(in thousands)

Number of
Contracts

Recorded
Investment

Number of
Contracts

Recorded
Investment

Number of
Contracts

Recorded
Investment

Three months ended September 30, 2021

Commercial real estate

Non owner-occupied

$

$

$

All other CRE

Acquisition and development

1-4 family residential construction

All other A&D

1

202

Commercial and industrial

Residential mortgage

Residential mortgage – term

1

215

Residential mortgage – home equity

Consumer

Total

$

2

$

417

$

Temporary Rate
Modification

Extension of Maturity

Modification of Payment
and Other Terms

(in thousands)

Number of
Contracts

Recorded
Investment

Number of
Contracts

Recorded
Investment

Number of
Contracts

Recorded
Investment

Three months ended September 30, 2020

Commercial real estate

Non owner-occupied

$

$

$

All other CRE

Acquisition and development

1-4 family residential construction

All other A&D

1

213

Commercial and industrial

Residential mortgage

Residential mortgage – term

1

227

1

111

Residential mortgage – home equity

Consumer

Total

$

2

$

440

1

$

111

22


During the nine monthsthree month period ended September 30, 2019,2021, there was 1were 0 new TDR due to a mortgage hardshipTDRs and 2 existing TDRs that had reached their modification maturity dates and were re-modified. There was no impactThe Bank had 0 significant commitments to the ALL from the newlend additional funds to TDR or the re-modifications. During the nine months ended September 30, 2019, there were 0 payment defaults.borrowers.  

23

Temporary Rate
Modification

Extension of Maturity

Modification of Payment
and Other Terms

(in thousands)

Number of
Contracts

Recorded
Investment

Number of
Contracts

Recorded
Investment

Number of
Contracts

Recorded
Investment

Three months ended September 30, 2020

Commercial real estate

Non owner-occupied

$

$

$

All other CRE

Acquisition and development

1-4 family residential construction

All other A&D

1

213

Commercial and industrial

Residential mortgage

Residential mortgage – term

1

227

1

111

Residential mortgage – home equity

Consumer

Total

$

2

$

440

1

$

111

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, 2019

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

1

149

Residential mortgage – home equity

Consumer

Total

1

$

149

$

$

During the three monthsmonth period ended SeptemberSept 30, 2020, there were 0 new TDRs but 32 existing TDRs that had reached their modification maturity dates were re-modified.  These re-modifications did not impact the ALL.  During the three months ended September 30, 2021 and 2020, there were 0 payment defaults under TDRs.

During the three months ended September 30, 2019, there was 1 new TDR, 0 modifications on existing TDRs and 0 payment defaults. There was no impact to the ALL from the new TDR.

Note 76 - Other Real Estate Owned, net

The following table presents the components of OREOother real estate owned (“OREO”) at September 30, 20202021 and December 31, 2019:2020:

(in thousands)

    

September 30,
2021

    

December 31,
2020

Commercial real estate

$

900

$

945

Acquisition and development

5,763

8,441

Residential mortgage

Total OREO, net

$

6,663

$

9,386

(in thousands)

September 30,
2020

December 31,
2019

Commercial real estate

$

2,256

$

2,256

Acquisition and development

1,531

1,780

Residential mortgage

91

Total OREO, net

$

3,787

$

4,127

23


The following table presents the activity in the OREO valuation allowance for the nine and three month periods ended September 30, 20202021 and 2019:2020:

Nine Months Ended

Three Months Ended

September 30,

September 30,

(in thousands)

    

2021

    

2020

2021

2020

Balance beginning of period

$

1,010

$

1,790

$

543

$

1,734

Fair value adjustment

(160)

102

63

Sales of OREO

(396)

(261)

(89)

(166)

Balance at end of period

$

454

$

1,631

$

454

$

1,631

Nine Months Ended

Three Months Ended

September 30,

September 30,

(in thousands)

2020

2019

2020

2019

Balance beginning of period

$

1,790

$

1,988

$

1,734

$

2,013

Fair value write-down

102

1,140

63

312

Sales of OREO

(261)

(1,159)

(166)

(356)

Balance at end of period

$

1,631

$

1,969

$

1,631

$

1,969

The following table presents the components of OREO (income)/expenses, net, for the nine and three month periods ended September 30, 20202021 and 2019:2020:

Nine Months Ended

Three Months Ended

September 30,

September 30,

(in thousands)

    

2021

    

2020

2021

2020

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

$

(594)

$

(93)

$

2

$

(72)

Fair value adjustment, net

(160)

102

63

Expenses, net

345

117

150

52

Rental and other income

(51)

(123)

(2)

(37)

Total OREO (income)/expense, net

$

(460)

$

3

$

150

$

6

Nine Months Ended

Three Months Ended

September 30,

September 30,

(in thousands)

2020

2019

2020

2019

Gains on real estate, net

$

(93)

$

(62)

$

(72)

$

(51)

Fair value write-down, net

102

1,140

63

312

Expenses, net

117

260

52

94

Rental and other income

(123)

(72)

(37)

(18)

Total OREO expense, net

$

3

$

1,266

$

6

$

337

Note 87 – Fair Value of Financial Instruments

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

24

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

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

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

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

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

Management believes that the Corporation’s valuation techniques are appropriate and consistent with the techniques used by other market participants. However, the use of different methodologies and assumptions could result in a different estimate of fair values at the reporting date. TheThe valuation techniques used by the Corporation to measure, on a recurring basis and on a non-recurring basis, the fair value of assets as of September 30, 20202021 are discussed in the paragraphs that follow.

24


Investments – The fair value of investments is determined using a market approach. As of September 30, 2020,2021, the U.S. Government agencies, residential and commercial mortgage-backed securities, collateralized mortgage obligations, and state and political subdivisions bonds, excluding the tax increment financing (“TIF”) bonds, segments arewere 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 arewere classified as Level 3 within the valuation hierarchy as they are not openly traded.

The collateralized debt obligation (“CDO”)CDO segment, which consists of pooled trust preferred securities issued by banks, thrifts and insurance companies, is classified as Level 3 within the valuation hierarchy. At September 30, 2020,2021, the Corporation owned 9 trust preferred securities with an amortized cost of $18.5$18.6 million and a fair value of $12.8$17.1 million. At As of September 30, 2020, 2021, the market for these securities iswas not active and the markets for similar securities arewere also not active. Recent developments in the credit markets have had ana negative impact on the market for CDOs. Specifically, as COVID-19 developed, which led to deteriorating performance of credit instruments, investors became less willing to buy a range of structured credit products. The result was massive spread-widening across a wide range of credit instruments, and for CDO bonds in particular. At present, we believe that it is no longernot currently economically feasible to form new CDOs or restructure existing CDOs, as the market for CDO bonds has effectively disappeared. The market values for these securities or any securities other than those issued or guaranteed by the U.S. Department of the Treasury are depressed relative to historical levels. Therefore, in the current market, a low market price for a particular bond may only provide evidence of stress in the credit markets in general rather than being an indicator of credit problems with a particular issue. Given the conditions in the current debt markets and the absence of observable transactions in the secondary and new issue markets, management has determined that (a) the few observable transactions and market quotations that are available are not reliable for the purpose of obtaining fair value at September 30, 2020,2021, (b) an income valuation approach technique (i.e. present value) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative of fair value than a market approach, and (c) the CDO segment is appropriately classified within Level 3 of the valuation hierarchy because management determined that significant adjustments were required to determine fair value at the measurement date.

25

Management utilizes onuses an independent third party to prepare both the evaluations of OTTI as well as the fair value determinations for its CDO portfolio. Management believes that the valuations are adequately reflected at September 30, 2020.2021.

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

At September 30, 2020, there has been2021, these conditions had a minimal impact on the trust preferred bonds, although there has been a significant effect on several asset classes in the equity and fixed income markets related to COVID-19. AManagement will continue to review of assumptions as they relate to the impact of COVID-19 will be on-going throughduring the remainder of the year.

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

Impaired loans – Loans included in the table below are those that are considered impaired with a specific allocation or with a partial charge-off. Fair value consists of the loan balance less its valuation allowance and is generally determined based on independent third-party appraisals of the collateral or discounted cash flowsdependent loans is measured based uponon the expected proceeds. These assets are included as Level 3 fair values based upon the lowest level of input that is significant toloan’s observable market price or the fair value measurements.of the collateral (less estimated selling costs). Collateral may be real estate and/or business assets such as equipment, inventory and/or accounts receivable. The value of business equipment, inventory and accounts receivable collateral is based on either net book value of the business’ financial statements or evaluations/appraisals obtained by the Bank.   If necessary, these values may be discounted based on management’s review and analysis.  Appraised and reported values may be discounted based on management’s historical experience, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Collateral dependent loans are reviewed and evaluated on at least a quarterly basis for additional individual reserve and adjusted accordingly, based on the factors identified above.

Other real estate owned – OREO included in the table below are considered impaired with specific write-downs. FairOREO is adjusted to fair value upon acquisition of otherthe real estate ownedcollateral. Subsequently, OREO is carried at the lower of carrying value or fair value. The estimated fair value for OREO included in Level 3 is determined by independent market based appraisals and other available market information, less costs to sell, that may be reduced further based on independent third-party appraisals of the properties. These values were determined based on themarket expectations or an executed 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 toagreement. If the fair value measurements.of the collateral deteriorates subsequent to initial recognition, the Corporation records the OREO as a nonrecurring Level 3 adjustment. Valuation techniques are consistent with those techniques applied in prior periods.

25


26

For Level 3 assets and liabilities measured at fair value on a recurring and non-recurring basis as of September 30, 20202021 and December 31, 2019,2020, the significant unobservable inputs used in the fair value measurements were as follows:

(in thousands)

    

Fair Value at
September 30,
2021

    

Valuation
Technique

    

Significant
Unobservable
Inputs

    

Significant
Unobservable
Input Value

Recurring:

Investment Securities – available for sale

$

17,092

Discounted Cash Flow

Discount Rate

4.50%

Non-recurring:

Impaired Loans

$

2,002

Market Comparable Properties

Marketability Discount

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

Other Real Estate Owned

$

349

Market Comparable Properties

Marketability Discount

15.0%

(in thousands)

    

Fair Value at
December 31,
2020

    

Valuation
Technique

    

Significant
Unobservable
Inputs

    

Significant
Unobservable
Input Value

Recurring:

Investment Securities – available for sale

$

13,260

Discounted Cash Flow

Discount Rate

5.50%

Non-recurring:

Impaired Loans

$

1,465

Market Comparable Properties

Marketability Discount

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

Other Real Estate Owned

$

913

Market Comparable Properties

Marketability Discount

15.0%

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

(in thousands)

Fair Value at
September 30,
2020

Valuation
Technique

Significant
Unobservable
Inputs

Significant
Unobservable
Input Value

Recurring:

Investment Securities – available for sale

$

12,760

Discounted
Cash Flow

Discount Rate

LIBOR+ 5.50%

Non-recurring:

Impaired Loans

$

8,198

Market Comparable
Properties

Marketability
Discount

10.0% - 15.0% (1)
(weighted avg 14.9%)

Other Real Estate Owned

$

1,284

Market Comparable
Properties

Marketability
Discount

15.0%

(in thousands)

Fair Value at
December 31,
2019

Valuation
Technique

Significant
Unobservable
Inputs

Significant
Unobservable
Input Value

Recurring:

Investment Securities – available for sale

$

14,354

Discounted
Cash Flow

Discount
Rate

LIBOR+ 4.75%

Non-recurring:

Impaired Loans

$

6,995

Market Comparable
Properties

Marketability
Discount

10.0% - 15.0% (1)
(weighted avg 12.9%)

Other Real Estate Owned

$

2,571

Market Comparable
Properties

Marketability
Discount

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

27

NOTE:

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


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, 20202021 and December 31, 2019 are2020 were as follows:

Fair Value Measurements
at September 30, 2021 Using

Quoted

Prices in

Significant

Assets/(liabilities)

Active Markets

Other

Significant

Measured at

for Identical

Observable

Unobservable

Fair Value

Assets

Inputs

Inputs

(in thousands)

    

09/30/21

    

(Level 1)

    

(Level 2)

    

(Level 3)

Recurring:

Investment securities available-for-sale:

U.S. government agencies

$

53,734

$

53,734

Residential mortgage-backed agencies

$

30,354

$

30,354

Commercial mortgage-backed agencies

$

55,509

$

55,509

Collateralized mortgage obligations

$

69,079

$

69,079

Obligations of states and political subdivisions

$

9,796

$

9,796

Collateralized debt obligations

$

17,092

$

17,092

Financial derivatives

$

(727)

$

(727)

Non-recurring:

Impaired loans

$

2,002

$

2,002

Other real estate owned

$

349

$

349

Fair Value Measurements
at December 31, 2020 Using

Quoted

Prices in

Significant

Assets/(liabilities)

Active Markets

Other

Significant

Measured at

for Identical

Observable

Unobservable

Fair Value

Assets

Inputs

Inputs

(in thousands)

    

12/31/20

    

(Level 1)

    

(Level 2)

    

(Level 3)

Recurring:

Investment securities available-for-sale:

U.S. government agencies

$

76,433

$

76,433

Residential mortgage-backed agencies

$

22,899

$

22,899

Commercial mortgage-backed agencies

$

33,042

$

33,042

Collateralized mortgage obligations

$

70,637

$

70,637

Obligations of states and political subdivisions

$

10,614

$

10,614

Collateralized debt obligations

$

13,260

$

13,260

Financial derivatives

$

(1,320)

$

(1,320)

Non-recurring:

Impaired loans

$

1,465

$

1,465

Other real estate owned

$

913

$

913

Fair Value Measurements
at September 30, 2020 Using

Assets/(liabilities)
Measured at
Fair Value

Quoted
Prices in
Active Markets
for Identical
Assets

Significant
Other
Observable
Inputs

Significant
Unobservable
Inputs

(in thousands)

09/30/20

(Level 1)

(Level 2)

(Level 3)

Recurring:

Investment securities available-for-sale:

U.S. government agencies

$

66,871

$

66,871

Residential mortgage-backed agencies

$

13,163

$

13,163

Commercial mortgage-backed agencies

$

34,160

$

34,160

Collateralized mortgage obligations

$

15,618

$

15,618

Obligations of states and political subdivisions

$

10,589

$

10,589

Collateralized debt obligations

$

12,760

$

12,760

Loans held for sale

$

5,211

$

5,211

Financial derivatives

$

(1,467)

$

(1,467)

Non-recurring:

Impaired loans

$

8,198

$

8,198

Other real estate owned

$

1,284

$

1,284

Fair Value Measurements
at December 31, 2019 Using

Assets/(liabilities)
Measured at
Fair Value

Quoted
Prices in
Active Markets
for Identical
Assets

Significant
Other
Observable
Inputs

Significant
Unobservable
Inputs

(in thousands)

12/31/19

(Level 1)

(Level 2)

(Level 3)

Recurring:

Investment securities available-for-sale:

U.S. government agencies

$

39,894

$

39,894

Residential mortgage-backed agencies

$

4,900

$

4,900

Commercial mortgage-backed agencies

$

27,764

$

27,764

Collateralized mortgage obligations

$

29,923

$

29,923

Obligations of states and political subdivisions

$

14,470

$

14,470

Collateralized debt obligations

$

14,354

$

14,354

Loans held for sale

$

1,749

$

1,749

Financial derivatives

$

(133)

$

(133)

Non-recurring:

Impaired loans

$

6,995

$

6,995

Other real estate owned

$

2,571

$

2,571

There were 0 transfers of assets between any of the fair value hierarchy for the nine and three month periods ended September 30, 20202021 or 2019.2020.

28

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 ended September 30, 20202021 and 2019:2020:

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 income

3,832

Ending balance September 30, 2021

$

17,092

Fair Value Measurements
Using Significant Unobservable Inputs
(Level 3)

(in thousands)

 Investment Securities
Available for Sale

Beginning balance July 1, 2021

$

16,230

Total gains realized/unrealized:

Included in other comprehensive income

862

Ending balance September 30, 2021

$

17,092

Fair Value Measurements

Using Significant Unobservable Inputs

(Level 3)

Investment Securities

(in thousands)

    

Available for Sale

Beginning balance January 1, 2020

$

14,354

Total losses realized/unrealized:

Included in other comprehensive loss

(1,594)

Ending balance September 30, 2020

$

12,760

Fair Value Measurements
Using Significant Unobservable Inputs
(Level 3)

(in thousands)

 Investment Securities
Available for Sale

Beginning balance July 1, 2020

$

11,952

Total losses realized/unrealized:

Included in other comprehensive income

808

Ending balance September 30, 2020

$

12,760

Fair Value Measurements
Using Significant Unobservable Inputs
(Level 3)

(in thousands)

 Investment Securities
Available for Sale

Beginning balance January 1, 2020

$

14,354

Total losses realized/unrealized:

Included in other comprehensive income

(1,594)

Ending balance September 30, 2020

$

12,760

Fair Value Measurements
Using Significant Unobservable Inputs
(Level 3)

(in thousands)

 Investment Securities
Available for Sale

Beginning balance January 1, 2019

$

15,277

Total losses realized/unrealized:

Included in other comprehensive income

(1,810)

Ending balance September 30, 2019

$

13,467

Fair Value Measurements
Using Significant Unobservable Inputs
(Level 3)

(in thousands)

 Investment Securities
Available for Sale

Beginning balance July 1, 2020

$

11,952

Total gains realized/unrealized:

Included in other comprehensive income

808

Ending balance September 30, 2020

$

12,760

Fair Value Measurements
Using Significant Unobservable Inputs
(Level 3)

(in thousands)

 Investment Securities
Available for Sale

Beginning balance July 1, 2019

$

14,872

Total losses realized/unrealized:

Included in other comprehensive loss

(1,405)

Ending balance September 30, 2019

$

13,467

There were 0 gains or losses included in earnings attributable to the change in realized/unrealized gains or losses related to the assets for the nine and three month periods ended September 30, 2020 and 2019.2021 or 2020.

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.

29

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

September 30, 2021

Fair Value Measurements

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

$

129,062

$

129,062

$

129,062

Interest bearing deposits in banks

5,876

5,876

5,876

Investment securities - AFS

235,564

235,564

$

218,472

$

17,092

Investment securities - HTM

61,979

71,707

42,633

29,074

Restricted bank stock

1,029

N/A

Loans, net

1,143,791

1,135,878

1,135,878

Accrued interest receivable

5,034

5,034

948

4,086

Financial Liabilities:

Deposits - non-maturity

1,270,342

1,270,342

1,270,342

Deposits - time deposits

174,152

175,298

175,298

Financial derivatives

727

727

727

Short-term borrowed funds

72,396

72,396

72,396

Long-term borrowed funds

30,929

30,980

30,980

Accrued interest payable

142

142

142

Off balance sheet financial instruments

December 31, 2020

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

$

146,673

$

146,673

$

146,673

Interest bearing deposits in banks

2,759

2,759

2,759

Investment securities - AFS

226,885

226,885

$

213,625

$

13,260

Investment securities - HTM

68,263

77,612

49,442

28,170

Restricted bank stock

4,468

N/A

Loans, net

1,149,596

1,150,186

1,150,186

Accrued interest receivable

6,241

6,241

907

5,334

Financial Liabilities:

Deposits - non-maturity

1,194,140

1,194,140

1,194,140

Deposits - time deposits

228,226

231,241

231,241

Financial derivative

1,320

1,320

1,320

Short-term borrowed funds

49,160

49,160

49,160

Long-term borrowed funds

100,929

104,825

104,825

Accrued interest payable

391

391

391

Off balance sheet financial instruments

September 30, 2020

Fair Value Measurements

Carrying

Fair

Quoted
Prices in
Active Markets
for Identical
Assets

Significant
Other
Observable
Inputs

Significant
Unobservable
Inputs

(in thousands)

Amount

Value

(Level 1)

(Level 2)

(Level 3)

Financial Assets:

Cash and due from banks

$

152,460

$

152,460

$

152,460

Interest bearing deposits in banks

3,146

3,146

3,146

Investment securities - AFS

153,161

153,161

$

140,401

$

12,760

Investment securities - HTM

69,221

76,370

50,332

26,038

Restricted bank stock

4,468

4,468

4,468

Loans, net

1,173,256

1,175,465

1,175,465

Loans held for sale

5,211

5,211

5,211

Accrued interest receivable

6,320

6,320

6,320

Financial Liabilities:

Deposits - non-maturity

1,141,596

1,141,596

1,141,596

Deposits - time deposits

235,688

239,136

239,136

Financial derivatives

1,467

1,467

1,467

Short-term borrowed funds

52,589

52,589

52,589

Long-term borrowed funds

100,929

103,338

103,338

Accrued interest payable

417

417

417

December 31, 2019

Fair Value Measurements

Carrying

Fair

Quoted
Prices in
Active Markets
for Identical
Assets

Significant
Other
Observable
Inputs

Significant
Unobservable
Inputs

(in thousands)

Amount

Value

(Level 1)

(Level 2)

(Level 3)

Financial Assets:

Cash and due from banks

$

48,512

$

48,512

$

48,512

Interest bearing deposits in banks

1,467

1,467

1,467

Investment securities - AFS

131,305

131,305

$

116,951

$

14,354

Investment securities - HTM

93,979

100,656

79,084

21,572

Restricted bank stock

4,415

4,415

4,415

Loans, net

1,038,894

1,037,032

1,037,032

Loans held for sale

1,749

1,749

1,749

Accrued interest receivable

4,116

4,116

4,116

Financial Liabilities:

Deposits - non-maturity

888,141

888,141

888,141

Deposits - time deposits

253,890

256,227

256,227

Financial derivative

133

133

133

Short-term borrowed funds

48,728

48,728

48,728

Long-term borrowed funds

100,929

100,848

100,848

Accrued interest payable

499

499

499


29


30

Note 98 – 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, 2019,2020, the three months ended March 31, 2021, the three months ended June 30, 2021, and the three months ended September 30, 2020:2021:

Investment

Investment

securities-

securities-

Investment

with OTTI

all other

securities-

Cash Flow

Pension

(in thousands)

    

AFS

    

AFS

    

HTM

    

Hedge

    

Plan

    

SERP

    

Total

Accumulated OCL, net:

Balance - January 1, 2020

$

(2,542)

$

(853)

$

(899)

$

(85)

$

(20,417)

$

(1,175)

$

(25,971)

Other comprehensive income/(loss) before reclassifications

(587)

1,291

(869)

(3,262)

(625)

(4,052)

Amounts reclassified from accumulated other comprehensive loss

(148)

(463)

584

1,049

138

1,160

Balance - December 31, 2020

$

(3,277)

$

(25)

$

(315)

$

(954)

$

(22,630)

$

(1,662)

$

(28,863)

Other comprehensive income/(loss) before reclassifications

266

(5,202)

405

(139)

(4,670)

Amounts reclassified from accumulated other comprehensive loss

(37)

45

272

55

335

Balance - March 31, 2021

$

(3,048)

$

(5,227)

$

(270)

$

(549)

$

(22,497)

$

(1,607)

$

(33,198)

Other comprehensive income/(loss) before reclassifications

1,581

2,034

(34)

938

4,519

Amounts reclassified from accumulated other comprehensive loss

(37)

(113)

34

272

55

211

Balance - June 30, 2021

$

(1,504)

$

(3,306)

$

(236)

$

(583)

$

(21,287)

$

(1,552)

$

(28,468)

Other comprehensive
  income/(loss) before
  reclassifications

550

(518)

79

(697)

(586)

Amounts reclassified from
  accumulated other
  comprehensive loss

(37)

31

273

55

322

Balance - September 30, 2021

$

(991)

$

(3,824)

$

(205)

$

(504)

$

(21,711)

$

(1,497)

$

(28,732)

(in thousands)

Investment
securities-
with OTTI
AFS

Investment
securities-
all other
AFS

Investment
securities-
HTM

Cash Flow
Hedge

Pension
Plan

SERP

Total

Accumulated OCL, net:

Balance – January 1, 2019

$

(1,899)

$

(3,601)

$

(1,131)

$

773

$

(18,017)

$

(528)

$

(24,403)

Other comprehensive
  income/(loss) before
  reclassifications

(497)

2,748

(858)

(3,189)

(730)

(2,526)

Amounts reclassified from
  accumulated other
  comprehensive loss

(146)

232

789

83

958

Balance – December 31, 2019

$

(2,542)

$

(853)

$

(899)

$

(85)

$

(20,417)

$

(1,175)

$

(25,971)

Other comprehensive
  income/(loss) before
  reclassifications

(1,188)

1,384

(963)

(5,177)

(5,944)

Amounts reclassified from
  accumulated other
  comprehensive loss

(37)

53

262

34

312

Balance - March 31, 2020

$

(3,767)

$

531

$

(846)

$

(1,048)

$

(25,332)

$

(1,141)

$

(31,603)

Other comprehensive
  income/(loss) before
  reclassifications

(244)

642

(81)

3,137

3,454

Amounts reclassified from
  accumulated other
  comprehensive loss

(37)

(34)

441

262

34

666

Balance - June 30, 2020

$

(4,048)

$

1,139

$

(405)

$

(1,129)

$

(21,933)

$

(1,107)

$

(27,483)

Other comprehensive
  income/(loss) before
  reclassifications

518

(235)

72

1,385

1,740

Amounts reclassified from
  accumulated other
  comprehensive loss

(37)

(421)

54

262

34

(108)

Balance - September 30, 2020

$

(3,567)

$

483

$

(351)

$

(1,057)

$

(20,286)

$

(1,073)

$

(25,851)

30


31

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

Before

Tax

Components of Other Comprehensive Income

Tax

(Expense)

(in thousands)

    

Amount

    

Benefit

    

Net

For the nine months ended September 30, 2021

Available for sale (AFS) securities with OTTI:

Unrealized holding gains

$

3,274

$

(877)

$

2,397

Less: accretable yield recognized in income

151

(40)

111

Net unrealized gains on investments with OTTI

3,123

(837)

2,286

Available for sale securities – all other:

Unrealized holding losses

(5,035)

1,349

(3,686)

Less: gains recognized in income

154

(41)

113

Net unrealized losses on all other AFS securities

(5,189)

1,390

(3,799)

Held to maturity securities:

Unrealized holding gains

Less: losses recognized in income

(54)

14

(40)

Less: amortization recognized in income

(96)

26

(70)

Net unrealized gains on HTM securities

150

(40)

110

Cash flow hedges:

Unrealized holding gains

615

(165)

450

Pension Plan:

Unrealized net actuarial gain

139

(37)

102

Less: amortization of unrecognized loss

(1,116)

299

(817)

Net pension plan liability adjustment

1,255

(336)

919

SERP:

Unrealized net actuarial loss

Less: amortization of unrecognized loss

(226)

���

60

(166)

Less: amortization of prior service costs

1

1

Net SERP liability adjustment

225

(60)

165

Other comprehensive income

$

179

$

(48)

$

131

September 30, 2020 and 2019:

32

Before

Tax

Components of Other Comprehensive Income

Tax

(Expense)

(in thousands)

    

Amount

    

Benefit

    

Net

For the nine months ended September 30, 2020

Available for sale (AFS) securities with OTTI:

Unrealized holding losses

$

(1,249)

$

335

$

(914)

Less: accretable yield recognized in income

151

(40)

111

Net unrealized losses on investments with OTTI

(1,400)

375

(1,025)

Available for sale securities – all other:

Unrealized holding gains

2,446

(655)

1,791

Less: gains recognized in income

622

(167)

455

Net unrealized gains on all other AFS securities

1,824

(488)

1,336

Held to maturity securities:

Unrealized holding gains

Less: gains recognized in income

60

(16)

44

Less: amortization recognized in income

(809)

217

(592)

Net unrealized gains on HTM securities

749

(201)

548

Cash flow hedges:

Unrealized holding losses

(1,335)

363

(972)

Pension Plan:

Unrealized net actuarial loss

(895)

240

(655)

Less: amortization of unrecognized loss

(1,074)

288

(786)

Net pension plan liability adjustment

179

(48)

131

SERP:

Unrealized net actuarial loss

Less: amortization of unrecognized loss

(141)

38

(103)

Less: amortization of prior service costs

2

(1)

1

Net SERP liability adjustment

139

(37)

102

Other comprehensive income

$

156

$

(36)

$

120

Components of Other Comprehensive Income
(in thousands)

Before
Tax
Amount

Tax
(Expense)
Benefit

Net

For the nine months ended September 30, 2020

Available for sale (AFS) securities with OTTI:

Unrealized holding losses

$

(1,249)

$

335

$

(914)

Less: accretable yield recognized in income

151

(40)

111

Net unrealized losses on investments with OTTI

(1,400)

375

(1,025)

Available for sale securities – all other:

Unrealized holding gains

2,446

(655)

1,791

Less: gains recognized in income

622

(167)

455

Net unrealized gains on all other AFS securities

1,824

(488)

1,336

Held to maturity securities:

Unrealized holding gains

Less: gains recognized in income

60

(16)

44

Less: amortization recognized in income

(809)

217

(592)

Net unrealized gains on HTM securities

749

(201)

548

Cash flow hedges:

Unrealized holding losses

(1,335)

363

(972)

Pension Plan:

Unrealized net actuarial loss

(895)

240

(655)

Less: amortization of unrecognized loss

(1,074)

288

(786)

Net pension plan liability adjustment

179

(48)

131

SERP:

Unrealized net actuarial loss

Less: amortization of unrecognized loss

(141)

38

(103)

Less: amortization of prior service costs

2

(1)

1

Net SERP liability adjustment

139

(37)

102

Other comprehensive income

$

156

$

(36)

$

120

Components of Other Comprehensive Income
(in thousands)

Before
Tax
Amount

Tax
(Expense)
Benefit

Net

For the nine months ended September 30, 2019

Available for sale (AFS) securities with OTTI:

Unrealized holding losses

$

(1,401)

$

380

$

(1,021)

Less: accretable yield recognized in income

149

(39)

110

Net unrealized losses on investments with OTTI

(1,550)

419

(1,131)

Available for sale securities – all other:

Unrealized holding gains

3,957

(1,072)

2,885

Less: gains recognized in income

1

1

Net unrealized gains on all other AFS securities

3,956

(1,072)

2,884

Held to maturity securities:

Unrealized holding gains

Less: amortization recognized in income

(243)

65

(178)

Net unrealized gains on HTM securities

243

(65)

178

Cash flow hedges:

Unrealized holding losses

(1,427)

387

(1,040)

Pension Plan:

Unrealized net actuarial gain

3,250

(881)

2,369

Less: amortization of unrecognized loss

(807)

219

(588)

Net pension plan liability adjustment

4,057

(1,100)

2,957

SERP:

Unrealized net actuarial loss

Less: amortization of unrecognized loss

(87)

23

(64)

Less: amortization of prior service costs

2

2

Net SERP liability adjustment

85

(23)

62

Other comprehensive income

$

5,364

$

(1,454)

$

3,910

33

Components of Other Comprehensive Loss
(in thousands)

Before
Tax
Amount

Tax
(Expense)
Benefit

Net

For the three months ended September 30, 2021

Available for sale (AFS) securities with OTTI:

Unrealized holding gains

$

751

$

(201)

$

550

Less: accretable yield recognized in income

50

(13)

37

Net unrealized gains on investments with OTTI

701

(188)

513

Available for sale securities – all other:

Unrealized holding losses

(708)

190

(518)

Less: gains recognized in income

Net unrealized gains on all other AFS securities

(708)

190

(518)

Held to maturity securities:

Unrealized holding gains

Less: losses recognized in income

(54)

14

(40)

Less: amortization recognized in income

12

(3)

9

Net unrealized gains on HTM securities

42

(11)

31

Cash flow hedges:

Unrealized holding gains

108

(29)

79

Pension Plan:

Unrealized net actuarial loss

(951)

254

(697)

Less: amortization of unrecognized loss

(372)

99

(273)

Net pension plan liability adjustment

(579)

155

(424)

SERP:

Less: amortization of unrecognized loss

(76)

20

(56)

Less: amortization of prior service costs

1

1

Net SERP liability adjustment

75

(20)

55

Other comprehensive loss

$

(361)

$

97

$

(264)

31


34

Components of Other Comprehensive Income
(in thousands)

Before
Tax
Amount

Tax
(Expense)
Benefit

Net

For the three months ended September 30, 2020

Available for sale (AFS) securities with OTTI:

Unrealized holding gains

$

708

$

(190)

$

518

Less: accretable yield recognized in income

50

(13)

37

Net unrealized losses on investments with OTTI

658

(177)

481

Available for sale securities – all other:

Unrealized holding losses

(321)

86

(235)

Less: gains recognized in income

575

(154)

421

Net unrealized gains on all other AFS securities

(896)

240

(656)

Held to maturity securities:

Less: amortization recognized in income

(74)

20

(54)

Net unrealized gains on HTM securities

74

(20)

54

Cash flow hedges:

Unrealized holding gains

90

(18)

72

Pension Plan:

Unrealized net actuarial gain

1,891

(506)

1,385

Less: amortization of unrecognized loss

(358)

96

(262)

Net pension plan liability adjustment

2,249

(602)

1,647

SERP:

Less: amortization of unrecognized loss

(47)

13

(34)

Less: amortization of prior service costs

1

(1)

Net SERP liability adjustment

46

(12)

34

Other comprehensive income

$

2,221

$

(589)

$

1,632

35

Components of Other Comprehensive Income
(in thousands)

Before
Tax
Amount

Tax
(Expense)
Benefit

Net

For the three months ended September 30, 2020

Available for sale (AFS) securities with OTTI:

Unrealized holding gains

$

708

$

(190)

$

518

Less: accretable yield recognized in income

50

(13)

37

Net unrealized gains on investments with OTTI

658

(177)

481

Available for sale securities – all other:

Unrealized holding losses

(321)

86

(235)

Less: gains recognized in income

575

(154)

421

Net unrealized losses on all other AFS securities

(896)

240

(656)

Held to maturity securities:

Unrealized holding gains

Less: amortization recognized in income

(74)

20

(54)

Net unrealized gains on HTM securities

74

(20)

54

Cash flow hedges:

Unrealized holding gains

90

(18)

72

Pension Plan:

Unrealized net actuarial gain

1,891

(506)

1,385

Less: amortization of unrecognized loss

(358)

96

(262)

Net pension plan liability adjustment

2,249

(602)

1,647

SERP:

Unrealized net actuarial loss

Less: amortization of unrecognized loss

(47)

13

(34)

Less: amortization of prior service costs

1

(1)

Net SERP liability adjustment

46

(12)

34

Other comprehensive income

$

2,221

$

(589)

$

1,632

Components of Other Comprehensive Loss
(in thousands)

Before
Tax
Amount

Tax
(Expense)
Benefit

Net

For the three months ended September 30, 2019

Available for sale (AFS) securities with OTTI:

Unrealized holding losses

$

(1,126)

$

306

$

(820)

Less: accretable yield recognized in income

50

(13)

37

Net unrealized losses on investments with OTTI

(1,176)

319

(857)

Available for sale securities – all other:

Unrealized holding gains

552

(149)

403

Less: gains recognized in income

1

1

Net unrealized gains on all other AFS securities

551

(149)

402

Held to maturity securities:

Unrealized holding gains

Less: amortization recognized in income

(82)

22

(60)

Net unrealized gains on HTM securities

82

(22)

60

Cash flow hedges:

Unrealized holding losses

(329)

90

(239)

Pension Plan:

Unrealized net actuarial loss

(103)

28

(75)

Less: amortization of unrecognized loss

(269)

73

(196)

Net pension plan liability adjustment

166

(45)

121

SERP:

Less: amortization of unrecognized loss

(29)

8

(21)

Less: amortization of prior service costs

1

1

Net SERP liability adjustment

28

(8)

20

Other comprehensive loss

$

(678)

$

185

$

(493)

The following table presents the details of amounts reclassified from accumulated other comprehensive loss for the nine and three month periods ended September 30, 20202021 and 2019:2020:

Amounts Reclassified from

Nine Months Ended

Accumulated Other Comprehensive Loss

September 30,

Affected Line Item in the Statement

(in thousands)

    

2021

    

2020

    

Where Net Income is Presented

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

Accretable yield

$

151

$

151

Interest income on taxable investment securities

Taxes

(40)

(40)

Provision for income tax expense

$

111

$

111

Net of tax

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

Gains recognized

$

154

$

622

Net gains

Taxes

(41)

(167)

Provision for income tax expense

$

113

$

455

Net of tax

Net unrealized losses on held to maturity securities:

Amortization

$

(96)

$

(809)

Interest income on taxable investment securities

(Losses)/gains recognized

(54)

60

Net gains

Taxes

40

201

Provision for income tax expense

$

(110)

$

(548)

Net of tax

Net pension plan liability adjustment:

Amortization of unrecognized loss

$

(1,116)

$

(1,074)

Other Expense

Taxes

299

288

Provision for income tax expense

$

(817)

$

(786)

Net of tax

Net SERP liability adjustment:

Amortization of unrecognized loss

$

(226)

$

(141)

Other Expense

Amortization of prior service costs

1

2

Salaries and employee benefits

Taxes

60

37

Provision for income tax expense

$

(165)

$

(102)

Net of tax

Total reclassifications for the period

$

(868)

$

(870)

Net of tax

36

Amounts Reclassified from

Three Months Ended

Accumulated Other Comprehensive Loss

September 30,

Affected Line Item in the Statement

(in thousands)

2021

2020

Where Net Income is Presented

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

Accretable Yield

$

50

$

50

Interest income on taxable investment securities

Taxes

(13)

(13)

Provision for income tax expense

$

37

$

37

Net of tax

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

Gains recognized

$

$

575

Net gains

Taxes

(154)

Provision for income tax expense

$

$

421

Net of tax

Net unrealized losses on held to maturity securities:

Amortization

$

12

$

(74)

Interest income on taxable investment securities

Losses recognized

(54)

Net gains

Taxes

11

20

Provision for income tax expense

$

(31)

$

(54)

Net of tax

Net pension plan liability adjustment:

Amortization of unrecognized loss

$

(372)

$

(358)

Other expense

Amortization of prior service costs

Salaries and employee benefits

Taxes

99

96

Provision for income tax expense

$

(273)

$

(262)

Net of tax

Net SERP liability adjustment:

Amortization of unrecognized loss

$

(76)

$

(47)

Other expense

Amortization of prior service costs

1

1

Salaries and employee benefits

Taxes

20

12

Provision for income tax expense

$

(55)

$

(34)

Net of tax

Total reclassifications for the period

$

(322)

$

108

Net of tax

Amounts Reclassified from

Nine Months Ended

Accumulated Other Comprehensive Loss

September 30,

Affected Line Item in the Statement

(in thousands)

2020

2019

Where Net Income is Presented

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

Accretable yield

151

149

Interest income on taxable investment securities

Taxes

(40)

(39)

Provision for income tax expense

$

111

$

110

Net of tax

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

Gains on sales

$

622

$

1

Net gains

Taxes

(167)

Provision for income tax expense

$

455

$

1

Net of tax

Net unrealized losses on held to maturity securities:

Amortization

$

(809)

$

(243)

Interest income on taxable investment securities

Gains on calls

60

Net gains

Taxes

201

65

Provision for income tax expense

$

(548)

$

(178)

Net of tax

Net pension plan liability adjustment:

Amortization of unrecognized loss

$

(1,074)

$

(807)

Other Expense

Taxes

288

219

Provision for income tax expense

$

(786)

$

(588)

Net of tax

Net SERP liability adjustment:

Amortization of unrecognized loss

$

(141)

$

(87)

Other Expense

Amortization of prior service costs

2

2

Salaries and employee benefits

Taxes

37

23

Provision for income tax expense

$

(102)

$

(62)

Net of tax

Total reclassifications for the period

$

(870)

$

(717)

Net of tax

Amounts Reclassified from

Three Months Ended

Accumulated Other Comprehensive Loss

September 30,

Affected Line Item in the Statement

(in thousands)

2020

2019

Where Net Income is Presented

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

Accretable Yield

$

50

$

50

Interest income on taxable investment securities

Taxes

(13)

(13)

Provision for income tax expense

$

37

$

37

Net of tax

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

Gains on sales

$

575

$

1

Net gains

Taxes

(154)

Provision for income tax expense

$

421

$

1

Net of tax

Net unrealized losses on held to maturity securities:

Amortization

$

(74)

$

(82)

Interest income on taxable investment securities

Taxes

20

22

Provision for income tax expense

$

(54)

$

(60)

Net of tax

Net pension plan liability adjustment:

Amortization of unrecognized loss

$

(358)

$

(269)

Other expense

Taxes

96

73

Provision for income tax expense

$

(262)

$

(196)

Net of tax

Net SERP liability adjustment:

Amortization of unrecognized loss

$

(47)

$

(29)

Other expense

Amortization of prior service costs

1

1

Salaries and employee benefits

Taxes

12

8

Provision for income tax expense

$

(34)

$

(20)

Net of tax

Total reclassifications for the period

$

108

$

(238)

Net of tax

37

Note 10 – Borrowed Funds

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

(Dollars in thousands)

Nine Months
Ended
September 30, 2020

Year Ended
December 31, 2019

Securities sold under agreements to repurchase:

Outstanding at end of period

$

52,589

$

48,728

Weighted average interest rate at end of period

0.18%

0.23%

Maximum amount outstanding as of any month end

$

52,589

$

50,345

Average amount outstanding

$

43,895

$

39,778

Approximate weighted average rate during the period

0.21%

0.28%

At September 30, 2020, the repurchase agreements were secured by $75.8 million in investment securities issued by government related agencies. A minimum of 102% of fair value is pledged against account balances.

At September 30, 2020, the long-term advances from the Federal Home Loan Bank of Atlanta (“FHLB”) were secured by $209.0 million in loans.

Note 119 – 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)

    

2021

    

2020

    

2021

    

2020

Service cost

$

117

$

169

$

39

$

57

Interest cost

1,066

1,219

355

406

Expected return on assets

(2,677)

(2,661)

(892)

(887)

Amortization of net actuarial loss

1,116

1,074

372

358

Net pension credit included in employee benefits and other expense

$

(378)

$

(199)

$

(126)

$

(66)

Nine Months Ended

Three Months Ended

Defined Benefit SERP

September 30,

September 30,

(in thousands)

    

2021

    

2020

    

2021

    

2020

Service cost

$

104

$

93

$

35

$

31

Interest cost

179

201

60

67

Amortization of recognized loss

226

141

75

47

Amortization of prior service cost

(1)

(2)

(1)

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

$

508

$

433

$

170

$

144

Pension Plan

Nine Months Ended

Three Months Ended

September 30,

September 30,

(in thousands)

2020

2019

2020

2019

Service cost

$

169

$

199

$

57

$

66

Interest cost

1,219

1,311

406

437

Expected return on assets

(2,661)

(2,292)

(887)

(764)

Amortization of net actuarial loss

1,074

807

358

269

Net pension (credit)/expense included in employee benefits
  and other expense

$

(199)

$

25

$

(66)

$

8

Defined Benefit SERP

Nine Months Ended

Three Months Ended

September 30,

September 30,

(in thousands)

2020

2019

2020

2019

Service cost

$

93

$

71

$

31

$

24

Interest cost

201

247

67

82

Amortization of recognized loss

141

87

47

29

Amortization of prior service cost

(2)

(2)

(1)

(1)

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

$

433

$

403

$

144

$

134

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 Corporation’s Pension Plan and the Defined Benefit SERP plans.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

34


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.

38

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. ANaN contributions were made to the Pension Plan during the first nine months of 2021 and a contribution of $1.0 million was made to the Pension Plan during the first nine months of 2020. 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 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 2018,2019, the Board approved discretionary contributions to four participants totaling $119,252.$123,179. The contributions vestedhad a two year vesting period that ended on December 31, 2019.2020. In January 2019,2020, the Board of Directors of First United Corporation approved discretionary contributions to four4 participants totaling $123,179.$126,058. The Corporation recorded $36,020 and $44,719$47,271 of related compensation expense for the first nine months of 20202021 and 2019, respectively,2020.  The Corporation recorded $15,757 for the third quarters of 2021 and 2020 related to these contributions. In January 2021, the Board of Directors approved discretionary contributions to 3 participants totaling $101,257. The Corporation recorded $12,007 and $14,906$37,971 of related compensation expense for the third quarters of 2020 and 2019, respectively, related to these contributions. In January 2020, the Board approved discretionary contributions to four participants totaling $126,058. The Corporation recorded $47,272 of related compensation for the first nine months of 20202021 and $15,757$12,657 for the third quarter of 20202021 related to these contributions. Each of the above annual contributionsdiscretionary contribution has a two year vesting period.

Note 1210 - 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).

35


Stock based awards were made to non employee directors in June 2020 pursuantPursuant to First United Corporation’s director compensation policy. Eachpolicy, each director receives an annual retainer of 1,000 shares of First United Corporation common stock, plus $10,000 to be paid, at the director’s election, in cash or additional shares of common stock. In June 2020, a total of 13,160 fully vested shares of common stock were issued to directors, which had a grant date fair market value of $14.52 per share. In July 2020, a total of 916 fully vested shares of common stock were issued to a new director, which had a grant date fair market value of $11.22 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.  Director stock compensation expense was $191,717

39

for the nine months ended September 30, 2021 and $158,795 for the nine months ended September 30, 2020 and $200,5942020. Director stock compensation expense was $58,857 for the ninethree months ended September 30, 2019. Director stock compensation expense was2021 and $52,114 for the three months ended September 30, 2020 and $66,893 for the three months ended September 30, 2019.2020.

Restricted Stock Units

On March 26, 2020, pursuant to the recently adoptedCorporation’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") of the Corporation granted restricted stock units (“RSU”)RSUs to the Corporation'sCorporation’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 theFirst 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-yearthree year performance period ending December 31, 2021, (b) a performance vesting award for a three year performance period ending December 31, 2022, and (c) a time-vesting award that will vest ratably over a three-yearthree year period beginning on March 26, 2021. UnderTarget performance levels were set based on the annual budget which supports the Corporation’s long-term objective of achieving high performance vesting RSUs,as compared to peers. Threshold performance is the officers will receive 50%minimum level of acceptable performance as defined by the target number of shares if at least oneCommittee and maximum performance represented a level potentially achievable under ideal circumstances. Achievement of the threshold performance levels is met, 100%level would result in each executive participant earning a payout at 50% of thehis or her respective target number of shares if at least oneaward opportunity. Achievement of the target performance levels is met,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 number of shares if at least one of the maximumopportunity. Actual results for any goal that falls between performance levels is met. Actual vesting amounts willwould be pro-rated between threshold and target levels and target and maximum levelsinterpolated to reward incremental improvement.calculate a proportionate award. For the performance period ending December 31, 2021, the RSUs'RSUs’ performance goal is based on earnings per share for the year ending December 31, 2021. For the performance period ending December 31, 2022, the RSUs'RSUs’ performance goals are based on earnings per share for the year ending December 31, 2022 and growth in tangible book value per share during the performance period. The threshold, target and maximum performance levels for these grants will be disclosed pursuant to Item 402 of Regulation S-K following the conclusion of the applicable performance period.

To receive any shares under aan 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 relating to 25,00419,934 performance vesting shares of common stockand 5,070 time vesting shares (target level) were granted, which had a grant date fair market value of $12.54 per share of common stock underlying each RSU. On March 26, 2021, 1,690 of the 5,070 time vesting shares were issued to participants.  Stock compensation expense was $78,381 and $93,727 for the first nine months of 2021 and 2020, respectively.  Stock compensation expense was $26,127 and $31,243 for the third quarterthree month periods ended September 30, 2021 and 2020. Unrecognized compensation expense at September 30, 2021 related to unvested RSUs was $110,173.

In May 2021, RSUs relating to 7,389 performance vesting shares and 3,693 time vesting shares (target level) were granted, which had a grant date fair market value of 2020. Compensation$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 beginning on May 5, 2022. Stock compensation expense was $27,619 for the nine month periods ended September 30, 2021.  Stock compensation expense was $16,571 for the three months ended September 30, 2021.  Unrecognized compensation expense as of September 30, 2021 related to unvested units was $219,797.$171,235.

Note 1311 – Derivative Financial Instruments

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

40

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

The fair value of the interest rate swap contracts was $(1.5)$(727) thousand and $(1.3) million and $(133) thousand at September 30, 20202021 and December 31, 2019,2020, respectively.

For the nine months ended September 30, 2020,2021, the Corporation recorded a decreasean increase in the value of the derivatives of $1.3 million$594 thousand and the related deferred tax of $363$62 thousand in net accumulated other comprehensive loss to reflect the effective portion of cash flow hedges. ASC Subtopic 815-30 requires the net accumulated other comprehensive loss to be reclassified to earnings if the hedge becomes ineffective or is terminated. There was 0 hedge ineffectiveness recorded for the ninesix months ended September 30, 2020.2021. 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, 2020.2021.

36


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, 20202021 and 2019.2020.

Derivative in Cash Flow Hedging Relationships

Amount of gain or

(loss) recognized in

Amount of gain or

income or derivative

Amount of gain or

(loss) reclassified from

(ineffective portion

(loss) recognized in

accumulated OCI into

and amount excluded

OCI on derivative

income (effective

from effectiveness

(in thousands)

    

(effective portion)

    

portion) (a)

    

testing) (b)

Interest rate contracts:

Nine months ended:

September 30, 2021

$

450

$

$

September 30, 2020

(972)

Three months ended:

September 30, 2021

$

79

$

$

September 30, 2020

72

Notes:

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

Note 12 – Revenue Recognition

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

Wealth Management

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

41

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

Service Charges on Deposit Accounts

Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, and other deposit account related fees. The Corporation’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Corporation’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.

Interchange Fees – Debit and Credit Card Income

Fees, exchange, and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Corporation’s debit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Corporation cardholder uses a non-Corporation ATM or a non-Corporation cardholder uses a Corporation ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. 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. Payment is typically received immediately or in the following month.

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

Nine Months Ended

Three Months Ended

September 30,

September 30,

(in thousands)

    

2021

2020

2021

2020

Noninterest income

In-scope of Topic 606:

Service charges on deposit accounts

$

1,292

$

1,439

$

475

$

447

Other service charges

664

517

232

195

Trust department

6,441

5,355

2,166

1,871

Debit card income

2,623

2,052

900

738

Brokerage commissions

854

713

229

234

Noninterest income (in-scope of Topic 606)

11,874

10,076

4,002

3,485

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

1,712

1,335

521

493

Total Noninterest Income

$

13,586

$

11,411

$

4,523

$

3,978

Derivative in Cash Flow Hedging Relationships

(in thousands)

Amount of gain or (loss) recognized in OCI on derivative (effective portion)

Amount of gain or (loss) reclassified from accumulated OCI into income (effective portion) (a)

Amount of gain or (loss) recognized in income or derivative (ineffective portion and amount excluded from effectiveness testing) (b)

Interest rate contracts:

Nine months ended:

September 30, 2020

$

(972)

$

$

September 30, 2019

(1,040)

Three months ended:

September 30, 2020

$

72

$

$

September 30, 2019

(239)

Notes:

(a) Reported as interest expense

42

Note 13 – Regulatory Capital Requirements

The following table presents our capital ratios for the nine months ended September 30, 2021.

(b) Reported

    

September 30,
2021

    

December 31,
2020

    

Required for
Capital
Adequacy
Purposes

    

Required
to be Well
Capitalized

 

Total Capital (to risk-weighted assets)

Consolidated

15.51

%  

16.08

%  

8.00

%  

10.00

%

First United Bank & Trust

14.64

%  

15.50

%  

8.00

%  

10.00

%

Tier 1 Capital (to risk-weighted assets)

Consolidated

14.26

%  

14.83

%  

6.00

%  

8.00

%

First United Bank & Trust

13.39

%  

14.25

%  

6.00

%  

8.00

%

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

Consolidated

12.15

%  

12.61

%  

4.50

%  

6.50

%

First United Bank & Trust

13.39

%  

14.25

%  

4.50

%  

6.50

%

Tier 1 Capital (to average assets)

Consolidated

10.33

%  

10.36

%  

4.00

%  

5.00

%

First United Bank & Trust

9.59

%  

9.81

%  

4.00

%  

5.00

%

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

First United Corporation’s stock repurchase plan was initially adopted effective January 27, 2021, which authorized the repurchase of up to 400,000 shares of common stock of First United Corporation. The plan authorizes the repurchases to be conducted through open market or private transactions at such times and in such amounts per transaction as other incomethe Chairman and Chief Executive Officer of First United Corporation determines to be appropriate.  

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

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

Interest Rate Swap Agreements

The Corporation has entered into interest rate swap agreements to modify the re-pricing characteristics of certain interest-bearing liabilities as a part of managing interest rate risk. The swap agreements have been designated as cash flow hedges, and accordingly, the fair value of the interest rate swap contracts is reported in Other Assets or Other Liabilities on the Consolidated Statement of Financial Condition. The swap agreements were entered into with a third-party financial institution. The Corporation is party to master netting arrangements with its financial institution counterparty; however, the Corporation does not offset assets and liabilities under these arrangements for financial statement presentation purposes. The master netting arrangements provide for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract. Collateral, in the form of cash and investment securities, are pledged by the Corporation as the counterparty with net liability positions in accordance with contract thresholds. See Note 1312 to the Consolidated Financial Statements for more information.

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

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

43

Bank to repurchase the assets. As a result, these repurchase agreements are accounted for as collateralized financing arrangements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is reflected as a liability in the Consolidated Statement of Financial Condition, while the securities underlying the repurchase agreements remain in the respective investment securities asset accounts. There is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities. In addition, as the Bank does not enter into reverse repurchase agreements, there is no such offsetting to be done with the repurchase agreements. The right of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral would be used to settle the fair value of the repurchase agreement should the Bank be in default (i.e. fails to repurchase the U.S. securities on the maturity date of the agreement). The investment security collateral, maintained at 102% of the borrowing, is held by a third party financial institution in the counterparty’s custodial account.

37


The following table presents the assets and liabilities subject to an enforceable master netting arrangement or repurchase agreements at September 30, 20202021 and December 31, 2019.2020.

Net Amounts

Gross Amounts

Gross

Gross

of (Assets)/

Not Offset in the

Amounts of

Amounts

Liabilities

Statement of Condition

Recognized

Offset in the

Presented in

Cash

(Assets)/

Statement of

the Statement

Financial

Collateral

Net

(in thousands)

    

Liabilities

    

Condition

    

of Condition

    

Instruments

    

Pledged

    

Amount

September 30, 2021

Interest Rate Swap Agreements

$

727

$

$

727

$

(727)

$

2,000

$

Repurchase Agreements

$

72,396

$

$

72,396

$

(72,396)

$

$

December 31, 2020

Interest Rate Swap Agreements

$

1,320

$

$

1,320

$

(1,320)

$

$

Repurchase Agreements

$

49,160

$

$

49,160

$

(49,160)

$

$

Gross Amounts
Not Offset in the
Statement of Condition

(in thousands)

Gross
Amounts of
Recognized
(Assets)/
Liabilities

Gross
Amounts
Offset in the
Statement of
Condition

Net Amounts
of (Assets)/
Liabilities
Presented in
the Statement
of Condition

Financial
Instruments

Cash
Collateral
Pledged

Net
Amount

September 30, 2020

Interest Rate Swap Agreements

$

1,467

$

$

1,467

$

(1,467)

$

2,000

$

Repurchase Agreements

$

52,589

$

$

52,589

$

(52,589)

$

$

December 31, 2019

Interest Rate Swap Agreements

$

133

$

$

133

$

(133)

$

$

Repurchase Agreements

$

48,728

$

$

48,728

$

(48,728)

$

$

Note 15 - Goodwill

Accounting Standards Codification (“ASC”) Topic 350, Intangibles – Goodwill and Other provides guidance with respect to goodwill.  Under this guidance, goodwill is not amortized but shall be tested at least annually for impairment at a level of accounting referred to as a reporting unit. The Corporation is considered the sole reporting unit. Goodwill of a reporting unit shall be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Impairment of goodwill is the condition that exists when the carrying amount of a reporting unit that includes goodwill exceeds its fair value. A goodwill impairment loss is recognized for the amount that the carrying amount of a reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit.  

An entity may assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill. If, after assessing the totality of events or circumstances qualitatively, an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the entity shall perform a quantitative goodwill impairment test. However, if, after assessing the totality of events or circumstances qualitatively, an entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the quantitative goodwill impairment test is unnecessary.

Management notes that the emergence of COVID-19 as a global pandemic during the first nine months of 2020 has resulted in significant deterioration in general economic conditions and has caused a deterioration in the environment in which the Corporation operates. This uncertainty has resulted in a significant decreases in the market prices for the stock of institutions in the financial services industry, including the Corporation.  Based on the totality of the circumstances and the impact of the economic conditions on the stock price, the events more likely than not reduce the fair value of a reporting unit below its carrying amount, including goodwill. As such, a quantitative analysis of the fair value of the Corporation as of September 30, 2020 was performed.  

We utilized an independent third party in our analysis which considered both income and market approaches. The income approach used a discounted cash flow analysis based on a five-year forecast of results, including potential cost synergies a buyer would consider. The market approaches took into account the fair value of comparable companies (public guideline companies) as well as the Corporation’s current stock price adjusted for a control premium. We assigned weightings of 50% to the income approach, 40% to the public guideline companies’ result and 10% to the Corporation’s stock price with control premium result. The results indicated the Corporation’s fair value exceeded its carrying value by approximately 3% and 0 impairment was recognized.

The assumptions used in the impairment test of goodwill are susceptible to change based on changes in economic conditions and other factors, including our stock price. Any change in the assumptions which we utilize to determine the carrying value of goodwill could adversely impact our results of operations.

Note 1615 – Adoption of New Accounting Standards and Effects of New Accounting Pronouncements

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

38


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.

In August 2018,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 FASB issuedCECL model to follow. The Corporation is currently evaluating the provisions of ASU 2018-13, “Fair Value Measurement (Topic 820)” - ChangesNo. 2016-13 to determine the Disclosure Requirements for Fair Value Measurement. This ASU modifiespotential impact the disclosure requirementsnew standard will have on fair value measurements by requiring that Level 3 fair value disclosures include the range and weighted average of significant unobservable inputs used to develop those fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 became effective for the Corporation on January 1, 2020 and did not have a significant impact on its 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 through December 31, 2022. The Corporation is in the process of evaluating the impact of this standard on the loan portfolio, investment portfolio, long term debt and interest rate swaps, but believes that its adoption will not have a material impact on the Corporation’s financial condition or results of operations.

44


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

INTRODUCTION

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, 2019.2020.

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

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements do not represent historical facts, but are statements about management'smanagement’s beliefs, plans and objectives about the future, as well as its assumptions and judgments concerning such beliefs, plans and objectives. These statements are evidenced by terms such as "anticipate," "estimate," "should," "expect," "believe," "intend," and similar expressions. Although these statements reflect management'smanagement’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", including the risk factor set forth in First United Corporation’s Annual Report on Form 10-K, as amended, for the year ended December 31, 20192020 entitled, “The outbreak of the recent coronavirus (‘COVID-19’), or an outbreak of another highly infectious or contagious disease, could adversely affect the Corporation’s business, financial condition and results of operations.” and any updates thereto that might be contained in subsequent reports filed by First United Corporation. The risks and uncertainties associated with the COVID-19 pandemic and its impact on the Corporation will depend on, among other things, the length of time that the pandemic continues; the duration of  the potential imposition of further restrictions on travel in the future; the effect of the pandemic on the global, national, and local economies and on the businesses of our borrowers and their ability to make payments on their obligations; the remedial actions and stimulus measures adopted by federal, state, and local governments; and the inability of employees to work due to illness, quarantine, or government mandates.

FIRST UNITED CORPORATION

First United Corporation is a Maryland corporation chartered in 1985 and a bank holding company registered with the Board of Governors of the Federal Reserve System (the “FRB”) under the Bank Holding Company Act of 1956, as amended.  The Corporation’s primary business is serving as the parent company of First United Bank & Trust, a Maryland trust company (the “Bank”), First United Statutory Trust I (“Trust I”) and First United Statutory Trust II (“Trust II” and together with Trust I, the “Trusts”), both Connecticut statutory business trusts.

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

At September 30, 2020,2021, the Corporation’s total assets were $1.7 billion, net loans were $1.2$1.1 billion, and deposits were $1.4 billion. Shareholders’ equity at September 30, 20202021 was $130.2$133.8 million.

45

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


COVID-19

40


ESTIMATES AND CRITICAL ACCOUNTING POLICIES

This discussionThe COVID-19 pandemic has adversely impacted our business and analysisfinancial results and that of many of our financial conditioncustomers, and resultsthe ultimate impact will depend on future developments, which are highly uncertain, cannot be predicted, and are largely outside of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted incontrol, including the United States of America. The preparation of these financial statements requires management to make estimatesscope and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. (See Note 1duration of the Notes to Consolidated Financial Statements includedpandemic and actions taken by governmental authorities in Item 8 of Part II of First United Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019). On an on-going basis, management evaluates estimates, including those related to loan losses and potential impairment of goodwill, other-than-temporary impairment (“OTTI”) of investment securities, income taxes, fair value of investments and pension plan assumptions. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the consolidated financial statements.

Management does not believe that any material changes in our critical accounting policies have occurred since December 31, 2019.

Allowance for Loan Losses

One of our most important accounting policies is that relatedresponse to the monitoring of the loan portfolio. A variety of estimates impact the carrying value of the loan portfolio, including the calculation of the allowance for loan losses (the “ALL”), the valuation of underlying collateral, the timing of loan charge-offs and the placement of loans on non-accrual status.pandemic. The ALL is established and maintained at a level that management believes is adequate to cover losses resulting from the inability of borrowers to make required payment on loans. Estimates for loan losses are arrived at by analyzing risks associated with specific loans and the loan portfolio, current and historical trends in delinquencies and charge-offs, and changes in the size and composition of the loan portfolio. The analysis also requires consideration of the economic climate and outlook, including the economic conditions specific to Western Maryland and Northeastern West Virginia, changes in lending rates, political conditions, and legislation impacting the banking industry. Because the calculation of the ALL relies on management’s estimates and judgments relating to inherently uncertain events, actual results may differ from management’s estimates.

Goodwill

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, Intangibles - Goodwill and Other, provides guidance on the accounting and reporting of goodwill subsequent to its acquisition. The $11.0 million recorded as goodwill at September 30, 2020 is primarily relatedCOVID-19 pandemic has created extensive disruptions to the 2003 acquisition of certain branches. 

Goodwill is not amortized but shall be tested at least annually for impairment at a level of accounting referred to as a reporting unit. The Corporation is considered the sole reporting unit. Goodwill of a reporting unit shall be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Impairment of goodwill is the condition that exists when the carrying amount of a reporting unit that includes goodwill exceeds its fair value. A goodwill impairment loss is recognized for the amount that the carrying amount of a reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit.   An entity may assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill. If, after assessing the totality of events or circumstances qualitatively, an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the entity shall perform the quantitative goodwill impairment test. However, if, after assessing the totality of events or circumstances qualitatively, an entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the quantitative goodwill impairment test is unnecessary.

The Corporation performs its annual goodwill assessment each December. However, management notes that the emergence of COVID-19 as a global pandemic during the first nine months of 2020 has resulted in significant deterioration in the general economic conditions and has caused a deterioration in the environment in which the Corporation operates.  The reduction in interest rates and the resultant impact to margin, the impact of full and partial closures on business clients leading to loss of jobs for consumers and reduced cash flow for businesses, the execution of Paycheck Protection Program (“PPP”) loans and modifications, and the inflow of deposits as customers flock to safety are all signs indicative of the economic and industry stress.  While the Corporation’s core income has remained strong year to date due to PPP fees, mortgage banking and steady net interest income, the provision expense has increased as the risk inherent in the loan portfolio has been recognized through changing qualitative factors. The full impact to earnings in the banking industryU.S. economies and to the Corporation specifically, remains uncertain as therelives of individuals throughout the world. Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including closures of businesses and schools, fiscal and monetary stimulus, and legislation designed to deliver financial aid and other relief. While the scope, duration, and full effects of COVID-19 are not fully known, the pandemic and the efforts to contain it have been a multitudedisrupted global economic activity, adversely affected the functioning of government plans implemented duringfinancial markets, impacted market interest rates, increased economic and market uncertainty, and disrupted trade and supply chains.

Congress, the second quarter of 2020 aimed at providing financial assistancePresident, and the FRB have taken several actions designed to businesses.  However, the stock price for the Corporation has been negatively impacted, as has been the case with stock prices of the Corporation’s peers.   Based on the totality of the circumstances and

41


the impact ofcushion the economic conditions onfallout. Most notably, the stock price, management concluded that it is more likely than not that the fair value of a reporting unit is less than its carrying amount and engaged an independent third party to perform the quantitative analysis of comparing the fair value of the Corporation to its carrying value, including goodwill.

The quantitative assessment of goodwill was performed utilizing a discounted cash flow analysis (“income approach”) and estimates of selected market information (“market approach”). The income approach measures the fair value of an interest in a business by discounting expected future cash flows to present value. One market approach takes into consideration the fair values of comparable companies operating in similar lines of business that are potentially subject to similar economic and environmental factors and could be considered reasonable investment alternatives. The second market approach considered the Corporation’s current stock price adjusted for a control premium. The results of the income approach were weighted at 50% while the results of the market approaches were weighted 40% and 10%, respectively. The results of the quantitative impairment analysis indicated that the Corporation’s fair value exceeded the carrying value by approximately 3%.

.

The assumptions used in the impairment test of goodwill are susceptible to change based on changes in economic conditions and other factors, including our stock price. Any change in the assumptions which we utilize to determine the carrying value of goodwill could adversely impact our results of operations.

Accounting for Income Taxes

We account for income taxes in accordance with ASC Topic 740, Income Taxes. Under this guidance, deferred taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Increases or decreases in the value of deferred tax assets and liabilities due to a change in tax rates are recognized as income or expense, respectively, in the period that includes the date on which the change becomes effective.

Management regularly reviews the carrying amount of the Corporation’s net deferred tax assets to determine if the establishment of a valuation allowance is necessary. If management determines, based on the available evidence, that it is more likely than not that all or a portion of our net deferred tax assets will not be realized in future periods, then a deferred tax valuation allowance will be established. Consideration is given to various positive and negative factors that could affect the realization of the deferred tax assets. In evaluating this available evidence, management considers, among other things, historical performance, expectations of future earnings, the ability to carry back losses to recoup taxes previously paid, length of statutory carry forward periods, experience with utilization of operating loss and tax credit carry forwards not expiring, tax planning strategies and timing of reversals of temporary differences. Significant judgment is required in assessing future earnings trends and the timing of reversals of temporary differences. Management’s evaluation is based on current tax laws as well as management’s expectations of future performance.

Management expects that our adherence to the required accounting guidance may result in increased volatility in quarterly and annual effective income tax rates because of changes in judgment or measurement including changes in actual and forecasted income before taxes, tax laws and regulations, and tax planning strategies.

Other-Than-Temporary Impairment of Investment Securities

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

42


Fair Value of Investments

We have determined the fair value of our investment securities in accordance with the requirements 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 measures the fair market values of its investments based on the fair value hierarchy established in Topic 820. The determination of fair value of investments and other assets is discussed further in Note 8 to the consolidated financial statements presented elsewhere in this report.

Pension Plan Assumptions

Our pension plan costs are calculated using actuarial concepts, as discussed within the requirements of ASC Topic 715, Compensation – Retirement Benefits. Pension expense and the determination of our projected pension liability are based upon two critical assumptions: (a) the discount rate; and (b) the expected return on plan assets. We evaluate each of these critical assumptions annually. Other assumptions impact the determination of pension expense and the projected liability including the primary employee demographics, such as retirement patterns, employee turnover, mortality rates, and estimated employer compensation increases. These factors, along with the critical assumptions, are carefully reviewed by management each year in consultation with our pension plan consultants and actuaries. Further information about our pension plan assumptions, the plan’s funded status, and other plan information is included in Note 11 to the consolidated financial statements presented elsewhere in this report.

Response to COVID-19

Protecting the health, safety, and financial well-being of our associates and customers was and continues to be our goal as we quickly adapted to COVID-19.

The following actions were implemented from our well-designed and tested Business Continuity Plan:

Notified our shareholders and customers in early March as to our enhanced measures to protect our associates and customers

Suspended all business travel, reduced all face to face meetings with outside vendors and customers, and requested all associates postpone personal travel outside of their market areas

oImplemented self-quarantine measures for associates who travel outside the market areas

Implemented plans in mid-March for all eligible associates to work remotely via our Virtual Private Network (“VPN”); utilized Skype and Microsoft teams for internal communication

oContinue to have approximately 80% of the workforce working remotely

Implemented a Pandemic Pay Policy for associates who are unable to work for COVID-19 related reasons, including those who need to care for family members and school children

Increased cleaning and disinfecting services in all physical locations

On March 19, communicated the closure of our branch lobbies and promoted the use of drive up facilities as well as our robust digital banking platform

During the month of October, we reopened our community office lobbies while maintaining proper safety controls.

Regular and up-to-date communication:

oWeekly COVID-19 update calls with internal Pandemic Team

oWeekly emails to all associates with international, national and state specific updates

oWeekly Teams meetings with all associates to ensure continued interaction for those associates still working remotely

oRegularly updated website with helpful links to keep our customers well-informed at www.mybank.com

Relieved the financial pressure for customers:

oWaived certificates of deposit early withdrawal penalties and overdraft fees, on a case by case basis, for non-sufficient funds

oTemporarily waived positive pay/Treasury Management fees for new customer signup for fraud prevention

oImplemented loan modifications and deferral programs for eligible consumer and commercial loan customers experiencing hardships; See Note 2 for more details

oTemporarily suspended repossession and foreclosure activity

oContinued frequent communication with associates and borrowers, keeping them apprised of changing regulations regarding PPP loan forgiveness

Paycheck Protection Program

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

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

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

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

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

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

46

Of the 2,046 PPP loans originated by the Corporation since the PPP’s inception, 1,675 loans, totaling $184.9 million, have been laid off,forgiven through the end of third quarter 2021, representing 86% of the number of loans originated and to cover applicable overhead expenses. We acted expeditiously to prepare our82% of originated principal balances.

COVID Modifications

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

43


associates so they could guide our customers on the proper procedures necessary to enable them to take advantage of this program. We developed an SBA PPP specific information site within our website that provided detailed information, links and materials for eligible customers to access. Internally, we reallocated resources to review, process and data enter customer applications, working tirelessly over extended hours to provide access to as many local business owners as possible. As of September 30, 2020, we have funded 1,174October 15, 2021, modified loans not treated as TDRs consisted of eleven commercial loans relating to real estate rental, food services and health care sectors and one mortgage loan, applications for approximately $148.9with an aggregate balance of $9.9 million.  These loans are 100% guaranteed byscheduled to return to contractual payment terms within the SBA, have up to a two or five year maturity, provide for a nine month deferral period, and have an interest rate of 1%. These loans may be forgiven, in whole or in part, by the SBA if the borrower meets certain conditions, including by using at least 60% of the loan proceeds for payroll costs. The SBA also established processing fees from 1% to 5%, depending on the loan amount. We anticipate recognizing approximately $3.5 million in deferred loan fees.next quarter.

In April 2020, the Bank established eligibility to participate in the Paycheck Protection Program Liquidity Facility (“PPPLF”) which was established by Congress and administered by the Federal Reserve Bank. This facility uses the SBA guaranteed PPP loans as collateral, offering 100% collateral coverage with no recourse to the Bank. The Bank’s board of directors and management team believe that it is prudent to maintain our existing liquidity facilities available for our contingency funding plan given the current economic conditions. The majority of the PPP loan disbursements have been to internal, non-interest-bearing accounts awaiting use by borrowers. As a result, we have not yet accessed the PPPLF, but are prepared to utilize the fund if and when management determines the timing is appropriate.

During the second quarter of 2020, the Bank was approved to participate in the Main Street Lending Program established by the Federal Reserve. This program supports lending to small and medium-sized businesses and non-profit organizations that were in sound financial condition before the onset of the COVID-19 pandemic.

During the third quarter of 2020, the Bank implemented forgiveness processes to assist our borrowers with applications. Communication with the associates and borrowers was a focus as we helped them through this process. As of October 26, 2020, 51 loans, or 4.4%, of total PPP loans, have been approved by SBA, 123 loans, or 10.5%, of total PPP loans, have been submitted and pending SBA validation, and an additional 76 loans, or 6.5% of total PPP loans, are under review at the Bank.

Liquidity Sources

Management has reviewed its Liquidity Contingency Funding Plan in preparation of funding needs as it relates to the COVID-19 pandemic. As of September 30, 2020,2021, the Corporation had approximately $145.0$130.0 million in unsecured lines of credit with its correspondent banks, $1.1$1.0 million with the Federal Reserve Discount Window, and approximately $137.5$189.0 million of secured borrowings with the Federal Home Loan Bank of Atlanta (“FHLB”). Additionally, the Corporation has access to the brokered certificates of deposit market.

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

Capital

Capital

The Corporation’s and the Bank’s capital ratios are strong, and both institutions are considered to be well-capitalized by applicable regulatory measures.

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SELECTED FINANCIAL DATA

The following table sets forth certain selected financial data for the nine month periods ended September 30, 20202021 and 20192020 and is qualified in its entirety by the detailed information and unaudited financial statements, including the notes thereto, included elsewhere in this quarterly report.

As of the nine months ended

September 30,

    

2021

    

2020

 

Per Share Data

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

$

1.81

$

1.32

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

2.45

1.32

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

$

1.81

$

1.32

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

2.45

1.32

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

$

20.22

$

18.63

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

$

20.19

$

18.62

Significant Ratios:

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

0.92

%

0.79

%

Settlement and FHLB expenses, net of income tax

0.33

%

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

1.25

%

0.79

%

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

12.45

%

9.87

%

Settlement and FHLB expenses, net of income tax

4.43

%

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

16.88

%

9.87

%

Average Equity to Average Assets

10.70

%

10.61

%

Capital Ratios:

Consolidated Total Capital (to risk weighted assets)

15.51

%

16.14

%

Consolidated Tier 1 Capital (to risk weighted assets)

14.26

%

14.89

%

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

12.15

%

12.59

%

Consolidated Tier 1 Capital (to average assets)

10.33

%

10.37

%

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

As of or for the nine months ended

September 30,

2020

2019

Per Share Data

Basic net income per common share

$

1.32

$

1.44

Diluted net income per common share

$

1.32

$

1.44

Basic book value per common share

$

18.63

$

18.20

Diluted book value per common share

$

18.62

$

18.20

Significant Ratios

Return on Average Assets (a)

0.79%

0.97%

Return on Average Equity (a)

9.87%

10.96%

Average Equity to Average Assets

10.61%

8.82%

Note: (a) Annualized

Note: (a) Annualized

RESULTS OF OPERATIONS

Overview

Overview

Consolidated net income for the nine months ended September 30, 2021 was $12.2 million, inclusive of litigation settlement expenses of $3.3 million and FHLB prepayment penalties of $2.4 million, compared to $9.3 million for the nine months ended September 30, 2020 compared to $10.2 million for the nine months ended September 30, 2019.2020.  Basic and diluted net income per share for the first nine months of 20202021 were both $1.32,$1.81, a 37.1% increase when compared to basic and diluted net income per share of $1.44$1.32 for the same period of 2019, an 8.3% decrease. 2020.

The decreaseincrease in earnings for the first nine months of 2021 was primarily dueattributable to an increase in the provision for loan losses of $4.3 million, offset by an increase in net interest income of $2.0$2.2 million, reduced provision expense of $4.9 million and an increase of $0.7 million in other operating income, including gains on sales of mortgage loans and a decreasesecurities’ of $1.3 million.  These changes were partially offset by an increase in other operating expenses of $0.7$4.0 million, inclusive of the $3.3 million in litigation settlement expenses and the $2.4 million FHLB prepayment penalty.    

48

Net interest income, on a non-GAAP, FTE basis, increased by $2.2 million (5.9%) during the nine months ended September 30, 2021 when compared to the nine months ended September 30, 2020 driven by a $2.7 million (36.5%) decrease in interest expense, partially offset by a decrease in interest income of $0.5 million.  The decrease in interest expense resulted from proactive efforts to reduce the cost of funds by further reductions to rates on deposit accounts throughout 2021, the runoff of balances in the time deposits of $100,000 or more, including brokered deposits, and the expiration of empowered rates on money market accounts.  The prepayment of the FHLB advances in the third quarter should significantly reduce interest expense in the fourth quarter and future years.  The net interest margin, on an FTE basis, declined to 3.21% for the nine months ended September 30, 2021 compared to 3.43% for the same period of 2020.  Excluding the average balance of PPP loans of $100.6 million and interest and fees of $4.0 million, the net interest margin for the nine months ended September 2021 was 3.07%.

Other operating income, including net gains on sales of mortgage loans and sales of investment securities, increased $1.3 million for the nine months ended September 30, 2021 when compared to the nine months ended September 30, 2020.  Gains on the sale of mortgage loans to the secondary market decreased $0.5 million due to refinancing activity occurring at a slower pace than the pace experienced in 2020. Trust and brokerage income increased $1.2 million year-over-year due to growth in new client relationships and assets under management.  Debit card income increased $0.6 million for the nine months ended September 30, 2021 when compared to the same period of 2020 due to growth in deposit relationships and increased customer usage of our electronic services. Other income increased $0.5 million, due primarily to the receipt of insurance proceeds related to litigation claims recorded in the first quarter of 2021. Service charge income remained stable when comparing the first nine months of 2021 to the same time period of 2020.

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

The provision for loan losses was $0.1 million for the nine months ended September 30, 2021 and $5.0 million for the nine months ended September 30, 2020.  The higher provision expense forrecorded in the first nine months of 2020 was driven by an increase in the qualitative factors reflecting the uncertainty of the economic environment related to the COVID-19 health crisis and its impact on our borrowers. Of the $5.0pandemic. Net recoveries of $0.4 million expense for the first nine months, $4.4 million was related to qualitative factor adjustments and $0.6 million was related to loan growth and the change in mix at higher reserve factors. The net interest margin, on a FTE basis, declinedwere recorded for the nine months ended September 30, 2020 to 3.43%2021, compared to 3.67%net charge offs of $1.3 million for the same period of 2020. The ratio of the ALL to loans outstanding, including PPP loan balances, was 1.46% at September 30, 2019.2021 compared to 1.36% at September 30, 2020 and 1.41% at December 31, 2020.  The ALL to loans outstanding, excluding PPP loan balances of $30.3 million and $148.9 million, was 1.49% at September 30, 2021 and 1.55% at September 30, 2020 and December 31, 2020, non-GAAP.

The provisionConsolidated net income was $4.4 million for loan losses wasthe third quarter of 2021 compared to $5.0 million for the nine month period ended September 30, 2020third quarter of 2020.  Basic and $0.7 milliondiluted net income per share for the nine month period ended September 30, 2019. The increase in provision expensethird quarter of 2021 were both $0.66, a 5.7% decrease when compared to basic and diluted net income per share of $0.70 for the first nine monthsthird quarter of 20202020.  The decline in earnings in the third quarter of 2021 was due to an increase in net interest income, a credit to provision expense, and increased wealth management income, offset by increased non-interest expenses, including the uncertaintyprepayment penalty of the economic environment related to the COVID-19 health crisis. Of the $5.0$2.4 million expense for the nine months ended September 30, 2020, $4.4 million is related to qualitative factor adjustments and $0.6 million is related to loan growth and a change in mix of loans at higher reserve factors.on FHLB borrowings.

Net interest income, on a non-GAAP, FTE basis, increased $2.0by $1.7 million (5.7%(14.2%) duringfor the nine months ended September 30, 2020third quarter 2021 when compared to the nine months ended September 30, 2019 due to a $0.9 million (2.1%)third quarter of 2020.  This increase resulted from an increase in interest income. Interestincome of $0.7 million and a decrease in interest expense decreasedof $1.1 million when comparedmillion.  The increase in interest income on loans was a result of increased interest on consumer loans related to the same time periodpurchase of 2019, despitea loan pool in the second quarter as well as an increase in averagethe unearned fees related to the PPP forgiveness during

49

the quarter.  The reduction of interest expense resulted from the further reduction of deposit rates early in the third quarter and the declining balances in the higher cost CD portfolio.  The prepayment of $62.8 million.the FHLB advances should positively impact interest expense for the remainder of 2021 and future years.  The weighted rate on the $70.0 million FHLB long-term borrowings was 1.90%.  The net interest margin for the nine months ended September 30, 2020third quarter of 2021 was 3.43%3.38%, compared to 3.67%3.12% for the nine months ended September 30, 2019. The impactthird quarter of 2020.  Excluding the average balancesbalance of PPP loans of approximately $91.0$48.5 million offset by the $1.5 million ofand interest and fees related to these loans, had a negative impact onof $1.4 million, the margin of approximately 9 basis points. The margin was also negatively impacted by the 2.25% drop in the Fed Funds rate since August of 2019, which resulted in loan production and loans repricing at lower rates. The foregoing factors resulted in a decrease of approximately 16 basis points in the loan yield when compared to the nine months ended September 30, 2019.

Comparing the nine months ended September 30, 2020 to the same period of 2019, the increase innet interest income was due to a $2.0 million increase in interest and fees on loans. Excess cash balances attributable to deposit growth were invested at the lower Fed Funds rate, which negatively impacted interest incomemargin for the nine months ended September 30, 2020. The increase in interest and fees on loansthird quarter of 2021 was due primarily to an increase in average balances of $136.6 million, primarily driven by the PPP loans but offset by the declining yield. The rate earned on the loan portfolio decreased by 37 basis points as a result of the significant decline in the rate environment over the past year and the high volume of PPP loans at the low 1.00% interest rate as noted above. Additionally, the average balance of the investment portfolio decreased by $9.3 million due primarily to calls and sales of securities. The rate earned on investments decreased by 26 basis points due to the calls as well as the reduced rate on the adjustable rate trust preferred collateralized debt obligations (“CDO”) portfolio.

3.12%.

45


Interest expense on our interest-bearing liabilities decreased $1.1 million during the nine months ended September 30, 2020 when compared to 2019 due to continued rate reductions on our deposit products in response to the declining rate environment, particularly our money market products. The average balance of money market accounts increased $51.1 million during the first nine months of 2020 when compared to the same period of 2019, while the rate on these accounts decreased by 34 basis points. We continue to monitor the rate environment in our markets and have been able to proactively reduce rates on our deposit products to mitigate the reduced interest income on our loan portfolio. Average growth of $93.9 million in our non-interest bearing accounts benefited our overall cost of deposits. Deposit growth was attributable to PPP funding and organic deposit growth in low cost core deposits with existing customers as well as new relationship customers through the first nine months of 2020.

Other operating income, including gains, increased $0.7 million for the nine months ended September 30, 2020 when compared to 2019. The increase was primarily attributable to the $1.8 million increase in net gains offset by a $1.0 million decline in Bank Owned Life Insurance (“BOLI”) income due to the receipt of $1.1 million death benefits in the third quarter of 2019. Service charge income, primarily NSF income, decreased as the consumer and business overdraft activity decreased in the first nine months quarter of 2020 due to reduced consumer spending as well as the receipt of stimulus and PPP funding. The increase in net gains was a result of increased fees on the sale of loans related to the high volume of mortgage refinancing activity due to historically low rates, as well as gains on the sale of investments. As prepayment speeds on investments held for sale were elevated due to the low rate environment and the investments were prepaying at par, we made the decision to capture $0.6 million in gains on the sale of these investments. Trust and brokerage income remained stable, impacted by market volatility early in the year which impacted fees that are directly related to the value of assets under management. Debit card income was stable for the nine months ended September 30, 2020 when compared to the same period of 2019 despite reduced consumer spending.

Other operating expenses decreased $0.7 million for the nine months ended September 30, 2020 when compared to the same period of 2019. Salaries and benefits decreased $2.4 million, primarily due to the $1.7 million salary expense offset related to loan originations, primarily related to PPP loans, as well as reduced headcount resulting from the voluntary separation program implemented in the fourth quarter of 2019 and reduced life and health insurance costs. These reductions offset the annual merit increases awarded to our associates in April 2020. Federal Deposit Insurance Corporation premiums increased slightly due to credits received on quarterly assessments in 2019. Equipment, occupancy and technology expenses increased $0.4 million when compared to the nine months ended September 30, 2019 due to final branch modernizations placed into service in the fourth quarter of 2019 and the first quarter of 2020. Professional services increased $1.7 million as a result of increased legal and professional expenses due to costs related to the 2020 annual meeting of shareholders (the “2020 Meeting”) and related proxy contest. Investor relations expenses increased $1.0 million, which also related to the 2020 Meeting and related proxy contest. OREO expenses decreased $1.3 million due to valuation allowance write-downs in 2019. Increased marketing, consulting, fraud expenses and Visa processing fees were offset by reductions in schools and seminars, contributions, dues and licenses, office supplies, mileage, contract labor, business related meals and other employee benefits expenses, most of which were related to limited operations as a result of the pandemic and management’s continued focus on cost savings and efficiencies.

Consolidated net income was $5.0 million for the third quarter of 2020 compared to $4.5 million for the third quarter of 2019. Basic and diluted net income per common share for the third quarter of 2020 were both $0.70, compared to basic and diluted net income per common share of $0.63 for the third quarter of 2019. Net interest income increased slightly by $0.3 million when comparing the third quarter of 2020 to the third quarter of 2019. The increase in net interest income was due to the decrease in interest expense of $0.7 million, offset by a decrease in interest income of $0.3 million when comparing the third quarters of 2020 and 2019. Other operating income for the third quarter of 20202021 decreased by approximately $1.0$0.6 million when compared to the same period of 2019.2020.  Service charge income particularly non-sufficient funds (“NSF”) income, declined as a result of significantly reduced overdraft activityremained stable during the third quarter of 20202021 when compared to the third quarter of 2019. 2020.  Trust and brokerage income increased slightly$0.3 million due to increased production and market values on assets under management.  These increases were offset by the reduction in BOLI income due to the receipt of $1.1 million in death benefits in the third quarter of 2019. Net gains increaseddecreased $1.1 million when comparing the third quarter of 20202021 to the third quarter of 2019. As prepayment speeds were elevated2020.  This decrease was due to the low rate environment and investments were prepaying at par, we made the decision to capture $0.6 million in gains on the sale of investments. Higher levels of gains of approximately $0.7 million on the sale of mortgage loans to the secondary market, related to the high volumeslowing of refinancing activity at historically low rates, continuedin the mortgage portfolio, which resulted in less gains on sales as well as no sales activity in the investment portfolio during the third quarter of 2020. Other operating expenses2021.  Bank Owned Life Insurance (“BOLI”) income decreased by $0.7$0.1 million when comparing the third quarter of 20202021 to the third quarter of 2019.2020 due to the receipt of policy proceeds in the third quarter of 2020.

Other operating expenses increased by $2.5 million when comparing the third quarter of 2021 to the third quarter of 2020.  This decreaseincrease was driven by the decreasean increase in salaries and benefits of $0.3 million related to reduced duea reduction in deferred loan origination costs in 2021 (primarily related to reduced headcount, reduced health insurance costsPPP activities) and the salary costs associated$2.4 million prepayment penalties incurred in connection with loan originations. Other miscellaneous expenses, such as contributions, office supplies, travel and lodging, schools and seminars, mileage and business-related meals, declined asthe prepayment of the FHLB advances.  As noted above, the prepayment was a resultstrategic decision to use $70.0 million of limitations imposed due to the pandemic. These decreases were offset by an increase in data processing fees and increased legal expenses. The net interest margincash for the third quarterpurpose of 2020 andreducing the third quartercost of 2019, on an FTE basis, was 3.12% and 3.62%, respectively. The reduced margin was attributable to lower loan yields and increased cash levels.

The provision for loan losses was $0.2 millionfunds for the third quarterremainder of 20202021 and $(13) thousand for the third quarter of 2019. 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,future years.  Occupancy, equipment and the qualitative factors affecting the ALL have been adjusted based on the current economic

46


environment and the characteristics of the loan portfolio. During the third quarter of 2020, factor adjustmentstechnology service expenses were offset by a re-allocation of a $1.3 million specific on an adversely classified, non-accrual loan. See Note 6 for further discussion.

Net interest income, on an FTE basis, increased $0.3 million (2.7%)stable during the third quarter of 2020 over the same period in 2019 as a result of a decrease in interest expense of approximately $0.7 million (21.7%), offset by a $0.3 million (2.2%) decrease in interest income. The net interest margin for the third quarter of 2020 was 3.12%, compared to 3.62% for the third quarter of 2019. As noted above, the participation in the PPP loan program and the reduced rate environment negatively impacted our margin during the third quarter.

Comparing the third quarter of 2020 to the same period of 2019, the decrease in interest income was primarily due to a $0.4 million increase in interest and fees on loans, offset by a $0.7 million decrease in investment and other interest income. The increase in interest and fees on loans was due to an increase in average balances of $213.1 million. The increase in average balances was attributable to PPP loans of approximately $145.0 million and new loans booked during the third quarter, all at lower rates. This increased activity, combined with existing loans repricing at lower rates contributed to the decrease of 75 basis points in the rate earned on the portfolio. During the third quarter, we continued to see pricing pressure in all markets as borrowers sought to take advantage of the reduced rate environment. Excess cash balances related to deposit growth, invested at the lower Fed funds rate, also negatively impacted interest income. Higher cash balances were maintained to preserve liquidity due to economic uncertainties.

Interest expense on our interest-bearing liabilities decreased by $0.7 million during the third quarter of 2020 when compared to the same period of 2019, due primarily to reductions in rates on the deposit portfolio and certificates of deposit rolling over at lower rates.

Other operating income, including gains, for the third quarter of 2020 increased by approximately $0.1 million when compared to the same period of 2019. Service charge income, particularly NSF income, declined as a result of significantly reduced overdraft activity during the third quarter of 20202021 when compared to the third quarter of 2019. Trust2020.  Investor relations and brokerage income increased slightly due to increased production and market values on assets under management. These increasesprofessional services costs were offset by the reduction in BOLI income due to the receipt of $1.1 million in death benefits inalso stable during the third quarter of 2019. Net gains increased $1.1 million2021 when comparing the third quarter of 2020compared to the third quarter of 2019. As prepayment speeds were elevated due to the low rate environment and investments were prepaying at par, we made the decision to capture $0.6 million in gains on the sale of investments. Higher levels of gains of approximately $0.7 million on the sale of mortgage loans to the secondary market, related to the high volume of refinancing activity at historically low rates, continued during the third quarter of 2020.

Other operating expenses decreased $0.7 million when comparing the third quarter of 2020 to the third quarter of 2019. Salaries and benefits decreased $0.9 million due to reduced headcount associated with the voluntary separation program introduced in the fourth quarter of 2019, reduced health insurance costs and the salary expense offset associated with the origination of loans during the third quarter. Equipment, occupancy and data processing expenses increased by $0.2 million. Legal and professional expenses increased by $0.3 million when comparing the third quarter of 2020 to the same time period of 2019 and was attributable to the recent litigation. OREO expenses decreased by $0.3 million when comparing the third quarter of 2020 to the third quarter of 2019 due to valuation allowance write-downs on properties in the third quarter of 2019.  Other miscellaneous expenses, such as marketing, consulting, miscellaneous, trust department expenses increased slightly but were offset by decreases in contributions, personnel related expenses, postage, travel and lodging, mileage,Visa processing fees, contract labor, schools and seminars, dues and business-related meals. Mostlicenses, in-house training, trust department expense, debit card expense and other personnel related expenses, declined.  The decreases were offset by increases in marketing, contributions and consulting expenses.  

The effective income tax rates as a percentage of income for the expense reductions arenine-month periods ended September 30, 2021 and 2020 were 24.9% and 22.1%, respectively.  The increase in the tax rate for the first nine months of 2021 was primarily due to the reduction in tax exempt income as well as the reduction in tax credits related to limited operationsthe expiration of a low-income housing tax credit in June 2021.  A new 2021 investment in low-income housing is expected to provide tax benefits in 2022 and beyond.

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 resultsubstitute 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 the pandemicresults as reported under GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies.

50

The following table presents a reconciliation of net income and management’s continued focus on cost savingsbasic and efficiencies.diluted earnings per share (as reported) to adjusted net income and adjusted basic and diluted earnings per share excluding settlement and prepayment penalty expense:

Nine months ended September 30,

    

2021

    

2020

(in thousands, except for per share amount)

Net income - as reported

$

12,221

$

9,285

Adjustments:

Settlement expense

3,300

FHLB penalty

2,368

Income tax effect of adjustment

(1,313)

Adjusted net income (non-GAAP)

$

16,576

$

9,285

Basic and Diluted earnings per share - as reported

$

1.81

$

1.32

Adjustments:

Settlement expense

0.47

FHLB penalty

0.35

Income tax effect of adjustment

(0.18)

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

$

2.45

$

1.32

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

Nine months ended September 30,

    

2021

2020

(in thousands, except for per share amount)

Basic book value per share

Equity

133,787

130,237

Outstanding shares

6,618

6,984

Basic book value per share

$

20.22

$

18.63

Diluted book value per share

Equity

133,787

130,237

Outstanding shares

6,625

6,989

Diluted book value per share

$

20.19

$

18.62

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.


47


51

The tabletables below summarizes net interest income for the nine and three monthsmonth periods ended September 30, 20202021 and 2019.2020.

GAAP

Non-GAAP - FTE

Nine Months Ended

Nine Months Ended

September 30,

September 30,

(dollars in thousands)

    

2021

    

2020

    

2021

    

2020

Interest income

$

43,408

$

43,973

$

44,113

$

44,651

Interest expense

4,784

7,528

4,784

7,528

Net interest income

$

38,624

$

36,445

$

39,329

$

37,123

Net interest margin %

3.16

%

3.37

%

3.21

%

3.43

%

Three Months Ended

Three Months Ended

September 30,

September 30,

(dollars in thousands)

2021

2020

2021

2020

Interest income

$

14,910

$

14,253

$

15,142

$

14,481

Interest expense

1,285

2,351

1,285

2,351

Net interest income

$

13,625

$

11,902

$

13,857

$

12,130

Net interest margin %

3.32

%

3.06

%

3.38

%

3.12

%

GAAP

Non-GAAP - FTE

Nine Months Ended

Nine Months Ended

(dollars in thousands)

2020

2019

2020

2019

Interest income

$

43,973

$

43,083

$

44,651

$

43,732

Interest expense

7,528

8,614

7,528

8,614

Net interest income

$

36,445

$

34,469

$

37,123

$

35,118

Net interest margin %

3.37%

3.59%

3.43%

3.67%

Three Months Ended

Three Months Ended

(dollars in thousands)

2020

2019

2020

2019

Interest income

$

14,253

$

14,600

$

14,481

$

14,810

Interest expense

2,351

3,004

2,351

3,004

Net interest income

$

11,902

$

11,596

$

12,130

$

11,806

Net interest margin %

3.06%

3.55%

3.12%

3.62%

48


52

The following table setstables 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 ended September 30, 2021 and 2020:

Nine Months Ended

September 30,

2021

2020

Average

Average

Average

Average

(dollars in thousands)

    

Balance

    

Interest

    

Yield/Rate

    

Balance

    

Interest

    

Yield/Rate

 

Assets

Loans

$

1,179,205

$

39,562

4.49

%

$

1,136,473

$

39,231

4.61

%

Investment Securities:

Taxable

267,899

2,864

1.43

%

197,186

3,612

2.45

%

Non taxable

25,487

1,448

7.60

%

26,335

1,448

7.34

%

Total

293,386

4,312

1.96

%

223,521

5,060

3.02

%

Federal funds sold

156,504

128

0.11

%

79,228

182

0.31

%

Interest-bearing deposits with other banks

3,419

1

0.06

%

889

9

1.37

%

Other interest earning assets

3,622

110

4.07

%

4,451

169

5.06

%

Total earning assets

1,636,136

44,113

3.60

%

1,444,562

44,651

4.13

%

Allowance for loan losses

(16,924)

(15,049)

Non-earning assets

154,464

146,213

Total Assets

$

1,773,676

$

1,575,726

Liabilities and Shareholders’ Equity

Interest-bearing demand deposits

$

211,005

$

460

0.29

%

$

177,848

$

531

0.40

%

Interest-bearing money markets

340,322

367

0.14

%

305,714

1,207

0.53

%

Savings deposits

218,605

63

0.04

%

172,735

136

0.10

%

Time deposits:

Less than $100k

100,777

979

1.30

%

111,757

1,310

1.57

%

$100k or more

108,195

1,008

1.25

%

129,290

1,813

1.87

%

Short-term borrowings

55,151

67

0.16

%

43,895

68

0.21

%

Long-term borrowings

92,980

1,840

2.65

%

100,929

2,463

3.26

%

Total interest-bearing liabilities

1,127,035

4,784

0.57

%

1,042,168

7,528

0.96

%

Non-interest-bearing deposits

488,870

362,547

Other liabilities

26,850

45,572

Shareholders’ Equity

130,921

125,439

Total Liabilities and Shareholders’ Equity

$

1,773,676

$

1,575,726

Net interest income and spread

$

39,329

3.03

%

$

37,123

3.17

%

Net interest margin

3.21

%

3.43

%

(1)The above table reflects the average rates earned or paid stated on an FTE basis assuming a 21% tax rate for 2021 and 2020. Non-GAAP interest income on a fully taxable equivalent was $705 and $678, respectively.
(2)Net interest margin is calculated as net interest income divided by average earning assets.
(3)The average yields on investments are based on amortized cost.

Net interest income, on a non-GAAP, FTE basis, increased by $2.2 million (5.9%) during the nine months ended September 30, 2021 when compared to the nine months ended September 30, 2020 driven by a $2.7 million (36.5%) decrease in interest expense, partially offset by a decrease in interest income of $0.5 million.  The decrease in interest expense resulted from proactive efforts to reduce the cost of funds by further reductions to rates on deposit accounts throughout 2021, the runoff of balances in the time deposits of $100,000 or more, including brokered deposits, and 2019:the expiration of empowered rates on money market accounts.  The prepayment of the FHLB advances in the third quarter should significantly reduce interest expense in the fourth quarter and future years.  The net interest margin, on an FTE basis, declined to 3.21% for the nine months ended September 30, 2021 compared to 3.43% for the same period of 2020.  Excluding the average balances of PPP loans of $100.6 million and interest and fees of $4.0 million, the net interest margin for the nine months ended September 2021 was 3.07%.

53

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

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

54

Three Months Ended

September 30,

2021

2020

(dollars in thousands)

Average
Balance

Interest

Average
Yield/Rate

Average
Balance

Interest

Average
Yield/Rate

Assets

Loans

$

1,162,374

$

13,689

4.67

%

$

1,198,888

$

12,950

4.30

%

Investment Securities:

Taxable

274,648

880

1.27

%

194,722

960

1.96

%

Non taxable

25,073

476

7.54

%

27,049

494

7.26

%

Total

299,721

1,356

1.79

%

221,771

1,454

2.61

%

Federal funds sold

159,444

65

0.16

%

119,039

28

0.09

%

Interest-bearing deposits with other banks

4,283

%

1,157

2

0.73

%

Other interest earning assets

2,772

32

4.64

%

4,468

47

4.15

%

Total earning assets

1,628,594

15,142

3.69

%

1,545,323

14,481

3.73

%

Allowance for loan losses

(17,597)

(17,252)

Non-earning assets

157,806

153,846

Total Assets

$

1,768,803

$

1,681,917

Liabilities and Shareholders’ Equity

Interest-bearing demand deposits

$

215,085

$

113

0.21

%

$

195,363

$

190

0.39

%

Interest-bearing money markets

332,889

79

0.09

%

332,012

330

0.40

%

Savings deposits

230,925

17

0.03

%

182,733

35

0.08

%

Time deposits:

Less than $100k

89,723

253

1.12

%

111,647

435

1.55

%

$100k or more

94,770

270

1.13

%

121,986

525

1.71

%

Short-term borrowings

63,968

17

0.11

%

45,719

19

0.17

%

Long-term borrowings

77,342

536

2.75

%

100,929

817

3.22

%

Total interest-bearing liabilities

1,104,702

1,285

0.46

%

1,090,389

2,351

0.86

%

Non-interest-bearing deposits

503,006

407,334

Other liabilities

27,143

56,091

Shareholders’ Equity

133,952

128,103

Total Liabilities and Shareholders’ Equity

$

1,768,803

$

1,681,917

Net interest income and spread

$

13,857

3.23

%

$

12,130

2.87

%

Net interest margin

3.38

%

3.12

%

Nine Months Ended

September 30,

2020

2019

(dollars in thousands)

Average
Balance

Interest

Average
Yield/Rate

Average
Balance

Interest

Average
Yield/Rate

Assets

Loans

$

1,136,473

$

39,231

4.61%

$

999,851

$

37,255

4.98%

Investment Securities:

Taxable

197,186

3,612

2.45%

207,261

4,333

2.79%

Non taxable

26,335

1,448

7.34%

25,540

1,380

7.22%

Total

223,521

5,060

3.02%

232,801

5,713

3.28%

Federal funds sold

79,228

182

0.31%

40,977

522

1.70%

Interest-bearing deposits with other banks

889

9

1.37%

1,111

16

1.92%

Other interest earning assets

4,451

169

5.06%

4,511

226

6.70%

Total earning assets

1,444,562

44,651

4.13%

1,279,251

43,732

4.57%

Allowance for loan losses

(15,049)

(11,835)

Non-earning assets

146,213

145,426

Total Assets

$

1,575,726

$

1,412,842

Liabilities and Shareholders’ Equity

Interest-bearing demand deposits

$

177,848

$

531

0.40%

$

160,975

$

466

0.39%

Interest-bearing money markets

305,714

1,207

0.53%

254,638

1,666

0.87%

Savings deposits

172,735

136

0.10%

161,148

225

0.19%

Time deposits:

Less than $100k

111,757

1,310

1.57%

106,006

1,066

1.34%

$100k or more

129,290

1,813

1.87%

154,457

2,377

2.06%

Short-term borrowings

43,895

68

0.21%

41,195

158

0.51%

Long-term borrowings

100,929

2,463

3.26%

100,929

2,656

3.52%

Total interest-bearing liabilities

1,042,168

7,528

0.96%

979,348

8,614

1.18%

Non-interest-bearing deposits

362,547

268,637

Other liabilities

45,572

40,212

Shareholders’ Equity

125,439

124,645

Total Liabilities and Shareholders’ Equity

$

1,575,726

$

1,412,842

Net interest income and spread

$

37,123

3.17%

$

35,118

3.39%

Net interest margin

3.43%

3.67%

Note:

(1)The above table reflects the average rates earned or paid stated on an FTE basis assuming a 21% tax rate for 20202021 and 2019.2020. Non-GAAP interest income on a fully taxable equivalent was $679$232 and $649,$228, respectively.

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

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

Net interest income, on a non-GAAP, FTE basis, increased $2.0by $1.7 million (5.7%(14.2%) duringfor the nine months ended September 30, 2020third quarter 2021 when compared to the nine months ended September 30, 2019 due to a $0.9 million (2.1%)third quarter of 2020.  This increase in interest income. Interest expense decreased $1.1 million comparing the same time period, despiteresulted from an increase in average balances of $62.8 million. The net interest margin for the nine months ended September 30, 2020 was 3.43%, compared to 3.67% for the nine months ended September 30, 2019. The impact of average balances of PPP loans of approximately $91.0 million offset by the $1.5 million of interest and fees related to these loans, had a negative impact on the margin of approximately 9 basis points. The margin was also negatively impacted by the 2.25% drop in the Fed Funds rate since August of 2019 which resulted in loan production and loans repricing at lower rates. This resulted in a decrease of approximately 16 basis points in the loan yield compared to the nine months ended September 30, 2019.

49


Comparing the nine months ended September 30, 2020 to the same period of 2019, the increase in interest income was due to a $2.0of $0.7 million increase in interest and fees on loans. Excess cash balances attributable to deposit growth were invested at the lower Fed Funds rate which negatively impacted interest income for the nine months ended September 30, 2020. The increase in interest and fees on loans was due primarily to an increase in average balances of $136.6 million primarily driven by the PPP loans offset by the declining yield. The rate earned on the loan portfolio decreased by 37 basis points as a result of the significant decline in the rate environment over the past year and the high volume of PPP loans at the low 1.00% rate as noted above. Additionally, the average balance of the investment portfolio decreased by $9.3 million due primarily to calls and sales of securities. The rate earned on investments decreased by 26 basis points due to the calls as well as the reduced rate on the adjustable rate trust preferred CDO portfolio.

Interest expense on our interest-bearing liabilities decreased $1.1 million during the nine months ended September 30, 2020 when compared to the same period of 2019 due to continued rate reductions on our deposit products in response to the declining rate environment, particularly our money market products. The average balance of money market accounts increased $51.1 million during the nine months ended 2020 when compared to same period of 2019 while the rate on these accounts decreased by 34 basis points. We continue to monitor the rate environment in our markets and have been able to proactively reduce rates on our deposit products to mitigate the reduced interest income on our loan portfolio. Average growth of $93.9 million in our non-interest bearing accounts benefits our overall cost of deposits. Deposit growth was attributable to PPP funding and organic deposit growth in low cost core deposits with existing customers as well as new relationship customers through the first nine months of 2020.

I

Three Months Ended

September 30,

2020

2019

(dollars in thousands)

Average
Balance

Interest

Average
Yield/Rate

Average
Balance

Interest

Average
Yield/Rate

Assets

Loans

$

1,198,888

$

12,950

4.30%

$

985,767

$

12,543

5.05%

Investment Securities:

Taxable

194,722

960

1.96%

208,418

1,416

2.70%

Non taxable

27,049

494

7.26%

24,575

445

7.18%

Total

221,771

1,454

2.61%

232,993

1,861

3.17%

Federal funds sold

119,039

28

0.09%

71,230

332

1.85%

Interest-bearing deposits with other banks

1,157

2

0.73%

1,103

7

2.52%

Other interest earning assets

4,468

47

4.15%

4,415

67

6.02%

Total earning assets

1,545,323

14,481

3.73%

1,295,508

14,810

4.54%

Allowance for loan losses

(17,252)

(12,302)

Non-earning assets

153,846

150,789

Total Assets

$

1,681,917

$

1,433,995

Liabilities and Shareholders’ Equity

Interest-bearing demand deposits

$

195,363

$

190

0.39%

$

160,309

$

172

0.43%

Interest-bearing money markets

332,012

330

0.40%

256,551

581

0.90%

Savings deposits

182,733

35

0.08%

162,088

77

0.19%

Time deposits:

Less than $100k

111,647

435

1.55%

109,493

402

1.46%

$100k or more

121,986

525

1.71%

159,390

832

2.07%

Short-term borrowings

45,719

19

0.17%

37,910

27

0.28%

Long-term borrowings

100,929

817

3.22%

100,929

913

3.59%

Total interest-bearing liabilities

1,090,389

2,351

0.86%

986,670

3,004

1.21%

Non-interest-bearing deposits

407,334

274,538

Other liabilities

56,091

43,957

Shareholders’ Equity

128,103

128,830

Total Liabilities and Shareholders’ Equity

$

1,681,917

$

1,433,995

Net interest income and spread

$

12,130

2.87%

$

11,806

3.33%

Net interest margin

3.12%

3.62%

Note:

(1)The above table reflects the average rates earned or paid stated on an FTE basis assuming a 21% tax rate for 2020 and 2019. Non-GAAP interest income on a fully taxable equivalent was $229 and $210, 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.

50


Net interest income, on an FTE basis, increased $0.3 million (2.7%) during the third quarter of 2020 over the same period in 2019 driven by a decrease in interest expense of approximately $0.7 million (21.7%) offset by a $0.3 million (2.2%) decrease$1.1 million.  

The increase in interest income.income on loans was a result of increased interest on consumer loans related to the purchase of a loan pool in the second quarter as well as an increase in the unearned fees related to the PPP forgiveness during the quarter.  The reduction of interest expense resulted from the further reduction of deposit rates early in the third quarter and the declining balances in the higher cost CD portfolio.  The prepayment of the FHLB advances should positively impact interest expense for the remainder of 2021 and future years.  The weighted rate on the $70.0 million FHLB long-term borrowings was 1.90%.  The net interest margin for the third quarter of 20202021 was 3.12%3.38%, compared to 3.62%3.12% for the third quarter of 2019. As noted above,2020.  Excluding the participation inaverage balance of PPP loans of $48.5 million and interest and fees of $1.4 million, the PPP loan program and the reduced rate environment negatively impacted ournet interest margin during the third quarter.

Comparingfor the third quarter of 2020 to2021 was 3.12%.

55

Participation in the same periodPPP, with an average outstanding loan balance of 2019, the increase in interest income was primarily due to a $0.4 million increase in interest and fees on loans. The increase in interest and fees on loans was due to an increase in average balances of $213.1 million. The increase in average balances is attributable to PPP loans of approximately $145.0$48.5 million and new loans booked duringan interest rate of 1.0%, negatively impacted the third quarter, all at lower rates. This activity, combined with existing loans repricing at lower rates, contributed to the decrease of 75 basis points in the rate earned on the portfolio. Duringmargin for the third quarter of 2020, we continued to see pricing pressure in all markets as borrowers sought to take advantage2021 by 6 basis points.  However, deferred fees of the reduced rate environment. Excess cash balances related to deposit growth, invested at the lower Fed funds rate, also negatively impacted interest income. Higher cash balances were maintained to preserve liquidity due to economic uncertainties.

Interest expense on our interest-bearing liabilities decreased by $0.7approximately $1.3 million recognized during the third quarter of 2020 when compared2021 positively impacted the margin by 32 basis points, with a net positive impact of 26 basis points.  Continued elevated cash levels have also negatively impacted the margin.

The decrease in interest expense of $1.1 million, despite an increase in average interest-bearing liabilities of $14.3 million, was a direct result of a reduction in the cost of deposits of 25 basis points, a 6 basis point decrease in the cost of our short-term borrowings and a 47 basis point decrease in the cost of long-term borrowings. The decrease in the rate on long-term borrowings is primarily due to the same periodrestructuring of 2019, due primarilythree long-term FHLB advances late in the fourth quarter of 2020 that resulted in a reduced weighted average rate of 80 basis points on the $70.0 million portfolio. The rate on the long-term borrowings will be reduced further as the $70.0 million of FHLB advances were repaid late in the third quarter of 2021.  These advances had a weighted rate of 1.90%.  The average balance on our interest-bearing money market accounts remained stable, while the rate on these accounts decreased by 31 basis points.   Average growth of $95.7 million in our non-interest-bearing accounts benefited our overall cost of deposits as well as the overall reduction to reductions in rates on all deposit products in the deposit portfolio and certificatesthird quarter.

56

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, 20202021 and 2019:2020:

For the Nine months ended September 30, 2021

compared to the Nine months ended September 30, 2020

(in thousands and tax equivalent basis)

    

Volume

    

Rate

    

Net

Interest Income:

Loans

$

1,477

$

(1,146)

$

331

Taxable Investments

1,299

(2,047)

(748)

Non-taxable Investments

(47)

47

0

Federal funds sold

180

(234)

(54)

Interest-bearing deposits

26

(34)

(8)

Other interest earning assets

(31)

(28)

(59)

Total interest income

2,904

(3,442)

(538)

Interest Expense:

Interest-bearing demand deposits

99

(170)

(71)

Interest-bearing money markets

138

(978)

(840)

Savings deposits

34

(107)

(73)

Time deposits less than $100K

(129)

(202)

(331)

Time deposits $100K or more

(296)

(509)

(805)

Short-term borrowings

18

(19)

(1)

Long-term borrowings

(194)

(429)

(623)

Total interest expense

(330)

(2,414)

(2,744)

Net interest income

$

3,234

$

(1,028)

$

2,206

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

(in thousands and tax equivalent basis)

Volume

Rate

Net

Interest Income:

Loans

$

(393)

$

1,132

$

739

Taxable Investments

392

(472)

(80)

Non-taxable Investments

(36)

18

(18)

Federal funds sold

9

28

37

Interest-bearing deposits

6

(8)

(2)

Other interest earning assets

(18)

3

(15)

Total interest income

(40)

701

661

Interest Expense:

Interest-bearing demand deposits

19

(96)

(77)

Interest-bearing money markets

1

(252)

(251)

Savings deposits

10

(28)

(18)

Time deposits less than $100K

(85)

(97)

(182)

Time deposits $100K or more

(116)

(139)

(255)

Short-term borrowings

8

(10)

(2)

Long-term borrowings

(190)

(91)

(281)

Total interest expense

(353)

(713)

(1,066)

Net interest income

$

313

$

1,414

$

1,727

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

57

For the Nine months ended September 30, 2020 compared to the Nine months ended September 30, 2019

(in thousands and tax equivalent basis)

Volume

Rate

Net

Interest Income:

Loans

$

5,105

$

(3,129)

$

1,976

Taxable Investments

(211)

(510)

(721)

Non-taxable Investments

43

25

68

Federal funds sold

489

(829)

(340)

Interest-bearing deposits

(3)

(4)

(7)

Other interest earning assets

(3)

(54)

(57)

Total interest income

5,420

(4,501)

919

Interest Expense:

Interest-bearing demand deposits

49

16

65

Interest-bearing money markets

335

(794)

(459)

Savings deposits

16

(105)

(89)

Time deposits less than $100K

58

186

244

Time deposits $100K or more

(388)

(176)

(564)

Short-term borrowings

10

(100)

(90)

Long-term borrowings

(193)

(193)

Total interest expense

80

(1,166)

(1,086)

Net interest income

$

5,340

$

(3,335)

$

2,005


For the Three months ended September 30, 2020 compared to the Three months ended September 30, 2019

(in thousands and tax equivalent basis)

Volume

Rate

Net

Interest Income:

Loans

$

2,690

$

(2,283)

$

407

Taxable Investments

(92)

(364)

(456)

Non-taxable Investments

44

5

49

Federal funds sold

221

(525)

(304)

Interest-bearing deposits

0

(5)

(5)

Other interest earning assets

1

(21)

(20)

Total interest income

2,864

(3,193)

(329)

Interest Expense:

Interest-bearing demand deposits

37

(19)

18

Interest-bearing money markets

169

(420)

(251)

Savings deposits

10

(52)

(42)

Time deposits less than $100K

8

25

33

Time deposits $100K or more

(194)

(113)

(307)

Short-term borrowings

6

(14)

(8)

Long-term borrowings

(96)

(96)

Total interest expense

36

(689)

(653)

Net interest income

$

2,828

$

(2,504)

$

324

Note:

(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 Losses

The provision for loan losses was $0.1 million for the nine months ended September 30, 2021 and $5.0 million for the nine month periodmonths ended September 30, 2020 and $0.7 million for the nine month period ended September 30, 2019.2020.  The increase inhigher provision expense forrecorded in the first nine months of 2020 was driven by an increase in the qualitative factors reflecting the uncertainty of the economic environment related to the COVID-19 health crisis and its impact on our borrowers. Of the $5.0pandemic. Net recoveries of $0.4 million expensewere recorded for the nine months ended September 30, 2020, $4.4 million is related2021, compared to qualitative factor adjustments and $0.6 million is related to loan growth as well as the change in mix within the portfolio at higher reserve factors.

The provision for loan losses was $0.2net charge offs of $1.3 million for the third quartersame period of 2020. The ratio of the ALL to loans outstanding, including PPP loan balances, was 1.46% at September 30, 2021 compared to 1.36% at September 30, 2020 and $(13) thousand for the third quarter1.41% at December 31, 2020.  The ALL to loans outstanding, excluding PPP loan balances of 2019.$30.3 million and $148.9 million, was 1.49% at September 30, 2021 and 1.55% at September 30, 2020 and December 31, 2020, non-GAAP.  Specific allocations have been made for impaired loans where management has determined that the collateral supporting the loans is not adequate to cover the loan balance, and the qualitative factors affecting the ALL have been adjusted based on the current economic environment and the characteristics of the loan portfolio. During the third quarter of 2020, factor adjustments were offset by a re-allocation of a $1.3 million specific on an adversely classified, non-accrual loan. See Note 6 for further details.

Other Income

52


Other Operating Income

The following table shows the major componentscomposition of other operating income for the nine and three month periods ended September 30, 2021 and 2020 and 2019, exclusive of net gains:is illustrated in the following table:

Income as % of

Income as % of

Total Other Income

Total Other Income

Nine Months Ended

Three Months Ended

September 30,

September 30,

(in thousands)

    

2021

    

2020

    

2021

    

2020

Service charges on deposit accounts

$

1,292

    

10%

$

1,439

    

13%

$

475

    

10%

$

447

    

11%

Other service charges

664

5%

517

5%

232

5%

195

5%

Trust department

6,441

47%

5,355

47%

2,166

48%

1,871

47%

Debit card income

2,623

19%

2,052

18%

900

20%

738

19%

Bank owned life insurance

877

7%

961

8%

298

7%

373

9%

Brokerage commissions

854

6%

713

6%

229

5%

234

6%

Other income

835

6%

374

3%

223

5%

120

3%

$

13,586

100%

$

11,411

100%

$

4,523

100%

$

3,978

100%

58

Income as % of
Total Other Operating Income, exclusive of net gains

Income as % of
Total Other Operating Income, exclusive of net gains

Nine Months Ended

Three Months Ended

September 30,

September 30,

(in thousands)

2020

2019

2020

2019

Service charges on deposit accounts

$

1,439

13%

$

1,652

14%

$

447

11%

$

578

13%

Other service charges

517

5%

607

6%

195

5%

225

6%

Trust department

5,355

47%

5,345

46%

1,871

47%

1,798

47%

Debit card income

2,052

18%

1,955

17%

738

19%

679

18%

Bank owned life insurance

961

8%

1,970

8%

373

9%

1,379

8%

Brokerage commissions

713

6%

646

6%

234

6%

205

5%

Other income

374

3%

369

3%

120

3%

115

3%

$

11,411

100%

$

12,544

100%

$

3,978

100%

$

4,979

100%

Other Operating Expenses

The composition of other operating expenses for the nine and three month periods ended September 30, 20202021 and 20192020 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)

    

2021

    

2020

    

2021

    

2020

Salaries and employee benefits

$

16,214

    

44%

$

16,244

    

49%

$

5,719

    

44%

$

5,378

    

51%

FDIC premiums

575

2%

404

1%

209

2%

201

2%

Equipment

2,837

8%

2,871

9%

1,032

8%

978

9%

Occupancy

2,102

6%

2,200

7%

684

5%

707

7%

Data processing

2,420

6%

3,155

10%

819

6%

1,130

11%

Marketing

408

1%

405

1%

129

1%

122

1%

Professional services

3,276

9%

2,506

8%

615

5%

602

6%

Contract labor

486

1%

480

1%

153

1%

180

2%

Line rentals

606

2%

654

2%

123

1%

216

2%

Other real estate owned

(460)

(1)%

3

0%

150

1%

6

0%

Investor relations

546

1%

1,160

3%

116

1%

54

0%

Settlement expense

3,300

9%

0%

0%

0%

FHLB prepayment penalty

2,368

6%

0%

2,368

18%

0%

Other

2,308

6%

2,890

9%

910

7%

966

9%

$

36,986

100%

$

32,972

100%

$

13,027

100%

$

10,540

100%

Expense as % of
Total Other Operating Expenses

Expense as % of
Total Other Operating Expenses

Nine Months Ended

Three Months Ended

September 30,

September 30,

(in thousands)

2020

2019

2020

2019

Salaries and employee benefits

$

16,244

49%

$

18,644

56%

$

5,378

51%

$

6,280

55%

FDIC premiums

404

1%

337

1%

201

2%

43

0%

Equipment

2,871

9%

2,775

8%

978

9%

956

9%

Occupancy

2,200

7%

2,112

6%

707

7%

694

6%

Data processing

3,155

10%

2,979

9%

1,130

11%

984

9%

Marketing

405

1%

274

1%

122

1%

110

1%

Professional services

2,506

8%

776

2%

602

6%

254

2%

Contract labor

480

1%

502

1%

180

2%

171

2%

Line rentals

654

2%

641

2%

216

2%

226

2%

Other real estate owned

3

0%

1,266

4%

6

0%

337

3%

Investor relations

1,160

3%

146

0%

54

0%

36

0%

Other

2,890

9%

3,225

11%

966

9%

1,155

10%

$

32,972

100%

$

33,677

100%

$

10,540

100%

$

11,246

100%

Provision for Income Taxes

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

The effective income tax rate as a percentage of income increased to 24.9% at September 30, 2021 from 22.1% at September 30, 2020 from 20.3% at September 30, 2019 primarily due to a reduction ofin tax exempt income related to BOLIand the reduction in low income duringhousing tax credits that expired in June 2021.  A new investment in a low income housing tax credit will reduce the first nine months of 2020.

effective tax rate beginning in 2022 and future years.

53


FINANCIAL CONDITION

Balance Sheet Overview

Total assets at September 30, 2020 increased by $243.9 million2021 decreased to $1.7 billion, fromrepresenting a $24.9 million decrease since December 31, 2019.2020.  During the first nine months of 2020,2021, cash and interest-bearing deposits in other banks increaseddecreased by $105.6$14.5 million, the investment portfolio decreasedincreased by $2.9$2.4 million and gross loans increaseddecreased by $142.0 million, offset by the increase to the ALL of $3.7$5.9 million.  The increasedecrease in cash was due primarily to the strategic decision to deploy $39.0 million of cash to purchase a pool of mortgage loans for the purpose of offsetting mortgage portfolio balances that have been declining due to continued deposit growth, consistingrefinancing activity.  Management also used $70.0 million to prepay FHLB advances.  Although the Bank recorded $2.4 million in penalties in connection with the FHLP prepayments, management anticipates that the resulting reduction in interest expense for the remainder of both core deposit growth2021 and deposits relatedin future years will offset the penalty and have a significant impact on the cost of funds.  OREO balances decreased $2.7 million due to the PPP loans, cash flow from calls on the investment portfolio,sale of a parcel of real estate

59

securing a large commercial participation loan payoffs in the first quarter of 2021 and the additional sales of undeveloped lots.  We anticipate further reduction to OREO balances over the next quarter as well as continued refinanceswe consummate additional sales contracts.

Total liabilities decreased by $27.6 million when compared to liabilities at December 31, 2020.  The decrease in the first nine months of 2021 was attributable to deposit growth of $22.1 million due to stimulus programs and to growth in core relationships, increased balances in short-term borrowings related to our mortgage portfolio. OREO balances declinedTreasury Management product, offset by the prepayment of $70.0 million in FHLB long-term borrowings. Total shareholders’ equity increased slightly due to minimal activity in this portfolio during the first nine months of 2020. Total liabilities increased by $239.6 million. This increase was attributable to the strong deposit growth of $235.3 million, inclusive of the remaining deposit balances related to the PPP loans at September 30, 2020. The deposit growth, excluding the PPP deposits, during the first nine months of 2020 was due to increased relationship balances2021, as we continued to grow core relationships and customers favored insured products given the volatile economic environment. Our Treasury Management overnight investment sweep increased by $3.9 million as we saw growth in existing municipality accounts during the third quarter of 2020. Total shareholders’ equity increased by $4.3 million in the first nine months of 2020, primarily due to the increase in earnings attributable to year-to-date net income of $12.2 million was offset by common stock dividends of $2.7 million and the decline in surplus related to the stock repurchase of $2.7$7.2 million during the first quarter(400,000 shares) of 2020.First United Corporation common stock.

Loan Portfolio

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

(dollars in thousands)

    

September 30, 2021

    

December 31, 2020

Commercial real estate

$

371,785

    

32%

$

369,176

    

32%

Acquisition and development

132,256

11%

116,961

10%

Commercial and industrial

195,758

17%

266,745

23%

Residential mortgage

405,885

35%

379,170

32%

Consumer

56,184

5%

35,760

3%

Total Loans

$

1,161,868

100%

$

1,167,812

100%

(dollars in thousands)

September 30, 2020

December 31, 2019

Commercial real estate

$

353,272

30%

$

335,504

31%

Acquisition and development

127,299

11%

117,890

12%

Commercial and industrial

277,723

23%

122,352

11%

Residential mortgage

398,709

33%

438,424

43%

Consumer

35,342

3%

36,199

3%

Total Loans

$

1,192,345

100%

$

1,050,369

100%

Outstanding loans increased toof $1.2 billion at September 30, 2020 when compared to December 31, 2019. The $142.02021 reflected a decline of $5.9 million during the first nine months of growth2021, which was primarily attributable to growth in our mortgage loan portfolio due to the participation in the SBA PPPpurchase of a $39.0 million loan program and core commercial loan growth,pool, offset by a decline in ourof portfolio balances.  This loan pool consisted of individual  adjustable and fixed rate residential mortgage loans.  Core commercial loan portfolio.growth was offset by PPP loan forgiveness.  Commercial real estate (“CRE”) loans increased by $17.8$2.6 million, due to expansion of several new customer relationships as well as an increase in small business loans. Acquisitionacquisition and development (“A&D”) loans increased by $9.4$15.3 million as new production offset amortization and payoffs. Commercialcommercial and industrial (“C&I”) loans increaseddecreased by $155.4$71.0 million, including $148.9 million of PPP loans. Theas growth in the commercial portfolioscore portfolio loans of $12.7 million was offset by a decline in residentialPPP loan forgiveness.  Residential mortgage loans increased $26.7 million due to the purchase of $39.7 million asa pool of 1-4 family residential loans, offset by the continued refinancing activity continued during the third quarter.activity. Given the current low interest rate environment, management has electedcustomers appear to utilizebe seeking longer-term, fixed-rate loans and we continued to use the secondary market rather than portfoliohold these longer term,longer-term fixed rate mortgage loans at this time.in the portfolio. The consumer loan portfolio declined slightlyincreased by $0.9$20.4 million duringdue to the first nine monthspurchase of 2020.a pool of consumer loans in the second quarter of 2021 as an effort to deploy excess cash into higher yielding, short-term assets.  

Commercial loan production for the first nine months of 20202021 was approximately $101.6 million.  Commercial construction funding continues to ramp up as projects are entering their larger draw periods, which should result in increased outstanding balances.$147.9 million, with $46.7 million originated during the third quarter, exclusive of PPP loan production. PPP loan production was approximately $66.1 million for the first nine months of 2021.   At quarter end,September 30, 2021, unfunded, committed commercial construction equaled $43.7loans totaled approximately $26.6 million. Commercial amortization and payoffs were approximately $40.4$117.3 million through September 30, 2020.  2021, exclusive of PPP. 

Consumer mortgage loan production continued at a record pace with production ofwas approximately $101.8$89.6 million for the first nine months of 2020.through September 30, 2021.  The production and pipeline mix of in-house, portfolio loans and investor loans have continued to even out during the third quarter.  The consumer mortgage pipeline remained robuststrong as of September 30, 2020 at $36.92021, with those loans totaling $20.0 million, consisting of $16.4$16.0 million in portfolio loans and $20.5$4.0 million in investor loans. At the end of the second quarter of 2021, management implemented special promotions for residential mortgage products to shift production towards portfolio loans and utilize excess cash balances.

Non-accrual loans totaled $7.4 million at September 30, 2021 compared to $3.3 million at December 31, 2020.  The increase in the non-accrual balance at September 30, 2021 was due to the movement of two hospitality loans, totaling approximately $4.0 million, to non-accrual status during the first quarter of 2021.  These loans suffered reduced cash flows due to the impact of the COVID-19 pandemic, received modifications and were classified as substandard at December 31, 2020.  These loans have returned to their contractual payment terms but will remain on non-accrual status until they pay full contractual payments for six months.


54


60

Risk Elements of Loan Portfolio

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

(dollars in thousands)

    

September 30,
2021

    

% of
Applicable
Portfolio

    

December 31,
2020

    

% of
Applicable
Portfolio

Non-accrual loans:

Commercial real estate

$

5,017

1.35%

$

898

0.24%

Acquisition and development

395

0.30%

366

0.31%

Residential mortgage

2,011

0.50%

2,048

0.54%

Consumer

18

0.03%

27

0.08%

Total non-accrual loans

$

7,441

0.64%

$

3,339

0.29%

Accruing Loans Past Due 90 days or more:

Acquisition and development

10

Residential mortgage

154

710

Consumer

35

4

Total loans past due 90 days or more

$

189

$

724

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

$

7,630

$

4,063

Restructured Loans (TDRs):

Performing

$

3,475

$

3,657

Non-accrual (included above)

284

301

Total TDRs

$

3,759

$

3,958

Other real estate owned

$

6,663

$

9,386

Impaired loans without a valuation allowance

$

9,148

$

6,060

Impaired loans with a valuation allowance

2,040

1,399

Total impaired loans

$

11,188

$

7,459

Valuation allowance related to impaired loans

$

205

$

57

(dollars in thousands)

September 30,
2020

% of
Applicable
Portfolio

December 31,
2019

% of
Applicable
Portfolio

Non-accrual loans:

Commercial real estate

$

927

0.26%

$

680

0.20%

Acquisition and development

7,447

5.85%

8,058

6.80%

Commercial and industrial

0.00%

30

0.00%

Residential mortgage

1,939

0.49%

2,077

0.50%

Consumer

31

0.09%

4

0.00%

Total non-accrual loans

$

10,344

0.87%

$

10,849

1.03%

Accruing Loans Past Due 90 days or more:

Acquisition and development

11

135

Residential mortgage

802

536

Consumer

54

Total loans past due 90 days or more

$

813

$

725

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

$

11,157

$

11,574

Restructured Loans (TDRs):

Performing

$

3,700

$

3,842

Non-accrual (included above)

308

324

Total TDRs

$

4,008

$

4,166

Other real estate owned

$

3,787

$

4,127

Impaired loans without a valuation allowance

$

13,233

$

5,974

Impaired loans with a valuation allowance

1,280

9,200

Total impaired loans

$

14,513

$

15,174

Valuation allowance related to impaired loans

$

72

$

2,174

Performing loans considered to be impaired (including performing troubled debt restructurings, or TDRs), as defined and identified by management, amounted to $4.0$7.6 million at September 30, 20202021 and $4.6$4.1 million at December 31, 2019.2020. 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. The decrease in valuation allowance related to impaired loans is due to the charge off of $1.1 million and re-allocation of $1.3 million of specific on the A&D loan. See Note 6 for further details.

Loans that have been modified in reliance on Section 4013 of the U.S. Government’s Coronavirus Aid, Relief, and Economic SecurityCARES Act and the guidance issued thereunder are not treated as TDRs. Information about these loans can be found in Notes 2 and 65 to the consolidated financial statements presented in Item 1 of Part I of this report.


55


61

The following table presents the details of impaired loans that are TDRs by class at September 30, 20202021 and December 31, 2019:2020:

September 30, 2021

December 31, 2020

Number of

Recorded

Number of

Recorded

(dollars in thousands)

    

Contracts

    

Investment

    

Contracts

    

Investment

Performing

Commercial real estate

Non owner-occupied

2

$

215

2

$

224

All other CRE

1

2,110

1

2,208

Acquisition and development

1-4 family residential construction

1

245

1

266

All other A&D

1

202

1

210

Commercial and industrial

Residential mortgage

Residential mortgage – term

7

703

7

749

Residential mortgage – home equity

Consumer

Total performing

12

$

3,475

12

$

3,657

Non-accrual

Commercial real estate

Non owner-occupied

$

$

All other CRE

Acquisition and development

1-4 family residential construction

All other A&D

Commercial and industrial

Residential mortgage

Residential mortgage – term

2

284

2

301

Residential mortgage – home equity

Consumer

Total non-accrual

2

284

2

301

Total TDRs

14

$

3,759

14

$

3,958

September 30, 2020

December 31, 2019

(dollars in thousands)

Number of
Contracts

Recorded
Investment

Number of
Contracts

Recorded
Investment

Performing

Commercial real estate

Non owner-occupied

2

$

226

2

$

235

All other CRE

1

2,226

1

2,265

Acquisition and development

1-4 family residential construction

1

272

1

291

All other A&D

1

213

1

220

Commercial and industrial

Residential mortgage

Residential mortgage – term

7

763

8

831

Residential mortgage – home equity

Consumer

Total performing

12

$

3,700

13

$

3,842

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

308

2

324

Residential mortgage – home equity

Consumer

Total non-accrual

2

308

2

324

Total TDRs

14

$

4,008

15

$

4,166

The level of TDRs decreasedwas $3.8 million at September 30, 2021 compared to $4.0 million at September 30, 2020 when compared to $4.2 million at December 31, 2019,2020, with a slight reduction due to payments made during the first nine months.months of 2021. There were no new TDRs during the first nine months of 2020.2021.

Allowance and Provision for Loan Losses

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

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

62

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

(dollars in thousands)

    

2021

    

2020

 

Balance, January 1

$

16,486

$

12,537

Charge-offs:

Acquisition and development

(85)

(1,144)

Commercial and industrial

(232)

Residential mortgage

(141)

(108)

Consumer

(266)

(274)

Total charge-offs

(492)

(1,758)

Recoveries:

Commercial real estate

69

Acquisition and development

172

29

Commercial and industrial

511

149

Residential mortgage

49

66

Consumer

112

116

Total recoveries

844

429

Net recoveries/(credit charge-offs)

352

(1,329)

Provision for loan losses

68

4,981

Balance at end of period

$

16,906

$

16,189

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

1.46

%  

1.36

%

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

0.04

%  

(0.16)

%

(dollars in thousands)

2020

2019

Balance, January 1

$

12,537

$

11,047

Charge-offs:

Acquisition and development

(1,144)

(29)

Commercial and industrial

(232)

(75)

Residential mortgage

(108)

(86)

Consumer

(274)

(212)

Total charge-offs

(1,758)

(402)

Recoveries:

Commercial real estate

69

67

Acquisition and development

29

132

Commercial and industrial

149

77

Residential mortgage

66

259

Consumer

116

122

Total recoveries

429

657

Net credit (charge-offs)/recoveries

(1,329)

255

Provision for loan losses

4,981

669

Balance at end of period

$

16,189

$

11,971

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

1.36%

1.20%

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

(0.16)%

0.03%

The ALL was $16.2increased to $16.9 million at September 30, 20202021 compared to $12.5$16.5 million at December 31, 2019, an increase of 29.1% that resulted primarily from adjustments to qualitative factors associated with the negative trend in the economic outlook directly related to COVID-19.2020.  The provision for loan losses was $0.1 million for the nine months ended September 30, 2021 and $5.0 million for the nine months ended September 30, 2020.  The higher provision expense recorded in the first nine months of 2020 and $0.7was driven by an increase in the qualitative factors reflecting the uncertainty of the economic environment related to the COVID-19 pandemic. Net recoveries of $0.4 million were recorded for the nine months ended September 30, 2019. Net charge-offs2021, compared to net charge offs of $1.3 million were recorded for the first nine monthssame period of 2020, compared to net recoveries of $0.3 million for 2019. COVID-19 related factor adjustments of $6.3 million were offset by a re-allocation of $1.3 million on an adversely classified, non-accrual loan as discussed in Note 6. Absent the COVID-19 related qualitative factor adjustments for the nine months of 2020, the provision expense would have been approximately $0.6 million that was primarily attributable to non-PPP growth in the portfolio.2020. The ratio of the ALL to loans outstanding, including PPP loan balances, was 1.46% at September 30, 2021 compared to 1.36% at September 30, 2020 compared to 1.20%and 1.41% at September 30, 2019 and 1.43% at June 30,December 31, 2020.  The ALL to loans outstanding, excluding PPP loan balances of $30.3 million and $148.9 million, was 1.49% at September 30, 2021 and 1.55% at September 30, 2020.2020 and December 31, 2020, non-GAAP.

The ratio of net charge offsrecoveries to average loans for the nine months ended September 30, 20202021 was an annualized 0.16%0.04%, compared to net recoveriescharge offs to average loans of 0.03%0.16% for the nine months ended September 30, 2019.2020.  The CRE portfolio did not have any charge offs or recoveries in the first nine months of 2021, compared to an annualized net recovery rate of 0.03% as of September 30, 2020. The A&D loans had an annualized net recovery rate of .03%0.01% as of both September 30, 2020, and September 30, 2019. The A&D loans had an annualized2021, compared to a net charge-off rate of 1.21% as of September 30, 2020, compared to a net recovery rate of 0.12% as of September 30, 2019. This increase2020. The decrease is related to thea $1.10 million charge off of $1.1 million on the adversely classifieda non-accrual participation loan as mentioned above.in 2020, which subsequently moved to OREO.  The C&I portfolio had net charge-offsrecoveries to average loans of 0.06% as of September 30, 2020,2021, compared to net recoveriescharge-offs of $2 thousand0.06% as of September 30, 2019.2020. The residential mortgage ratios were a net charge-off rate of 0.01% as of September 30, 2020, compared to a net recovery rate of 0.05% as of September 30, 2019,2021 and the2020.  The consumer loan ratios were net charge-off rates of 0.59%0.02% and 0.34%0.59% as of September 30, 20202021 and September 30, 2019,2020, respectively. Our special assets team continues to aggressively collect on charged-off loans.

Management believes that the ALL at September 30, 2020 is2021 was adequate to provide for probable credit losses inherent in our loan portfolio. Amounts that will be recorded for the provision for loan losses in future periods will depend upon trends in the loan balances, including the composition of the loan portfolio, changes in loan quality and loss experience trends, potential recoveries on previously charged-off loans and changes in other qualitative factors. Management also applies interest rate risk, collateral value and debt service sensitivity analyses to the Commercial real estate loan portfolio and obtains new appraisals on specific loans under defined parameters to assist in the determination of the periodic provision for loan losses.

63

Investment Securities

At September 30, 2020,2021, the total amortized cost basis of the available-for-sale investment portfolio was $156.5$241.2 million, compared to a fair value of $153.2$235.6 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 $69.2$62.0 million, compared to a fair value of $76.4$71.7 million.

57


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

September 30, 2021

December 31, 2020

Amortized

Fair Value

FV as % 

Amortized

Fair Value

FV as % 

(dollars in thousands)

    

Cost

    

(FV)

    

of Total

    

Cost

    

(FV)

    

of Total

Securities Available-for-Sale:

U.S. government agencies

$

55,527

$

53,734

23%

$

75,856

$

76,433

34%

Residential mortgage-backed agencies

30,936

30,354

13%

22,999

22,899

10%

Commercial mortgage-backed agencies

55,980

55,509

24%

32,549

33,042

14%

Collateralized mortgage obligations

70,766

69,079

29%

70,372

70,637

31%

Obligations of state and political subdivisions

9,402

9,796

4%

10,144

10,614

5%

Collateralized debt obligations

18,586

17,092

7%

18,544

13,260

6%

Total available for sale

$

241,197

$

235,564

100%

$

230,464

$

226,885

100%

Securities Held to Maturity:

Residential mortgage-backed agencies

$

32,113

$

32,601

45%

$

34,597

$

35,732

46%

Commercial mortgage-backed agencies

9,697

10,032

14%

11,716

12,303

16%

Collateralized mortgage obligations

0%

1,348

1,406

2%

Obligations of state and political subdivisions

20,169

29,074

41%

20,602

28,171

36%

Total held to maturity

$

61,979

$

71,707

100%

$

68,263

$

77,612

100%

September 30, 2020

December 31, 2019

Amortized

Fair Value

FV as % 

Amortized

Fair Value

FV as % 

(dollars in thousands)

Cost

(FV)

of Total

Cost

(FV)

of Total

Securities Available-for-Sale:

U.S. government agencies

$

65,942

$

66,871

44%

$

39,987

$

39,894

30%

Residential mortgage-backed agencies

13,037

13,163

9%

4,917

4,900

4%

Commercial mortgage-backed agencies

33,566

34,160

22%

27,634

27,764

21%

Collateralized mortgage obligations

15,226

15,618

10%

29,903

29,923

23%

Obligations of state and political subdivisions

10,159

10,589

7%

14,124

14,470

11%

Collateralized debt obligations

18,525

12,760

8%

18,443

14,354

11%

Total available for sale

$

156,455

$

153,161

100%

$

135,008

$

131,305

100%

Securities Held to Maturity:

U.S. government agencies

$

$

$

16,164

$

16,823

17%

Residential mortgage-backed agencies

34,868

36,025

47%

42,939

43,253

43%

Commercial mortgage-backed agencies

11,773

12,388

16%

15,521

15,865

16%

Collateralized mortgage obligations

1,821

1,919

3%

3,140

3,143

3%

Obligations of state and political subdivisions

20,759

26,038

34%

16,215

21,572

21%

Total held to maturity

$

69,221

$

76,370

100%

$

93,979

$

100,656

100%

Total fair value of investment securities available-for-sale increased by $21.9$8.7 million since December 31, 2019.2020. At September 30, 2020,2021, the securities classified as available-for-sale included a net unrealized loss of $3.3$5.6 million, which represents the difference between the fair value and amortized cost of securities in the portfolio. This unrealized loss at September 30, 2020 is related to the CDO portfolio. All other available securities were at an unrealized gain position.

As discussed in Note 87 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 pricesprices or valuation techniques require inputs that are both significant to the valuation assumptions and are not readily observable in the market (i.e. supported with little or no market activity). These Level 3 instruments are valued based on both observable and unobservable inputs derived from the best available data, some of which is internally developed, and considers risk premiums that a market participant would require.

Approximately $140.4$218.5 million of the available-for-sale portfolio was valued using Level 2 pricing and had net unrealized gainslosses of $2.5$4.1 million at September 30, 2020.2021. The remaining $12.8$17.1 million of the securities available-for-sale represents the entire CDOcollateralized debt obligation (“CDO”) portfolio, which was valued using significant unobservable inputs (Level 3 assets). The $5.8$1.5 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 $4.3$0.7 million represent non-credit related OTTI charges on seven of the securities, while $1.5$0.8 million of unrealized losses relates to two securities which have had no credit related OTTI.

64

The following table provides a summary of the trust preferred securities in the CDO portfolio and the credit status of these securities as of September 30, 2020:2021:

Level 3 Investment Securities Available for Sale

(dollars in thousands)

Investment Description

First United Level 3 Investments

Security Credit Status

Deferrals/

Collateral

Number of

Defaults

Support

Performing

Fair

Unrealized

Lower

as % of

as % of

Issuers/

Amortized

Market

Gain/

Credit

Original

Original

Performing

Collateral

Performing

Total

Deal

    

Class

    

Cost

    

Value

    

(Loss)

    

Rating

    

Collateral

    

Collateral

    

Collateral

    

Support

    

Collateral

    

Issuers

Preferred Term Security XVIII*

C

$

1,894

$

1,522

$

(372)

C

676,565

14.82%

268,049

21,124

7.88%

40 / 56

Preferred Term Security XVIII

C

2,717

2,283

(434)

C

676,565

14.82%

268,049

21,124

7.88%

40 / 56

Preferred Term Security XIX*

C

1,842

1,860

18

C

700,535

6.57%

412,787

30,381

7.36%

47 / 52

Preferred Term Security XIX*

C

1,102

1,116

14

C

700,535

6.57%

412,787

30,381

7.36%

47 / 52

Preferred Term Security XIX*

C

2,554

2,604

50

C

700,535

6.57%

412,787

30,381

7.36%

47 / 52

Preferred Term Security XIX*

C

1,103

1,116

13

C

700,535

6.57%

412,787

30,381

7.36%

47 / 52

Preferred Term Security XXII*

C-1

1,599

1,491

(108)

C

1,386,600

9.59%

624,548

82,765

13.25%

58 / 72

Preferred Term Security XXII*

C-1

3,997

3,728

(269)

C

1,386,600

9.59%

624,548

82,765

13.25%

58 / 72

Preferred Term Security XXIII

C-1

1,778

1,372

(406)

C

1,467,000

12.95%

658,365

76,775

11.66%

70 / 82

Total Level 3 Securities Available for Sale

$

18,586

$

17,092

$

(1,494)

Level 3 Investment Securities Available for Sale

(dollars in thousands)

Investment Description

First United Level 3 Investments

Security Credit Status

Deal

Class

Amortized
Cost

Fair
Market
Value

Unrealized
Gain/
(Loss)

Lower
Credit
Rating

Original
Collateral

Deferrals/
Defaults
as % of
Original
Collateral

Performing
Collateral

Collateral
Support

Collateral
Support
as % of
Performing
Collateral

Number of
Performing
Issuers/
Total
Issuers

Preferred Term Security XVIII*

C

$

1,894

$

1,139

$

(755)

C

676,565

14.83%

268,437

19,130

7.13%

40 / 56

Preferred Term Security XVIII

C

2,717

1,708

(1,009)

C

676,565

14.83%

268,437

19,130

7.13%

40 / 56

Preferred Term Security XIX*

C

1,845

1,399

(446)

C

505,062

5.14%

469,062

33,181

7.07%

50 / 55

Preferred Term Security XIX*

C

1,100

840

(260)

C

505,062

5.14%

469,062

33,181

7.07%

50 / 55

Preferred Term Security XIX*

C

2,541

1,959

(582)

C

505,062

5.14%

469,062

33,181

7.07%

50 / 55

Preferred Term Security XIX*

C

1,101

840

(261)

C

505,062

5.14%

469,062

33,181

7.07%

50 / 55

Preferred Term Security XXII*

C-1

1,578

1,098

(480)

C

807,548

10.31%

664,548

69,263

10.42%

59 / 73

Preferred Term Security XXII*

C-1

3,945

2,747

(1,198)

C

807,548

10.31%

664,548

69,263

10.42%

59 / 73

Preferred Term Security XXIII

C-1

1,804

1,030

(774)

C

895,365

14.52%

682,365

67,917

9.95%

71 / 85

Total Level 3 Securities Available for Sale

$

18,525

$

12,760

$

(5,765)

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

The terms of the debentures underlying trust preferred securities allow the issuer of the debentures to defer interest payments for up to 20 quarters, and, in such case, the terms of the related trust preferred securities allow their issuers to defer dividend payments for up to 20 quarters. Some of the issuers of the trust preferred securities in our investment portfolio have defaulted and/or deferred payments ranging from 5.14%6.57% to 14.83%14.82% of the total collateral balances underlying the securities. The securities were designed to include structural features that provide investors with credit enhancement or support to provide default protection by subordinated tranches. These features include over-collateralization of the notes or subordination, excess interest or spread which will redirect funds in situations where collateral is insufficient, and a specified order of principal payments. There are securities in our portfolio that are under-collateralized, which does represent additional stress on our tranche. However, in these cases, the terms of the securities require excess interest to be redirected from subordinate tranches as credit support, which provides additional support to our investment.

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

The market for these securities as of September 30, 2020 is2021 was not active and markets for similar securities arewere also not active. The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which these securities trade and then by a significant decrease in the volume of trades relative to historical levels. The new issue market is also inactive, as no new CDOs have been issued since 2007. There are currently very few market participants who are willing to effect transactions in these securities. The market values for these securities, or any securities other than those issued or guaranteed by the U.S. Department of the Treasury (the “Treasury”), are very depressed relative to historical levels. Therefore, in the current market, a low market price for a particular bond may only provide evidence of stress in the credit markets in general rather than being an indicator of credit problems with a particular issue. Given the conditions in the current debt markets and the absence of observable transactions in the secondary and new issue markets, management has determined that (a) the few observable transactions and market quotations that are available are not reliable for the purpose of obtaining fair value at September 30, 2020,2021, (b) an income valuation

65

approach technique (i.e. present value) that maximizes the use of relevant unobservable inputs and minimizes the use of observable inputs will be equally or more

59


representative of fair value than a market approach, and (c) the CDO segment is appropriately classified within Level 3 of the valuation hierarchy because management determined that significant adjustments were required to determine fair value at the measurement date.

Management utilizes onuses an independent third party to prepare both the evaluations of OTTI and the fair value determinations for the CDO portfolio. Management does not believe that there were any material differences in the OTTI evaluations and pricing between December 31, 20192020 and September 30, 2020.2021.

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

Based upon a review of credit quality and the cash flow tests performed by the independent third party, management determined that no securities had credit-related OTTI during the first nine months of 2020.2021.  Additionally, there has been no change in the performing collateral, no decline in the percentage of deferrals/defaults to original collateral, and increases in collateral support for each of the positions held by the Corporation.

Deposits

Deposits

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

(dollars in thousands)

    

September 30, 2021

    

December 31, 2020

Non-interest bearing demand deposits:

    

    

Retail

$

491,441

34%

$

420,427

30%

Interest-bearing deposits:

Demand

212,385

15%

201,571

14%

Money Market:

Retail

333,113

23%

376,096

26%

Savings deposits

233,403

16%

196,046

14%

Time deposits less than $100,000:

Retail

74,166

5%

88,728

6%

Time deposits $100,000 or more:

Retail

99,986

7%

139,498

10%

Total Deposits

$

1,444,494

100%

$

1,422,366

100%

(dollars in thousands)

September 30, 2020

December 31, 2019

Non-interest bearing demand deposits:

Retail

$

419,935

31%

$

294,649

26%

Interest-bearing deposits:

Demand

197,177

14%

159,567

14%

Money Market:

Retail

340,095

25%

275,007

24%

Savings deposits

184,389

13%

158,918

14%

Time deposits less than $100,000:

Retail

91,255

7%

96,198

8%

Time deposits $100,000 or more:

Retail

144,433

10%

147,692

13%

Brokered

0%

10,000

1%

Total Deposits

$

1,377,284

100%

$

1,142,031

100%

Total deposits at September 30, 20202021 increased by $235.3$22.1 million when compared to deposits at December 31, 2019.2020.  During the first nine months of 2020,2021, non-interest-bearing deposits increased by $125.3 million. This growth was$71.0 million, driven by our retail and commercial markets as well as deposits from PPP loans.account growth partially attributable to government stimulus programs. Traditional savings accounts increased by $25.5$37.4 million as we continuecontinued to see significant growth in our Prime Saver product. Totalproduct, and total demand deposits increased by $37.6 million and total$10.8 million. Total money market accounts increaseddecreased by $65.1$43.0 million due primarily to growthmanagement’s decision to sweep approximately $70.0 million of wealth management money market funds off balance sheet in our variable rate Value Money Market account.the first quarter of 2021. These funds can be readily shifted back to in-house money market accounts should liquidity needs arise in the future.  Time deposits less than $100,000 decreased by $4.9$54.1 million, and time deposits greater than $100,000 decreased by $13.3 million. The declineprimarily in time deposits greater thanover $100,000, was due to a local municipality utilizing a maturing certificate of deposit for cash needs during this unprecedented economic environment as well as our repayment of the full outstanding balance ofa $10.0 million in a brokered CD that matured in May 2020.2021 and as we continued to reduce pricing on single-service relationships and municipal bids.

66

Borrowed Funds

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

(in thousands)

    

September 30,
2021

    

December 31,
2020

Securities sold under agreements to repurchase

$

72,396

$

49,160

Total short-term borrowings

72,396

49,160

FHLB advances

$

$

70,000

Junior subordinated debt

30,929

30,929

Total long-term borrowings

$

30,929

$

100,929

(in thousands)

September 30,
2020

December 31,
2019

Securities sold under agreements to repurchase

$

52,589

$

48,728

Total short-term borrowings

52,589

48,728

FHLB advances

$

70,000

$

70,000

Junior subordinated debt

30,929

30,929

Total long-term borrowings

$

100,929

$

100,929

Total short-term borrowings increased by $3.9$23.2 million during the first nine months of 2020.2021. This increase iswas due to the increase in our Treasury Management overnight investment sweep as we saw growth inincreased cash balances from our existing municipality accounts. Long-term borrowings remained constantdecreased $70.0 million as management made the strategic decision to deploy excess cash and prepay the FHLB advances during the first nine months of 2020.third quarter.  

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.

Reliability and stability of core deposits;

Cash flow structure and pledging status of investments; and

Potential for unexpected loan demand.

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

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

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

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

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

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

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

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

6.Federal Reserve PPPLF – provides funding and uses SBA PPP loans as collateral at 100% value

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

67

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

61


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, 2020,2021, we were asset sensitive.

Our interest rate risk management goals are:

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

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

Enable dynamic measurement and management of interest rate risk;

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

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

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

In order 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 rateswill 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.

68

Based on the simulation analysis performed at September 30, 20202021 and December 31, 2019,2020, management estimated the following changes in net interest income, assuming the indicated rate changes:

(Dollars in thousands)

    

September 30,
2021

December 31,
2020

+400 basis points

$

3,598

$

5,124

+300 basis points

$

2,896

$

4,067

+200 basis points

$

2,097

$

2,897

+100 basis points

$

1,022

$

1,527

-100 basis points

$

(2,952)

$

(2,174)

(Dollars in thousands)

September 30,
2020

December 31,
2019

+400 basis points

$

7,719

$

1,500

+300 basis points

$

5,978

$

1,381

+200 basis points

$

4,097

$

1,075

+100 basis points

$

2,043

$

645

-100 basis points

$

(1,841)

$

(2,477)

62


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, 2019.2020. Our NII simulation analysis as of December 31, 20192020 is included in Item 7 of Part II Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 20192020 under the heading “Market Risk and Interest Sensitivity.

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

Capital Resources

We require capital to fund loans, satisfy our obligations under the Bank’s letters of credit, meet the deposit withdrawal demands of the Bank’s customers, and satisfy our other monetary obligations. To the extent that deposits are not adequate to fund our capital requirements, we can rely on the funding sources identified above under the heading “Liquidity Management”. At September 30, 2020,2021, the Bank had $145.0$130.0 million available through unsecured lines of credit with correspondent banks, $1.1$1.0 million available through a secured line of credit with the Fed Discount Window and approximately $137.5$189.0 million available through the FHLB. FHLB. Management is not aware of any demands, commitments, events or uncertainties that are likely to materially affect our ability to meet our future capital requirements.

In addition to operational requirements, the Bank and First United Corporation are 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, 2020,2021, both the Bank and First United Corporation are considered to be well-capitalized.

69

The following table presents our capital ratios as of the dates indicated:

    

September 30,
2021

    

December 31,
2020

    

Required for
Capital
Adequacy
Purposes

    

Required
to be Well
Capitalized

 

Total Capital (to risk-weighted assets)

Consolidated

15.51

%  

16.08

%  

8.00

%  

10.00

%

First United Bank & Trust

14.64

%  

15.50

%  

8.00

%  

10.00

%

Tier 1 Capital (to risk-weighted assets)

Consolidated

14.26

%  

14.83

%  

6.00

%  

8.00

%

First United Bank & Trust

13.39

%  

14.25

%  

6.00

%  

8.00

%

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

Consolidated

12.15

%  

12.61

%  

4.50

%  

6.50

%

First United Bank & Trust

13.39

%  

14.25

%  

4.50

%  

6.50

%

Tier 1 Capital (to average assets)

Consolidated

10.33

%  

10.36

%  

4.00

%  

5.00

%

First United Bank & Trust

9.59

%  

9.81

%  

4.00

%  

5.00

%

September 30,
2020

December 31,
2019

Required for
Capital
Adequacy
Purposes

Required
to be Well
Capitalized

Total Capital (to risk-weighted assets)

Consolidated

16.14%

16.29%

8.00%

10.00%

First United Bank & Trust

15.36%

15.60%

8.00%

10.00%

Tier 1 Capital (to risk-weighted assets)

Consolidated

14.89%

15.17%

6.00%

8.00%

First United Bank & Trust

14.11%

14.44%

6.00%

8.00%

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

Consolidated

12.59%

12.79%

4.50%

6.50%

First United Bank & Trust

14.11%

14.44%

4.50%

6.50%

Tier 1 Capital (to average assets)

Consolidated

10.37%

11.77%

4.00%

5.00%

First United Bank & Trust

9.64%

10.99%

4.00%

5.00%

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

63


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, 20202021 to December 31, 2019,2020, short-term borrowings increased $3.9by $23.2 million primarilyduring the first nine months of 2021. This increase was due to the increase in our Treasury Management overnight investment sweep accounts as we saw growth inincreased cash balances from our existing municipality accounts. Long-term borrowings decreased $70.0 million as management made the strategic decision to deploy excess cash and prepay the FHLB advances during the third quarter.  

Commitments

Commitments

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

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

(in thousands)

    

September 30,
2021

    

December 31,
2020

Residential Mortgage - home equity

$

64,316

$

59,615

Residential Mortgage - construction

21,210

12,220

Commercial

139,233

125,294

Consumer - personal credit lines

4,654

4,314

Standby letters of credit

16,731

17,675

Total

$

246,144

$

219,118

70

(in thousands)

September 30,
2020

December 31,
2019

Residential Mortgage - home equity

$

57,294

$

53,827

Residential Mortgage - construction

10,919

4,995

Commercial

123,192

85,089

Consumer - personal credit lines

4,266

3,903

Standby letters of credit

11,690

9,112

Total

$

207,361

$

156,926

The increase of $50.4$27.0 million in commitments at September 30, 20202021 when compared to December 31, 20192020 was due to increasedcontinued demand for consumer and commercial construction funding during the first nine months of 2020.2021. Management will continue to monitor these balances as the COVID-19 pandemic has slowed the underlying projects and disbursements of funds.
balances.

64


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, 20192020 under the heading “Market Risk and Interest Sensitivity” both of which are incorporated in this Item 3 by reference.

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, 20202021 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 quarternine months ended September 30, 2020,2021, 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.


65


71

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

On September 4, 2020, Driver Opportunity Partners I LP (“Driver”) filed a lawsuit against the Corporation, all of its current directors, and former directors Robert W. Kurtz and Elaine L. McDonald (the individuals being collectively referred to as the “Director Defendants”) in the United States District Court for the District of Maryland and styled Driver Opportunity Partners I LP v. First United Corp., et al., No. 1:20-cv-2575 RDB (the “Driver Litigation”).  Driver’s complaint follows a lawsuit filed by the Corporation in May 2020 against Driver and affiliated persons seeking a declaration that Driver’s acquisition of approximately 5.1% of the Corporation’s outstanding common stock during 2019 violated Maryland law, rendering those shares ineligible to be voted for five years, including at the 2020 Meeting. In connection with the 2020 Meeting, Driver ran a proxy contest seeking to replace three of the Corporation’s directors with nominees of its own. The declaratory relief action, now pending in the same court, is captioned First United Corp. v. Driver Opportunity Partners I LP, et al., No. 1:20-cv-2592-RDB.

For its complaint, Driver alleges that certain acts and omissions of the Corporation and/or the Director Defendants in connection with the 2020 Meeting and/or in response to Driver’s proxy contest (i) constituted breaches of fiduciary duties allegedly owed to Driver by the Director Defendants, (ii) constituted abuses of process by the Corporation, (iii) constituted malicious prosecution of Driver by the Corporation, (iv) defamed Driver, (v) tortuously interfered with Driver’s economic relations, (vi) constituted unfair competition, and (vii) resulted in the Defendant Directors being unjustly enriched.  Driver seeks unspecified compensatory and punitive damages and asks the court to vacate the results of director election at the 2020 Meeting and order a new meeting of shareholders for the purpose of electing directors. 

The Corporation and the Director Defendants believe that Driver’s claims lack merit and intend to defend the lawsuit vigorously. The Company maintains insurance coverages that it believes will cover portions of the legal expenses associated with the Driver Litigation and any damages that might be awarded to Driver. The Corporation has certain obligations both to indemnify and to advance defense expenses to each of the Director Defendants to the fullest extent permissible under Maryland law, and the Corporation intends to honor those obligations. It is not possible at this time for the Corporation to assess the likelihood of success of any of its and the Defendant Directors’ defenses or, thus, the outcome of the litigation, or the amount of legal fees that it and the Director Defendants will incur in defending the Driver Litigation.

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, 2019.2020. Management does not believe that any material changes in our risk factors have occurred since they were last disclosed except as follows.

Risks Relating to First United Corporation and its Affiliates

First United Corporation will likely incur significant expenses and faces the possibility of damages in connection with recent litigation.

As discussed in in Item 1 of Part II of this report, the Corporation, its directors, and two former directors have been sued by Driver. The Driver Litigation will likely be time consuming and involve significant defense and other costs. We cannot predict what expenses that we might incur in connection with the Driver Litigation. The Driver Litigation, if decided adversely to us, could result in significant monetary damages and reputational harm and require us to incur significant expenses related to holding a new meeting of shareholders, if the court were to order such a meeting as part of the relief granted. Subject to certain conditions imposed by Maryland law, our bylaws require us to indemnify and advance expenses to each of the current and former directors who are parties to the Driver Litigation. Further, our insurance policies might not cover all expenses and/or claims that have been or might be brought against us and the individual defendants, and insurance coverage might not continue to be available to us at a reasonable cost. As a result, we are exposed to the possibility of substantial uninsured liabilities in connection with the Driver Litigation, including pursuant to our indemnification obligations, which could materially and adversely affect our business, prospects, results of operations and financial condition.

66


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

None.

The following table provides information about shares of common stock purchased by or on behalf of First United Corporation and its affiliates (as defined by Exchange Act Rule 10b-18) during the three-month period ended September 30, 2020:

Issuer Purchases of Equity Securities

Period

Total Number of Shares (or Units) Purchased (1)

Average Price Paid per Share (or Unit)

Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs

Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs

July 2020

367,581

August 2020

4,031

11.40

4,031

513,550

September 2020

30,065

$

11.41

30,065

483,485

Total

34,096

$

11.41

34,096

483,485

(1)The shares were purchased by the Trust Department of First United Bank & Trust (the “Trust Department”) in open-market transactions using assets in the First United Corporation noncontributory defined benefit pension plan (the “Pension Plan”). On November 20, 2019, the Board of Directors of First United Corporation authorized the Trust Department, which administers the Pension Plan, to use up to 10% of the Pension Plan’s assets to purchase up to 150,000 shares of common stock, to be held as an investment in the Pension Plan. Such authorization, which was publicly announced, permits the Trust Department to purchase the shares in open market transactions or privately-negotiated transactions at such times, in such amounts, at such prices, and upon such other terms as are determined in the discretion of the Trust Department. On August 26, 2020, the Board of Directors of First United Corporation authorized the Trust Department to purchase up to an additional 150,000 shares of common stock, to be held as an investment in the Pension Plan. In addition to the foregoing, the Board of Directors of the Corporation authorized, on April 30, 2020, the Corporation to purchase up to an aggregate of 354,449 shares of its common stock over a 12 month period. On November 20, 2019, the Board voted to increase the number of shares that may be purchased to 500,000 shares and to extend the term of the repurchase program through November 20, 2020. All of these authorizations were publicly announced.

Item 3. Defaults upon Senior Securities

None.

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

72

Item 6. Exhibits

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

Exhibit

Description

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

101.INS

Inline XBRL Instance Document (filed herewith)

101.SCH

101.SCH

Inline XBRL Taxonomy Extension Schema (filed herewith)

101.CAL

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase (filed herewith)

101.DEF

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase (filed herewith)

101.LAB

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase (filed herewith)

101.PRE

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase (filed herewith)

104

104

The cover page of First United Corporation’s Quarterly Report on Form 10Q for the quarter ended September 30, 2020,2021 formatted in Inline XBRL, included within the Exhibit 101 attachments (filed herewith).


67


73

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

FIRST UNITED CORPORATION

Date: November 9, 2021

Date: November 10, 2020

/s/ Carissa L. Rodeheaver

Carissa L. Rodeheaver, CPA CFP

Chairman of the Board, President and Chief Executive Officer

(Principal Executive Officer)

(Principal Executive Officer)

Date: November 9, 2021

Date: November 10, 2020

/s/ Tonya K. Sturm

Tonya K. Sturm, Senior Vice President,

Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

6874