What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2022-05-09 compared with 2021-11-09 · 374 added, 682 removed, 693 unchanged (60% of the section changed)

1 unchanged sentence

First United Corporation and Subsidiaries

Consolidated Statement of Financial Condition

Consolidated Statements of Financial Condition

(In thousands, except share data - Unaudited)

September 30,

Cash and due from banks

2 unchanged sentences

Investment securities – available for sale (at fair value)

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

Investment securities – held to maturity (fair value $ 235,026 at March 31, 2022 and $ 65,369 at December 31, 2021)

Restricted investment in bank stock, at cost

3 unchanged sentences

Premises and equipment, net

Goodwill and other intangibles

Bank owned life insurance

1 unchanged sentence

Other real estate owned, net

Operating lease asset

Accrued interest receivable and other assets

Right of use assets

Pension asset

Accrued interest receivable

Liabilities and Shareholders’ Equity

5 unchanged sentences

Operating lease liability

SERP deferred compensation

Accrued interest payable and other liabilities

4 unchanged sentences

Authorized 25,000,000 shares;

issued and outstanding 6,617,941 shares at September 30, 2021 and 6,992,911 at December 31, 2020

issued and outstanding 6,637,979 shares at March 31, 2022 and 6,620,955 at December 31, 2021

Retained earnings

4 unchanged sentences

First United Corporation and Subsidiaries

Consolidated Statement of Operations

Consolidated Statements of Operations

(In thousands, except per share data)

Nine Months Ended

September 30,

Three Months Ended

Interest income

6 unchanged sentences

Interest on deposits:

Interest-bearing transaction accounts

Total interest on Deposits

Interest on short-term borrowings

2 unchanged sentences

Net Interest income

Provision for loan losses

Provision/(credit) for loan losses

Net interest income after provision for loan losses

1 unchanged sentence

Net gains on investments, available for sale

Net gains on investments, held to maturity

Gains on sale of residential mortgage loans

Gains/(losses) on disposal of fixed assets

Net gains on sale of residential mortgage loans

Net gains on disposal of fixed assets

Service charges on deposit accounts

9 unchanged sentences

FDIC premiums

Data processing

Equipment expense

Occupancy expense of premises

Data processing expense

Marketing expense

Professional services

3 unchanged sentences

Settlement expense

FHLB prepayment penalty

Contributions

Total other operating expenses

8 unchanged sentences

First United Corporation and Subsidiaries

Consolidated Statement of Operations

(In thousands, except per share data)

Three Months Ended

September 30,

Interest income

Interest and fees on loans

Interest on investment securities

Exempt from federal income tax

Total investment income

Total interest income

Interest expense

Interest on deposits

Interest on short-term borrowings

Interest on long-term borrowings

Total interest expense

Net interest income

Provision for loan losses

Net interest income after provision for loan losses

Other operating income

Net gains on investments, available for sale

Net gains on investments, held to maturity

Gains on sale of residential mortgage loans

Gains on disposal of fixed assets

Service charges on deposit accounts

Other service charges

Trust department

Debit card income

Bank owned life insurance

Brokerage commissions

Total other income

Total other operating income

Other operating expenses

Salaries and employee benefits

FDIC premiums

Data processing

Professional services

Contract labor

Other real estate owned

Investor relations

FHLB prepayment penalty

Total other operating expenses

Income before income tax expense

Provision for income tax expense

Basic net income per common share

Diluted net income per common share

Weighted average number of basic shares outstanding

Weighted average number of diluted shares outstanding

Dividends declared per common share

See accompanying notes to the consolidated financial statements

First United Corporation and Subsidiaries

Consolidated Statement of Comprehensive Income

Consolidated Statements of Comprehensive Loss

(In thousands)

Nine Months Ended

September 30,

Comprehensive Income

Other comprehensive income, net of tax and reclassification adjustments:

Net unrealized gains/(losses) on investments with OTTI

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

Net unrealized gains on HTM securities

Net unrealized gains/(losses) on cash flow hedges

Net unrealized gains on pension

Net unrealized gains on SERP

Other comprehensive income, net of tax

Comprehensive income

Three Months Ended

September 30,

Comprehensive Income (in thousands)

Comprehensive Loss

Other comprehensive income, net of tax and reclassification adjustments:

Net unrealized gains on investments with OTTI

Net unrealized losses on all other AFS securities

Net unrealized gains on HTM securities

Net unrealized gains on cash flow hedges

Net unrealized (losses)/gains on pension

Net unrealized gains on SERP

Other comprehensive (loss)/income, net of tax

Comprehensive income

Available for sale securities:

Unrealized holding gains on investments with OTTI

Reclassification adjustment for accretable yield realized in income

Other comprehensive income on investments with OTTI

Unrealized holding losses on all other AFS investments

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

Reclassification adjustment for gains realized in income

Other comprehensive losses on all other AFS investments

Held to Maturity Securities

Unrealized holding losses on securities transferred to held to maturity

Reclassification adjustment for amortization realized in income

Other comprehensive (losses)/income on HTM investments

Cash flow hedges:

Unrealized holding gains on cash flow hedges

Reclassification adjustment for gains realized in income

Other comprehensive income on cash flow hedges

Pension plan liability:

Unrealized holding losses on pension plan liability

Reclassification adjustment for amortization of unrecognized loss realized in income

Other comprehensive (losses)/income on pension plan liability

SERP liability:

Unrealized holding losses on SERP liability

Reclassification adjustment for amortization of prior service costs realized in income

Other comprehensive losses on SERP liability

Other comprehensive losses before income tax

Income tax benefit related to other comprehensive income

Other comprehensive loss, net of tax

Comprehensive Loss

See accompanying notes to the consolidated financial statements

First United Corporation and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity

Consolidated Statements of Changes in Shareholders’ Equity

(In thousands, except per share data)

7 unchanged sentences

Balance at March 31, 2022

Other comprehensive income

Stock based compensation

Common stock issued - 3,261 shares

Common stock repurchase - 400,000 shares

Common stock dividend declared - $ 0.15 per share

Balance at June 30, 2021

Other comprehensive loss

Stock based compensation

Common stock issued - 3,337 shares

Common stock dividend declared -

$0.15 per share

Balance at September 30, 2021

See accompanying notes to the consolidated financial statements

First United Corporation and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity

(In thousands, except per share data)

Comprehensive

4 unchanged sentences

Common stock issued - 2,956 shares

Stock repurchase - 145,291 shares

Common stock dividend declared - $ 0.15 per share

Balance at March 31, 2021

Other comprehensive income

Stock based compensation

Common stock issued - 3,465 shares

Common stock dividend declared - $ 0.13 per share

Balance at June 30, 2020

Other comprehensive income

Stock based compensation

Common stock issued - 4,245 shares

Common stock dividend declared -

$0.13 per share

Balance at September 30, 2020

See accompanying notes to the consolidated financial statements

First United Corporation and Subsidiaries

Consolidated Statement of Cash Flows

Consolidated Statements of Cash Flows

(In thousands)

Nine Months Ended

September 30,

Three Months Ended

Operating activities

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

Provision for loan losses

Provision (credit) for loan losses

Stock based compensation

Gains on sales of other real estate owned

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

Write-downs of other real estate owned

Originations of loans held for sale

1 unchanged sentence

Gains from sale of loans held for sale

(Gains)/losses on disposal of fixed assets

Gains on disposal of fixed assets

Net amortization of investment securities discounts and premiums- AFS

Net amortization of investment securities discounts and premiums- HTM

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

Amortization of intangible assets

Gains on sales/calls of investment securities – AFS

Losses/(gains) on investment securities – HTM

Earnings on Bank owned life insurance

Amortization of deferred loan fees

Operating lease asset

Amortization of operating lease right of use asset

Increase in accrued interest receivable and other assets

Deferred tax (benefit)/expense

Deferred tax expense/(benefit)

Operating lease liability

Increase in accrued interest payable and other liabilities

(Decrease)/increase in accrued interest payable and other liabilities

Net cash provided by operating activities

7 unchanged sentences

Proceeds from disposal of fixed assets

Net decrease/(increase) in restricted stock

Net decrease/(increase) in loans

Purchases of loans

Net decrease in restricted stock

Net increase in loans

Purchases of premises and equipment

Net cash provided by/(used in) investing activities

Net cash used in investing activities

Financing activities

3 unchanged sentences

Net increase in short-term borrowings

Stock repurchase

Net decrease in long-term borrowings

Net cash (used in)/provided by financing activities

Net cash provided by financing activities

(Decrease)/increase in cash and cash equivalents

4 unchanged sentences

Non-cash investing activities:

Transfers from loans to other real estate owned

Transfers from securities available for sale to held to maturity

See accompanying notes to the consolidated financial statements

2 unchanged sentences

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.

The financial information is presented in accordance with generally accepted accounting principles and general practice for financial institutions in the United States of America (“U.S.

In preparing financial statements, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities as of the date of financial statements.

In addition, these estimates and assumptions affect revenues and expenses in the financial statements and as such, actual results could differ from those estimates.

Material estimates that are particularly susceptible to change include:

(a) the allowance for loan losses and (b) fair values of available for sale debt securities based on estimates from independent valuation services or from brokers.

Transfers of Investment Securities from Available-for-Sale to Held-to-Maturity

Transfers of debt securities into the held-to-maturity category from the available-for-sale category are made at fair value at the date of transfer.

The unrealized holding gain or loss at the date of transfer is retained in other comprehensive income and in the carrying value of the held-to-maturity securities.

Such amounts are amortized over the remaining expected life of the security.

Principles of Consolidation

The consolidated financial statements include the accounts of First United Corporation, the Bank, the OakFirst Loan Centers, First OREO Trust and FUBT OREO I, LLC.

All significant inter-company accounts and transactions have been eliminated.

Certain prior period balances have been reclassified to conform to the current period presentation.

Operating results for the three and nine month periods ended September 30, 2021 are not necessarily indicative of the results that may be expected for the full year or for any future interim period.

Operating results for the three month period ended March 31, 2022 are not necessarily indicative of the results that may be expected for the full year or for any future interim period.

These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in First United Corporation’s Annual Report on Form 10-K for the year ended December 31, 2021.

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

The Corporation has evaluated events and transactions occurring subsequent to the statement of financial condition date of September 30, 2021 for items that should potentially be recognized or disclosed in these financial statements.

Note 2 – COVID-19

The COVID-19 pandemic has adversely impacted our business and financial results and that of many of our customers, and the ultimate impact will depend on future developments, which are highly uncertain, cannot be predicted, and are largely outside of our control, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

The COVID-19 pandemic has created extensive disruptions to the global and U.S.

economies and to the lives of individuals throughout the world.

Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including closures of businesses and schools, fiscal and monetary stimulus, and legislation designed to deliver financial aid and other relief.

While the scope, duration, and full effects of COVID-19 are not fully known, the pandemic and the efforts to contain it have disrupted global economic activity, adversely affected the functioning of financial markets, impacted market interest rates, increased economic and market uncertainty, and disrupted trade and supply chains.

Congress, the President, and the Board of Governors of the Federal Reserve System (the “Federal Reserve”) have taken several actions designed to cushion the economic fallout.

Most notably, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), a $2 trillion legislative package, was signed into law at the end of March 2020.

The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors, such as by providing funds for loans under the Paycheck Protection Program (the “PPP”) administered by the Small Business Administration (the “SBA”).

Section 4013 of the CARES Act, “Temporary Relief from Troubled Debt Restructurings,” provides banks the option to temporarily suspend certain requirements under U.S.

GAAP related to trouble debt restructurings (“TDRs”) for a limited period of time to account for the effects of COVID-19.

Additionally, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”) was enacted on December 27, 2020 and provided for a second round of PPP loans.

The PPP Extension Act of 2021, which was enacted on March 30, 2021, extended the PPP application deadline to May 31, 2021 and provided the SBA with additional time to process applications through June 30, 2021.

Also, the Consolidated Appropriations Act (the “CAA”) passed on December 27, 2020, which, among other things, extended the provisions of Section 4013 of the CARES Act to January 1, 2022.

The Federal Reserve’s actions have included cutting the federal funds rate 150 basis points and targeting a 0 to 25 basis point rate.

In addition to the general impact of the COVID-19 pandemic, certain provisions of the CARES Act as well as other legislative and regulatory relief efforts are expected to have a material impact on the Corporation’s operations.

During the first nine months of 2021, we continued to assist our business customers with the PPP loan forgiveness process and to originate additional PPP loans through the third round of funding.

We remained diligent in protecting our associates and customers from the lingering effects of the pandemic, delaying opening our lobbies until April 1, 2021.

During the third quarter, we made the decision to reclose our lobbies as COVID cases increased in most of our markets and staffing was at reduced levels.

Many of our sales and support employees continue to work remotely as we have adjusted to a hybrid work environment.

We have continued to monitor our market areas, maintaining travel protocols and utilizing safety precautions while continuing to provide full banking services to our customers.

Paycheck Protection Program

The Corporation continues to actively participate in the PPP.

On January 19, 2021, the SBA implemented a third round of funding for PPP loans.

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

During 2021, the Corporation originated a total of $ 66.1 million in PPP loans under the third round of funding, consisting of 870 loans with an average loan size of $ 80 thousand.

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

During 2020, 290 PPP loans, totaling $ 34.5 million were forgiven, resulting in 885 loans with a remaining balance of $ 114.0 million at December 31, 2020.

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

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

COVID Modifications

While the COVID-19 pandemic has had an impact on most industries, some have been more affected than others.

In accordance with Section 4013 of the CARES Act and related regulatory pronouncements, we have not accounted for modifications of loans affected by the pandemic as troubled debt restructurings (“TDRs”) nor have we designated them as past due or nonaccrual.

As of October 15, 2021, modified loans not treated as TDRs consisted of eleven commercial loans relating to real estate rental, food services and health care sectors and one mortgage loan, with an aggregate balance of $ 9.9 million.

These loans are scheduled to return to contractual payment terms within the next quarter.

The Corporation has evaluated events and transactions occurring subsequent to the statement of financial condition date of March 31, 2022 for items that should potentially be recognized or disclosed in these financial statements.

Note 2 – Earnings Per Common Share

1 unchanged sentence

Diluted earnings per share is derived by dividing net income available to common shareholders by the weighted-average number of shares outstanding, adjusted for the dilutive effect of outstanding common stock equivalents, such as restricted stock units (“RSUs”).

At September 30, 2021, there were RSUs relating to 7,073 time-vested shares of common stock outstanding.

There were no anti-dilutive shares at September 30, 2021 or 2020.

The following tables set forth the calculation of basic and diluted earnings per common share for the nine and three months periods ended September 30, 2021 and 2020:

Nine months ended September 30,

(in thousands, except for per share amount)

Basic Earnings Per Share:

Diluted Earnings Per Share:

Three months ended September 30,

There were no anti-dilutive shares outstanding at March 31, 2022 or 2021.

The following table sets forth the calculation of basic and diluted earnings per common share for the three month periods ended March 31, 2022 and 2021:

Three months ended March 31,

(in thousands, except for per share amount)

1 unchanged sentence

Diluted Earnings Per Share:

Restricted stock units

Note 3 – Investments

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

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

(in thousands)

September 30, 2021

March 31, 2022

Available for Sale:

4 unchanged sentences

Obligations of states and political subdivisions

Corporate bonds

Collateralized debt obligations

Total available for sale

(in thousands)

March 31, 2022

Held to Maturity:

government agencies

Residential mortgage-backed agencies

Commercial mortgage-backed agencies

Collateralized mortgage obligations

Obligations of states and political subdivisions

Total held to maturity

(in thousands)

December 31, 2021

7 unchanged sentences

Total available for sale

(in thousands)

December 31, 2021

Held to Maturity:

1 unchanged sentence

Commercial mortgage-backed agencies

Collateralized mortgage obligations

Obligations of states and political subdivisions

Total held to maturity

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

The Corporation reassessed classification of certain investments and, effective February 1, 2022, the Corporation transferred $ 139.0 million of callable agencies, obligation of state and political subdivisions, and collateralized mortgage obligations from available for sale to held to maturity securities.

The transfer occurred at fair value.

The related unrealized loss of $ 8.4 million included in other comprehensive loss remained in other comprehensive loss, to be amortized out of other comprehensive loss with an offsetting entry to interest income as a yield adjustment over the remaining term of the securities.

No gain or loss was recorded at the time of transfer.

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

Less than 12 months

1 unchanged sentence

(in thousands)

September 30, 2021

March 31, 2022

Available for Sale:

3 unchanged sentences

Collateralized mortgage obligations

Obligations of states and political subdivisions

Collateralized debt obligations

Total available for sale

Less than 12 months

12 months or more

(in thousands)

March 31, 2022

Held to Maturity:

government agencies

Residential mortgage-backed agencies

Commercial mortgage-backed agencies

Collateralized mortgage obligations

Obligations of states and political subdivisions

Total held to maturity

Less than 12 months

12 months or more

(in thousands)

December 31, 2021

4 unchanged sentences

Collateralized mortgage obligations

Obligations of states and political subdivisions

Collateralized debt obligations

Total available for sale

Less than 12 months

12 months or more

(in thousands)

December 31, 2021

Held to Maturity:

2 unchanged sentences

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.

Based upon application of Accounting Standards Codification (“ASC”) Topic 320 (Section 320-10-35), management must assess whether (a) the Corporation has the intent to sell the security and (b) it is more likely than not that the Corporation will be required to sell the security prior to its anticipated recovery.

If neither applies, then declines in the fair value of securities below their cost that are considered other-than-temporary declines are split into two components.

The 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 other than temporary impairment (“OTTI”) losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) adverse conditions specifically related to the security, an industry, or a geographic area, (3) the historic and implied volatility of the fair value of the security, (4) changes in the rating of the security by a rating agency, (5) recoveries or additional declines in fair value subsequent to the balance sheet date, (6) failure of the issuer of the security to make scheduled interest or principal payments, and (7) the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future.

Management also monitors cash flow projections for securities that are considered beneficial interests under the guidance of ASC Subtopic 325-40, Investments – Other – Beneficial Interests in Securitized Financial Assets , (ASC Section 325-40-35).

Management believes that the valuation of certain securities is a critical accounting policy that requires significant estimates in preparation of the Corporation’s consolidated financial statements.

Management utilizes an independent third party to prepare both the impairment valuations and fair value determinations for the Corporation’s collateralized debt obligation (“CDO”) portfolio consisting of pooled trust preferred securities.

See Note 7 for a discussion of the methodology used by management to determine the fair values of these securities.

Based upon a review of credit quality and the cash flow tests performed by the independent third party, management determined that there were no securities that had credit-related OTTI charges during the first nine months of 2021 or 2020.

The Corporation believes that the investment securities that were in an unrealized loss position at September 30, 2021 do not represent other-than-temporary impairment.

The Corporation does not intend to sell, nor is it anticipated that the Corporation will be required to sell, any of its impaired investment securities at a loss.

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

Nine Months Ended

September 30,

(in thousands)

Balance of credit-related OTTI at January 1

Reduction for increases in cash flows expected to be collected

Balance of credit-related OTTI at September 30

The second component consists of all other losses.

The other losses are recognized in other comprehensive income.

In estimating other than temporary impairment (“OTTI”) charges, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) adverse conditions specifically related to the security, an industry, or a geographic area, (3) the historic and implied volatility of the security, (4) changes in the rating of a security by a rating agency, (5) recoveries or additional declines in fair value subsequent to the balance sheet date, (6) failure of the issuer of the security to make scheduled interest payments, and (7) the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future.

Due to the duration and the significant market value decline in the pooled trust preferred securities held in our portfolio, we performed more extensive testing on these securities for purposes of evaluating whether or not an OTTI has occurred.

A cash flow analysis is performed quarterly on each of the collateralized debt obligation (“CDO”) investment securities.

In performing the detailed cash flow analysis the Bank works with an independent third party to estimate expected cash flows and assist with the evaluation of OTTI.

The cash flow analyses performed included the following assumptions:

● Default probabilities vary for each investment.

● Recoveries of 10 % for banks and 15 % for insurance companies with a two-year lag on all defaults and deferrals.

● No prepayments for 5 years and then 5 % per annum for the remaining life of the investment.

● Our investment securities have been modeled using the above assumptions by independent third party using the forward London Inter-bank Offered Rate (“LIBOR”)

Based upon a review of credit quality and the cash flow tests performed by the independent third party, management determined that no additional credit-related OTTI was required during the first three months of 2022.

Management performs due diligence on the third-party processes and has an adequate understanding of the analysis, assumptions and methodology used by the third party to prepare the fair value determination and the OTTI evaluation.

Management reviews the qualifications of the third party and believes the third party is qualified to provide the analysis and pricing determinations.

Quarterly, management reviews the third party’s detailed assumptions and analyzes its projected discounted present value results for reasonableness and consistency with the trend of prior projections.

Annually, management performs stress tests of the assumptions used in the third party models and performs back tests of the assumptions and prepayment projections to validate the impairment model results.

As a result of its due diligence process, the fair value presented and the OTTI recognized are appropriate.

A total of $ 3.0 million in impairment losses were realized between calendar year 2009 and calendar year 2011 on the CDO portfolio remaining at March 31, 2022.

Due to the prior credit impairment, the securities in this portfolio have continued to be evaluated to determine whether any additional OTTI has occurred.

Based on management’s review of the third-party evaluations, there were no material differences in the relative valuations between March 31, 2022 and December 31, 2021.

Due to the duration and 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 OTTI has occurred.

The market for these securities as of March 31, 2022 was not active and markets for similar securities were also not active.

The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which these securities trade and then by a significant decrease in the volume of trades relative to historical levels.

The new issue market is also inactive, as no new CDOs have been issued since 2007.

There are currently very few market participants who are willing to effect transactions in these securities.

The market values for these securities, or any securities other than those issued or guaranteed by the U.S.

Department of the Treasury (the “Treasury”), are very depressed relative to historical levels.

Therefore, in the current market, a low market price for a particular bond may only provide evidence of stress in the credit markets in general rather than being an indicator of credit problems with a particular issue.

Given the conditions in the current debt markets and the absence of observable transactions in the secondary and new issue markets, management has determined that (a) the few observable transactions and market quotations that are available are not reliable for the purpose of obtaining fair value at March 31, 2022, (b) an income valuation approach technique (i.e.

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

Management utilizes 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, 2021 and March 31, 2022.

The following table presents a cumulative roll-forward of the amount of non-cash OTTI charges related to credit losses that have been recognized in earnings for the trust preferred securities held in the CDO portfolio during the three month periods ended March 31, 2022 and 2021 that the Corporation does not intend to sell:

Three Months Ended

September 30,

(in thousands)

Balance of credit-related OTTI at July 1

Balance of credit-related OTTI at January 1

Reduction for increases in cash flows expected to be collected

Balance of credit-related OTTI at September 30

The amortized cost and estimated fair value of securities by contractual maturity at September 30, 2021 are shown in the following table.

Balance of credit-related OTTI at March 31

The amortized cost and estimated fair value of securities by contractual maturity at March 31, 2022 are shown in the following table.

Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

September 30, 2021

March 31, 2022

(in thousands)

Contractual Maturity

Available for Sale:

7 unchanged sentences

Held to Maturity:

Due after one year through five years

Due after five years through ten years

Due after ten years

4 unchanged sentences

Note 4 – Loans and Related Allowance for Loan Losses

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

The following table summarizes the primary segments of the loan portfolio at March 31, 2022 and December 31, 2021:

(in thousands)

September 30, 2021

March 31, 2022

Individually evaluated for impairment

3 unchanged sentences

Collectively evaluated for impairment

The commercial and industrial portfolio in the table above includes $ 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 no 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, 2021 and December 31, 2020:

The commercial and industrial portfolio in the table above includes $ 1.3 million and $ 7.7 million of Paycheck Protection Program (“PPP”) loans at March 31, 2022 and December 31, 2021, respectively, which are 100 % guaranteed by the SBA, and no 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 March 31, 2022 and December 31, 2021:

(in thousands)

September 30, 2021

March 31, 2022

Commercial real estate

19 unchanged sentences

Residential mortgage - home equity

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

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

The increase of $ 6.3 million in the substandard category was related to one large relationship in the nursing care sector that was downgraded from special mention in the first quarter of 2022.

This relationship continues to perform according to its contractual terms and is not considered impaired.

The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and non-accrual loans at March 31, 2022 and December 31, 2021:

(in thousands)

September 30, 2021

March 31, 2022

Commercial real estate

19 unchanged sentences

Residential mortgage - home equity

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

Non-accrual loans that have been subject to partial charge-offs totaled $ 0.5 million at September 30, 2021 and $ 0.4 million at December 31, 2020.

Loans secured by 1-4 family residential real estate properties in the process of foreclosure totaled $ 0.2 million at September 30, 2021 and $ 0.4 million at December 31, 2020.

Foreclosure and repossession activities were temporarily suspended as a result of COVID-19 but resumed during the third quarter 2021.

The current category of commercial and industrial loans includes $ 1.3 million and $ 7.7 million of PPP loans at March 31, 2022 and December 31, 2021, respectively.

Non-accrual loans that have been subject to partial charge-offs totaled $ 0.6 million at March 31, 2022 and $ 0.5 million at December 31, 2021.

Loans secured by 1-4 family residential real estate properties in the process of foreclosure totaled $ 0.2 million at both March 31, 2022 and December 31, 2021.

Management continues to conform to federal and state mandates relative to the foreclosure processes for both Federal Backed and Non-Federal Backed mortgages.

As a percentage of the loan portfolio, accruing loans past due 30 days or more decreased to 0.20 %, including PPP loans, or 0.21 % excluding PPP loans, compared to 0.20 % at December 31, 2020.

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

As a percentage of the loan portfolio, accruing loans past due 30 days or more decreased to 0.19 % at March 31, 2022 from 0.31 % at December 31, 2021.

The following table summarizes the primary segments of the ALL at March 31, 2022 and December 31, 2021, segregated by the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment:

(in thousands)

September 30, 2021

March 31, 2022

Individually evaluated

8 unchanged sentences

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.

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

Impaired Loans with

3 unchanged sentences

Investment (1)

September 30, 2021

March 31, 2022

Commercial real estate

22 unchanged sentences

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

The following tables present the activity in the ALL for the nine and three month periods ended September 30, 2021 and 2020:

Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate.

For general allowances, historical loss trends are used in the estimation of losses in the current portfolio.

These historical loss amounts are modified by other qualitative factors.

The classes described above, which are based on the Federal call code assigned to each loan, provide the starting point for the ALL analysis.

Management tracks the historical net charge-off activity (full and partial charge-offs, net of full and partial recoveries) at the call code level.

A historical charge-off factor is calculated utilizing a defined number of consecutive historical quarters.

Consumer pools currently utilize a rolling twelve quarters, while Commercial pools currently utilize a rolling eight quarters.

Management supplements the historical charge-off factor with a number of additional qualitative factors that are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience.

The additional factors, which are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources, are:

(a) national and local economic trends and conditions;

(b) levels of and trends in delinquency rates and non-accrual loans;

(d) effects of changes in lending policies;

(e) experience, ability, and depth of lending staff;

(f) value of underlying collateral;

and (g) concentrations of credit from a loan type, industry and/or geographic standpoint.

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process to make appropriate and timely adjustments to the ALL.

When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.

Residential mortgage and consumer loans are charged off after they are 120 days contractually past due.

All other loans are charged off based on an evaluation of the facts and circumstances of each individual loan.

When the Bank believes that its ability to collect is solely dependent on the liquidation of the collateral, a full or partial charge-off is recorded promptly to bring the recorded investment to an amount that the Bank believes is supported by an ability to collect on the collateral.

The circumstances that may impact the Bank’s decision to charge-off all or a portion of a loan include default or non-payment by the borrower, scheduled foreclosure actions, and/or prioritization of the Bank’s claim in bankruptcy.

There may be circumstances where due to pending events, the Bank will place a specific allocation of the ALL on a loan for which a partial charge-off has been previously recognized.

This specific allocation may be either charged-off or removed depending upon the outcome of the pending event.

Full or partial charge-offs are not recovered until full principal and interest on the loan have been collected, even if a subsequent appraisal supports a higher value.

In most cases, loans with partial charge-offs remain in non-accrual status.

Both full and partial charge-offs reduce the recorded investment of the loan and the ALL and are considered to be charge-offs for purposes of all credit loss metrics and trends, including the historical rolling charge-off rates used in the determination of the ALL.

The following tables present the activity in the ALL for the three month periods ended March 31, 2022 and 2021:

(in thousands)

ALL balance at January 1, 2022

ALL balance at September 30, 2021

ALL balance at March 31, 2022

ALL balance at January 1, 2021

ALL balance at September 30, 2020

(in thousands)

ALL balance at July 1, 2021

ALL balance at September 30, 2021

ALL balance at July 1, 2020

ALL balance at September 30, 2020

ALL balance at March 31, 2021

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.

The following tables 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)

Interest income

recognized on

an accrual basis

Interest income

recognized on

Interest income

recognized on

an accrual basis

Interest income

recognized on

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

Residential mortgage – home equity

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

Three months ended

September 30, 2021

September 30, 2020

March 31, 2022

March 31, 2021

(in thousands)

19 unchanged sentences

Residential mortgage – home equity

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 that the borrower is troubled (i.e., experiencing financial difficulties).

In 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 abilities to meet their financial obligations.

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 January 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 defer or delay the payment of principal or interest, or change the interest rate on the loan and that were not more than 30 days past due as of December 31, 2019.

In April 2020, federal and state banking regulators issued the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus to provide further interpretation of when a borrower is experiencing financial difficulty, specifically indicating that if the modification is either short-term (i.e., up to nine months) or mandated by a federal or state government in response to the COVID-19 pandemic, the borrower is not experiencing financial difficulty under ASC 310-40.

The Corporation continues to prudently work with borrowers negatively impacted by the COVID-19 pandemic while managing credit risks and recognizing appropriate allowance for credit losses on its loan portfolio.

See Note 2 to the financial statements included elsewhere in this report for additional information.

There were 14 loans totaling $ 3.8 million and $ 4.0 million that were classified as TDRs at September 30, 2021 and December 31, 2020, respectively.

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

Temporary Rate

Extension of Maturity

Modification of Payment

and Other Terms

(in thousands)

Nine 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

Commercial and industrial

Residential mortgage

Residential mortgage – term

Residential mortgage – home equity

Temporary Rate

Extension of Maturity

Modification of Payment

and Other Terms

(in thousands)

Nine 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

Commercial and industrial

Residential mortgage

Residential mortgage – term

Residential mortgage – home equity

During the nine month period ended September 30, 2021, there were no new TDRs and three existing TDRs that had reached their modification maturity date and was re-modified.

The Bank had no significant commitments to lend additional funds to TDRs.

During the nine month period ended September 30, 2020, there were no new TDRs but nine existing TDRs that had reached their modification maturity dates were re-modified.

These modifications did not impact the ALL.

During the nine months ended September 30, 2021 and 2020, there were no 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

Extension of Maturity

Modification of Payment

and Other Terms

(in thousands)

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

Commercial and industrial

Residential mortgage

Residential mortgage – term

Residential mortgage – home equity

Temporary Rate

Extension of Maturity

Modification of Payment

and Other Terms

(in thousands)

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

Commercial and industrial

Residential mortgage

Residential mortgage – term

Residential mortgage – home equity

During the three month period ended September 30, 2021, there were no new TDRs and two existing TDRs that had reached their modification maturity dates and were re-modified.

In the normal course of business, the Bank modifies loan terms for various reasons.

These reasons may include as a retention strategy to compete in the current interest rate environment, and to re-amortize or extend a loan term to better match the loan’s payment stream with the borrower’s cash flows.

A modified loan is considered to be a troubled debt restructuring (a “TDR”) when the Bank has determined that the borrower is troubled (i.e.

experiencing financial difficulties) and a concession has been granted.

The Bank evaluates the probability that the borrower will be in payment default on any of its debt in the foreseeable future without modification.

To make this determination, the Bank performs a global financial review of the borrower and loan guarantors to assess their current ability to meet their financial obligations.

When the Bank restructures a loan to a troubled borrower, the loan terms (i.e.

interest rate, payment, amortization period and/or maturity date) are modified in such a way to enable the borrower to cover the modified debt service payments based on current financials and cash flow adequacy.

If a borrower’s hardship is thought to be temporary, then modified terms are only offered for that time period.

Where possible, the Bank obtains additional collateral and/or secondary payment sources at the time of the restructure in order to put the Bank in the best possible position if the borrower is not able to meet the modified terms.

To date, the Bank has not forgiven any principal as a restructuring concession.

The Bank will not offer modified terms if it believes that modifying the loan terms will only delay an inevitable permanent default.

All loans designated as TDRs are considered impaired loans and may be in either accruing or non-accruing status.

If the loan was accruing at the time of the modification, then it continues to be in accruing status subsequent to the modification.

Non-accrual TDRs may return to accruing status when there has been sufficient payment performance for a period of at least six months.

TDRs are considered to be in payment default if, subsequent to modification, the loans are transferred to non-accrual status or to foreclosure.

A loan may be removed from being reported as a TDR in the calendar year following the modification if the interest rate at the time of modification was consistent with the interest rate for a loan with comparable credit risk and the loan has performed according to its modified terms for at least six months.

Further, a loan that has been removed from TDR reporting status and has been subsequently re-modified at standard market terms, may be removed from impaired status as well.

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

There were 12 loans totaling $ 3.2 million and $ 3.3 million that were classified as TDRs at March 31, 2022 and December 31, 2021, respectively.

During the three month periods ended March 31, 2022 and 2021, there were no new TDRs and no modifications on existing TDRs, nor were there any payment defaults under existing TDRs.

The Bank had no significant commitments to lend additional funds to TDR borrowers.

During the three month period ended Sept 30, 2020, there were no new TDRs but two 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 no payment defaults under TDRs.

Note 5 - Other Real Estate Owned, net

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

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

(in thousands)

September 30,

Commercial real estate

Acquisition and development

Residential mortgage

Total OREO, net

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

Nine Months Ended

The following table presents the activity in the OREO valuation allowance for the three month periods ended March 31, 2022 and 2021:

Three Months Ended

September 30,

(in thousands)

3 unchanged sentences

Balance at end of period

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

Nine Months Ended

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

Three Months Ended

September 30,

(in thousands)

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

Gains on sale of real estate, net

Fair value adjustment, net

1 unchanged sentence

Rental and other income

Total OREO (income)/expense, net

Total OREO expenses/(income), net

Note 6 – Fair Value of Financial Instruments

The Corporation complies with the guidance of ASC Topic 820, Fair Value Measurements and Disclosures , which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements required under other accounting pronouncements.

The Corporation also follows the guidance on matters relating to all financial instruments found in ASC Subtopic 825-10, Financial Instruments – Overall .

Fair value is defined as the price to sell an asset or to transfer a liability in an orderly transaction between willing market participants as of the measurement date.

17 unchanged sentences

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.

The valuation techniques used by the Corporation to measure, on a recurring basis and on a non-recurring basis, the fair value of assets as of September 30, 2021 are discussed in the paragraphs that follow.

Investments – The fair value of investments is determined using a market approach.

As of September 30, 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, were classified as Level 2 within the valuation hierarchy.

Their fair values were determined based upon market-corroborated inputs and valuation matrices, which were obtained through third party data service providers or securities brokers through which the Corporation has historically transacted both purchases and sales of investment securities.

The TIF bonds were classified as Level 3 within the valuation hierarchy as they are not openly traded.

The CDO segment, which consists of pooled trust preferred securities issued by banks, thrifts and insurance companies, is classified as Level 3 within the valuation hierarchy.

At September 30, 2021, the Corporation owned nine trust preferred securities with an amortized cost of $ 18.6 million and a fair value of $ 17.1 million.

As of September 30, 2021, the market for these securities was not active and the markets for similar securities were also not active.

Recent developments in the credit markets have had a negative impact on the market for CDOs.

Specifically, as COVID-19 developed, which led to deteriorating performance of credit instruments, investors became less willing to buy a range of structured credit products.

The result was massive spread-widening across a wide range of credit instruments, and for CDO bonds in particular.

At present, we believe that it is not currently economically feasible to form new CDOs or restructure existing CDOs, as the market for CDO bonds has effectively disappeared.

The market values for these securities or any securities other than those issued or guaranteed by the U.S.

Department of the Treasury are depressed relative to historical levels.

Given the conditions in the current debt markets and the absence of observable transactions in the secondary and new issue markets, management has determined that (a) the few observable transactions and market quotations that are available are not reliable for the purpose of obtaining fair value at September 30, 2021, (b) an income valuation approach technique (i.e.

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

Management uses an independent third party to prepare both the evaluations of OTTI as well as the fair value determinations for its CDO portfolio.

Management believes that the valuations are adequately reflected at September 30, 2021.

The approach used by the third party to determine fair value involved several steps, which included detailed credit and structural evaluation of each piece of collateral in each bond, projection of default, recovery and prepayment/amortization probabilities for each piece of collateral in the bond, and discounted cash flow modeling.

The discount rate methodology used by the third party combines a baseline current market yield for comparable corporate and structured credit products with adjustments based on evaluations of the differences found in structure and risks associated with actual and projected credit performance of each CDO being valued.

Currently, the only active and liquid trading market that exists is for stand-alone trust preferred securities, with a limited market for highly-rated CDO securities that are more senior in the capital structure than the securities in the CDO portfolio.

Therefore, adjustments to the baseline discount rate are also made to reflect the additional leverage found in structured instruments.

At September 30, 2021, these conditions had a minimal impact on the trust preferred bonds, although there has been a significant effect on several asset classes in the equity and fixed income markets related to COVID-19.

Management will continue to review assumptions as they relate to the impact of COVID-19 during the remainder of the year.

Transfers in and out of Level 1, 2 or 3 are recorded at fair value at the beginning of the reporting period.

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

The fair value of investments available-for-sale is determined using a market approach.

At March 31, 2022 and December 31, 2021, the U.S.

Government agencies and treasuries, residential and commercial mortgage-backed securities, and municipal bonds segments are classified as Level 2 within the valuation hierarchy.

Their fair values were determined based upon market-corroborated inputs and valuation matrices, which were obtained through third party data service providers or securities brokers through which we have historically transacted both purchases and sales of investment securities.

Derivative financial instruments (Cash flow hedge) – The Corporation’s open derivative positions are interest rate swap agreements.

1 unchanged sentence

The Corporation has considered counterparty credit risk in the valuation of its interest rate swap assets.

Impaired loans – Fair value of the collateral dependent loans is measured based on the loan’s observable market price or the fair value of the collateral (less estimated selling costs).

Collateral may be real estate and/or business assets such as equipment, inventory and/or accounts receivable.

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 .

Impaired loans – Loans included in the table below are those that are considered impaired with a specific allocation or with partial charge-offs, based upon the guidance of the loan impairment subsection of the Receivables Topic, ASC Section 310-10-35, under which the Corporation has measured impairment generally based on the fair value of the loan’s collateral.

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 flows based upon the expected proceeds.

These assets are included as Level 3 fair values based upon the lowest level of input that is significant to the fair value measurements.

Equity Investment- Equity investments included in the table below are considered impaired with losses recognized on the income statement in net gains.

Fair value of the equity investment was based on an independent third-party valuation report where the value was determined based on the revenue multiples of like kind information technology businesses.

These assets are included as Level 3 fair values based upon the lowest level of input that is significant to the fair value measurements.

Other real estate owned – OREO included in the table below are considered impaired with specific write-downs.

OREO is adjusted to fair value upon acquisition of the real estate collateral.

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 market expectations or an executed sales agreement.

If the fair value of the collateral deteriorates subsequent to initial recognition, the Corporation records the OREO as a nonrecurring Level 3 adjustment.

Valuation techniques are consistent with those techniques applied in prior periods.

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

(in thousands)

Fair Value at

September 30,

Investment Securities – available for sale

Discounted Cash Flow

Discount Rate

Non-recurring:

Impaired Loans

Market Comparable Properties

Marketability Discount

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

Other Real Estate Owned

Market Comparable Properties

Marketability Discount

(in thousands)

Fair Value at

Investment Securities – available for sale

Discounted Cash Flow

Discount Rate

Non-recurring:

Impaired Loans

Market Comparable Properties

Marketability Discount

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

Other Real Estate Owned

Market Comparable Properties

Marketability Discount

(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, 2021 and December 31, 2020 were as follows:

Fair value of other real estate owned was based on independent third-party appraisals of the properties.

These values were determined based on the sales prices of similar properties in the approximate geographic area.

These assets are included as Level 3 fair values based upon the lowest level of input that is significant to the fair value measurements.

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

Fair Value Measurements

at September 30, 2021 Using

at March 31, 2022 Using

Assets/(liabilities)

8 unchanged sentences

Obligations of states and political subdivisions

Corporate bonds

Collateralized debt obligations

1 unchanged sentence

Non-recurring:

Impaired loans

Impaired loans, net

Equity Investment

Other real estate owned

14 unchanged sentences

Non-recurring:

Impaired loans

Impaired loans, net

Equity investment

Other real estate owned

There were no transfers of assets between any of the fair value hierarchy for the nine and three month periods ended September 30, 2021 or 2020.

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, 2021 and 2020:

Fair Value Measurements

Using Significant Unobservable Inputs

Investment Securities

At March 31, 2022, the fair value of impaired loans with a valuation allowance or partial charge-off was $ 0.8 million, net of valuation allowances of $ 35,500 and partial charge-offs of $ 1.3 million.

During the three months ended March 31, 2022, changes to the valuation allowance or additional charge off activity was recorded on loans with a net balance of approximately $ 0.1 million.

At December 31, 2021, the fair value of impaired loans with a valuation allowance or charge-off was $ 1.0 million, net of valuation allowances of $ 64,700 and charge-offs of $ 1.3 million.

During the year ended December 31, 2021, changes to the valuation allowance or additional charge off activity was recorded on loans with a net balance of approximately $ 0.4 million.

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

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

(in thousands)

Available for Sale

Beginning balance January 1, 2021

Total losses realized/unrealized:

Included in other comprehensive income

Ending balance September 30, 2021

Fair Value Measurements

Using Significant Unobservable Inputs

Fair Value at

Investment Securities – available for sale -CDO

Discounted Cash Flow

Discount Rate

Non-recurring:

Impaired Loans, net

Market Comparable Properties

Marketability Discount

10.0% - 15.0% (1) (weighted avg 0 %)

Equity Investment

Market Method

Revenue Multiples

(in thousands)

Investment Securities

Available for Sale

Beginning balance July 1, 2021

Total gains realized/unrealized:

Included in other comprehensive income

Ending balance September 30, 2021

Fair Value at

Investment Securities – available for sale -CDO

Discounted Cash Flow

Discount Rate

Non-recurring:

Impaired Loans, net

Market Comparable Properties

Marketability Discount

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

Equity Investment

Market Method

Revenue Multiples

Other Real Estate Owned

Market Comparable Properties

Marketability Discount

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

Fair Value Measurements

6 unchanged sentences

Included in other comprehensive loss

Ending balance September 30, 2020

Ending balance March 31, 2022

Fair Value Measurements

Using Significant Unobservable Inputs

(in thousands)

Investment Securities

(in thousands)

Available for Sale

Beginning balance July 1, 2020

Beginning balance January 1, 2021

Total losses realized/unrealized:

Included in other comprehensive income

Ending balance September 30, 2020

There were no gains or losses included in earnings attributable to the change in realized/unrealized gains or losses related to the assets for the nine and three month periods ended September 30, 2021 or 2020.

Included in other comprehensive loss

Ending balance March 31, 2021

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

The disclosed fair values may vary significantly between institutions based on the estimates and assumptions used in the various valuation methodologies.

6 unchanged sentences

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

March 31, 2022

Fair Value Measurements

8 unchanged sentences

Restricted bank stock

Financial derivatives

Accrued interest receivable

2 unchanged sentences

Deposits - time deposits

Financial derivatives

Short-term borrowed funds

1 unchanged sentence

Accrued interest payable

Off balance sheet financial instruments

December 31, 2021

13 unchanged sentences

Deposits - time deposits

Financial derivative

Financial derivatives

Short-term borrowed funds

1 unchanged sentence

Accrued interest payable

Off balance sheet financial instruments

Note 7 – Accumulated Other Comprehensive Loss

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

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

(in thousands)

7 unchanged sentences

Balance - March 31, 2022

Other comprehensive income/(loss) before reclassifications

Amounts reclassified from accumulated other comprehensive loss

Balance - June 30, 2021

Other comprehensive

income/(loss) before

reclassifications

Amounts reclassified from

accumulated other

comprehensive loss

Balance - September 30, 2021

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

Components of Other Comprehensive Income

The following tables present the components of other comprehensive income/(loss) for the three month periods ended March 31, 2022 and 2021:

Components of Other Comprehensive Loss

(in thousands)

For the nine months ended September 30, 2021

For the three months ended March 31, 2022

Available for sale (AFS) securities with OTTI:

4 unchanged sentences

Unrealized holding losses

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

gains recognized in income

1 unchanged sentence

Held to maturity securities:

Unrealized holding gains

losses recognized in income

Unrealized holding losses on securities transferred to held to maturity

amortization recognized in income

Net unrealized gains on HTM securities

Net unrealized losses on HTM securities

Cash flow hedges:

1 unchanged sentence

Pension Plan:

Unrealized net actuarial gain

amortization of unrecognized loss

Net pension plan liability adjustment

Unrealized net actuarial loss

amortization of unrecognized loss

amortization of prior service costs

Net SERP liability adjustment

Other comprehensive income

Components of Other Comprehensive Income

(in thousands)

For the nine months ended September 30, 2020

Available for sale (AFS) securities with OTTI:

Unrealized holding losses

accretable yield recognized in income

Net unrealized losses on investments with OTTI

Available for sale securities – all other:

Unrealized holding gains

gains recognized in income

Net unrealized gains on all other AFS securities

Held to maturity securities:

Unrealized holding gains

gains recognized in income

amortization recognized in income

Net unrealized gains on HTM securities

Cash flow hedges:

Unrealized holding losses

Pension Plan:

Unrealized net actuarial loss

amortization of unrecognized loss

Net pension plan liability adjustment

Unrealized net actuarial loss

amortization of unrecognized loss

1 unchanged sentence

Net SERP liability adjustment

Other comprehensive income

Other comprehensive loss

Components of Other Comprehensive Loss

(in thousands)

For the three months ended September 30, 2021

For the three months ended March 31, 2021

Available for sale (AFS) securities with OTTI:

8 unchanged sentences

Unrealized holding gains

losses recognized in income

amortization recognized in income

10 unchanged sentences

Other comprehensive loss

Components of Other Comprehensive Income

(in thousands)

For the three months ended September 30, 2020

Available for sale (AFS) securities with OTTI:

Unrealized holding gains

accretable yield recognized in income

Net unrealized losses on investments with OTTI

Available for sale securities – all other:

Unrealized holding losses

gains recognized in income

Net unrealized gains on all other AFS securities

Held to maturity securities:

amortization recognized in income

Net unrealized gains on HTM securities

Cash flow hedges:

Unrealized holding gains

Pension Plan:

Unrealized net actuarial gain

amortization of unrecognized loss

Net pension plan liability adjustment

amortization of unrecognized loss

amortization of prior service costs

Net SERP liability adjustment

Other comprehensive income

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

Amounts Reclassified from

Nine Months Ended

Accumulated Other Comprehensive Loss

September 30,

Affected Line Item in the Statement

(in thousands)

Where Net Income is Presented

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

Accretable yield

Interest income on taxable investment securities

Provision for income tax expense

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

Gains recognized

Provision for income tax expense

Net unrealized losses on held to maturity securities:

Interest income on taxable investment securities

(Losses)/gains recognized

Provision for income tax expense

Net pension plan liability adjustment:

Amortization of unrecognized loss

Other Expense

Provision for income tax expense

Net SERP liability adjustment:

Amortization of unrecognized loss

Other Expense

Amortization of prior service costs

Salaries and employee benefits

Provision for income tax expense

Total reclassifications for the period

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

Amounts Reclassified from

1 unchanged sentence

Accumulated Other Comprehensive Loss

September 30,

Affected Line Item in the Statement

10 unchanged sentences

Interest income on taxable investment securities

Losses recognized

Provision for income tax expense

2 unchanged sentences

Other Expense

Amortization of prior service costs

Salaries and employee benefits

Provision for income tax expense

8 unchanged sentences

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

September 30,

(in thousands)

3 unchanged sentences

Net pension credit included in employee benefits and other expense

Nine Months Ended

Three Months Ended

Defined Benefit SERP

September 30,

(in thousands)

17 unchanged sentences

The Corporation will assess the need for future annual contributions to the pension plan based upon its funded status and an evaluation of the future benefits to be provided thereunder.

No contributions were made to the Pension Plan during the first nine months of 2021 and a contribution of $ 1.0 million was made during the first nine months of 2020.

No contributions were made to the Pension Plan during the first three months of 2022 or 2021.

The Corporation expects to fund the annual projected benefit payments for the Defined Benefit SERP from operations.

7 unchanged sentences

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).

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 2019, the Board approved discretionary contributions to four participants totaling $ 123,179 .

The contributions had a two year vesting period that ended on December 31, 2020.

In January 2020, the Board of Directors of First United Corporation approved discretionary contributions to four participants totaling $ 126,058 .

The Corporation recorded $ 47,271 of related compensation expense for the first nine months of 2021 and 2020.

The Corporation recorded $ 15,757 for the third quarters of 2021 and 2020 related to these contributions.

In January 2021, the Board of Directors approved discretionary contributions to three participants totaling $ 101,257 .

The Corporation recorded $ 37,971 of related compensation expense for the first nine months of 2021 and $ 12,657 for the third quarter of 2021 related to these contributions.

The Corporation recorded $ 12,657 of related compensation expense for the first three months of 2022 and 2021 related to these contributions.

In January 2022, the Board of Directors approved discretionary contributions to three participants totaling $ 103,689 .

The Corporation recorded $ 12,961 of related compensation expense for the first three months of 2022 related to these contributions.

Each discretionary contribution has a two year vesting period.

5 unchanged sentences

Pursuant to First United Corporation’s director compensation policy, each director receives an annual retainer of 1,000 shares of First United Corporation common stock, plus $ 10,000 to be paid, at the director’s election, in cash or additional shares of common stock.

In June 2020, 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 January 2021, a total of 1,202 fully vested shares were issued to two new directors, which had a grant date fair market value of $ 16.66 per share.

In May 2021, a total of 12,726 fully vested shares of common stock were issued to directors, which had a grant date fair value of $ 18.50 per share.

Director stock compensation expense was $ 191,717

for the nine months ended September 30, 2021 and $ 158,795 for the nine months ended September 30, 2020.

Director stock compensation expense was $ 58,857 for the three months ended September 30, 2021 and $ 52,114 for the three months ended September 30, 2020.

Director stock compensation expense was $ 58,858 for the three months ended March 31, 2022 and $ 70,216 for the three months ended March 31, 2021.

Restricted Stock Units

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

On March 26, 2020, pursuant to the Corporation’s Long Term Incentive Plan (the "LTIP"), which is a sub-plan of the Equity Plan, the Compensation Committee of First United Corporation’s Board of Directors (the "Committee") granted restricted stock units (“RSUs”) to the Corporation’s principal executive officer, its principal financial officer, and certain of its other executive officers.

An RSU contemplates the issuance of shares of common stock of First United Corporation if and when the RSU vests.

The RSUs granted to each of the foregoing officers consist of (a) a performance vesting award for a three year performance period ending December 31, 2021, (b) a performance vesting award for a three year performance period ending December 31, 2022, and (c) a time-vesting award that will vest ratably over a three year period beginning on March 26, 2021.

The RSUs granted to each of the foregoing officers consist of (a) a performance vesting award for a three year performance period and (b) a time-vesting award that will vest ratably over a three year period.

Target performance levels were set based on the annual budget which supports the Corporation’s long-term objective of achieving high performance as compared to peers.

5 unchanged sentences

For the performance period ending December 31, 2022, the RSUs performance goals are based on earnings per share for the year ending December 31, 2022 and growth in tangible book value per share during the performance period.

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.

For the performance period ending

December 31, 2023, the RSUs performance goals are based on earnings per share for the year ending December 31, 2023 and growth in tangible book value per share during the performance period.

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

In the first quarter of 2020, RSUs relating to 19,934 performance vesting shares and 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.

In the first quarter of 2020, RSUs were granted relating to 9,791 performance vesting shares (target level) for 2019 LTIP plan for the performance period ending December 31, 2021 and 10,143 performance vesting shares and 5,070 time vesting shares (target level) for 2020 LTIP plan for the performance period ending December 31, 2022, which had a grant date fair market value of $ 12.54 per share of common stock underlying each RSU.

The 2020 plan has a performance period for the performance-vesting RSUs of three years ending December 31, 2022 and the time-vesting RSUs will vest ratably over a three year period that began on March 26, 2021.

On March 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 three 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 $ 17.93 per share of common stock underlying each RSU.

On March 26, 2022, 1,688 shares of the 3,380 remaining time vesting shares were issued to participants.

Stock compensation expense was $ 26,127 for both of the three month periods ended March 31, 2022 and 2021.

Unrecognized compensation expense at March 31, 2022 related to unvested RSUs was $ 63,584 .

In May 2021, RSUs relating to 7,389 performance vesting shares and 3,693 time vesting shares (target level) for plan year 2021 were granted, which had a grant date fair market value of $ 17.93 per share of common stock underlying each RSU.

The performance period for the performance-vesting RSUs is the three year period ending December 31, 2023.

The time-vesting RSUs will vest ratably over a three year period 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 $ 171,235 .

Stock compensation expense was $ 16,571 for the three months ended March 31, 2022.

Unrecognized compensation expense as of March 31, 2022 related to unvested units was $ 138,093 .

In March 2022, RSUs relating to 8,096 performance vesting shares and 6,238 time vesting shares (target level) for plan year 2022 were granted, which had a grant date fair market value of $ 21.88 per share of common stock underlying each RSU.

The performance period for the performance-vesting RSUs is the three year period ending December 31, 2024.

The time-vesting RSUs will vest ratably over a three year period beginning on March 9, 2023.

Unrecognized compensation expense as of March 31, 2022 related to unvested units was $ 313,743 .

Note 10 – 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.

As a part of managing interest rate risk, the Corporation entered into interest rate swap agreements to modify the re-pricing characteristics of certain interest-bearing liabilities.

The Corporation has designated its interest rate swap agreements as cash flow hedges under the guidance of ASC Subtopic 815-30, Derivatives and Hedging – Cash Flow Hedges .

Cash flow hedges have the effective portion of changes in the fair value of the derivative, net of taxes, recorded in net accumulated other comprehensive income.

In March 2016, the Corporation entered into four interest rate swap contracts totaling $ 30.0 million notional amount, hedging future cash flows associated with floating rate trust preferred debt.

These contracts included a three year $ 5.0 million contract that matured on September 17, 2019 , a five year $ 5.0 million contract that matured on March 17, 2021 , a seven year $ 5.0 million contract that matures on March 17, 2023 and a 10 year $ 15.0 million contract that matures on March 17, 2026 .

As of September 30, 2021, $ 20.0 million notional amount remains.

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

For the nine months ended September 30, 2021, the Corporation recorded an increase in the value of the derivatives of $ 5 94 thousand and the related deferred tax of $ 62 thousand in net accumulated other comprehensive loss to reflect the effective portion of cash flow hedges.

As of March 31, 2022, $ 20.0 million notional amount remains.

The fair value of the interest rate swap contracts was $ 0.4 million and $( 0.5 ) million at March 31, 2022 and December 31, 2021, respectively.

For the three months ended March 31, 2022, the Corporation recorded an increase in the value of the derivatives of $ 0.8 million and the related deferred tax of $ 0.2 million in net accumulated other comprehensive loss to reflect the effective portion of cash flow hedges.

ASC Subtopic 815-30 requires the net accumulated other comprehensive loss to be reclassified to earnings if the hedge becomes ineffective or is terminated.

There was no hedge ineffectiveness recorded for the six months ended September 30, 2021.

There was no hedge ineffectiveness recorded for the three months ended March 31, 2022.

The Corporation does not expect any material losses relating to these hedges to be reclassified into earnings within the next 12 months.

Interest rate swap agreements are entered into with counterparties that meet established credit standards and the Corporation believes that the credit risk inherent in these contracts is not significant as of September 30, 2021.

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, 2021 and 2020.

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

Derivative in Cash Flow Hedging Relationships

15 unchanged sentences

Interest rate contracts:

Nine months ended:

September 30, 2021

September 30, 2020

Three months ended:

September 30, 2021

September 30, 2020

March 31, 2022

March 31, 2021

(a) Reported as interest expense

1 unchanged sentence

Note 11 – 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

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

ASC Topic 606 is applicable to noninterest revenue streams such as wealth management, including trust and brokerage services, service charges on deposit accounts, interchange fee income – debit card income and gains/losses on OREO sales.

Noninterest revenue streams in-scope of ASC Topic 606 are discussed below.

Wealth Management – Trust and Brokerage

Trust and asset management income is primarily comprised of fees earned from the management and administration of trusts and other customer assets.

1 unchanged sentence

Payment is generally received a few days after month end through a direct charge to customers’ accounts.

Optional services such as real estate

sales and tax return preparation services are also available to existing trust and asset management customers.

Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers.

The Corporation’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred).

5 unchanged sentences

Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.

Other Service Charges

Fees, exchange, and other service charges are primarily comprised of ATM fees, loan servicing fees and other service charges.

ATM fees are primarily generated when a Bank cardholder uses a non-Bank ATM or a non-Bank cardholder uses a Bank ATM.

Loan servicing fees are comprised of fees earned on servicing of loan portfolios sold to the secondary market.

Other service

charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services.

The Corporation’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion.

Interchange Fees – Debit and Credit Card Income

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

The following presents noninterest income, segregated by revenue streams that are within and outside the scope of ASC Topic 606, for the three month periods ended March 31, 2022 and March 31, 2021:

Three Months Ended

September 30,

(in thousands)

10 unchanged sentences

Note 12 – Regulatory Capital Requirements

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

September 30,

The following table presents our capital ratios for the three months ended March 31, 2022.

Total Capital (to risk-weighted assets)

6 unchanged sentences

First United Bank & Trust

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 the Chairman and Chief Executive Officer of First United Corporation determines to be appropriate.

On April 16, 2021, First United Corporation entered into a Stock Purchase Agreement with Driver Opportunity Partners I LP (“Driver Partners”) under which, pursuant to the foregoing stock repurchase program.

First United Corporation agreed to repurchase 360,737 shares of its common stock held by Driver Partners at a purchase price of $ 18.00 per share.

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

Interest Rate Swap Agreements

The Corporation has entered into interest rate swap agreements to modify the re-pricing characteristics of certain interest-bearing liabilities as a part of managing interest rate risk.

The swap agreements have been designated as cash flow hedges, and accordingly, the fair value of the interest rate swap contracts is reported in Other Assets or Other Liabilities on the Consolidated Statement of Financial Condition.

The swap agreements were entered into with a third-party financial institution.

The Corporation is party to master netting arrangements with its financial institution counterparty;

however, the Corporation does not offset assets and liabilities under these arrangements for financial statement presentation purposes.

The master netting arrangements provide for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract.

Collateral, in the form of cash and investment securities, are pledged by the Corporation as the counterparty with net liability positions in accordance with contract thresholds.

See Note 12 to the Consolidated Financial Statements for more information.

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

The Bank enters into agreements under which it sells interests in U.S.

government agency securities to certain customers subject to an obligation to repurchase, and on the part of the customers to resell, such interests.

Under these arrangements, the Bank may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the

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.

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

Gross Amounts

Not Offset in the

Statement of Condition

Offset in the

the Statement

(in thousands)

September 30, 2021

Interest Rate Swap Agreements

Repurchase Agreements

December 31, 2020

Interest Rate Swap Agreements

Repurchase Agreements

Note 15 – 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):

As of March 31, 2022, the Bank was considered “well capitalized” under the regulatory framework for prompt corrective action.

Note 13 – Recent Accounting Pronouncements

Recently issued but not yet effective Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments- Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments .

18 unchanged sentences

The Corporation is in the process of evaluating the impact of this standard on the loan portfolio, investment portfolio, long term debt and interest rate swaps, but believes that its adoption will not have a material impact on the Corporation’s financial condition or results of operations.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures.

ASU 2022-02 made certain targeted amendments specific to troubled debt restructurings (TDRs) by creditors and vintage disclosure related to gross write-offs.

Upon adoption, the Corporation will be required to apply the loan and refinancing and restructuring guidance to determine whether a modification results in a new loan or a continuation of an existing loan, rather than applying the recognition and measurement guidance for TDRs.

The ASU also requires companies to disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases within scope of Subtopic 326-20.

ASU 2022-02 is effective March 31, 2023, for entities that have adopted ASU 2016-13, otherwise effective date is the same as ASU 2016-13.

The Corporation’s current plan is to adopt ASU 2016-13 January 1, 2023 and will simultaneously implement ASU 2022-02.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements