FIRST UNITED CORP/MD/ 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations INTRODUCTION The following discussion and analysis is intended as a review of material changes in and significant factors affecting the financial condition and results of operations of First United Corporation and its consolidated subsidiaries for the periods indicated. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and the notes thereto contained in Item 1 of Part I of this report, as well as the audited consolidated financial statements and related notes included in First United Corporation’s Annual Report on Form 10-K for the year ended December 31, 2021. 38 Table of Contents Unless the context clearly suggests otherwise, references in this report to “us”, “we”, “our”, and “the Corporation” are to First United Corporation and its consolidated subsidiaries. FORWARD-LOOKING STATEMENTS This report contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements do not represent historical facts, but are statements about management’s beliefs, plans and objectives about the future, as well as its assumptions and judgments concerning such beliefs, plans and objectives. These statements are evidenced by terms such as "anticipate," "estimate," "should," "expect," "believe," "intend," and similar expressions. Although these statements reflect management’s good faith beliefs and projections, they are not guarantees of future performance and they may not prove true. The beliefs, plans and objectives on which forward-looking statements are based involve risks and uncertainties that could cause actual results to differ materially from those addressed in the forward-looking statements. For a discussion of these risks and uncertainties, see the section of the periodic reports that First United Corporation files with the Securities and Exchange Commission entitled "Risk Factors". FIRST UNITED CORPORATION First United Corporation is a Maryland corporation chartered in 1985 and a financial holding company registered with the Board of Governors of the Federal Reserve System (the “FRB”) under the Bank Holding Company Act of 1956, as amended. The Corporation’s primary business is serving as the parent company of First United Bank & Trust, a Maryland trust company (the “Bank”), First United Statutory Trust I (“Trust I”) and First United Statutory Trust II (“Trust II” and together with Trust I, the “Trusts”), both Connecticut statutory business trusts. The Trusts were formed for the purpose of selling trust preferred securities that qualified as Tier 1 capital. The Bank has two consumer finance company subsidiaries - OakFirst Loan Center, Inc., a West Virginia corporation, and OakFirst Loan Center, LLC, a Maryland limited liability company - and two subsidiaries that it uses to hold real estate acquired through foreclosure or by deed in lieu of foreclosure - First OREO Trust, a Maryland statutory trust, and FUBT OREO I, LLC, a Maryland limited liability company. In addition, the Bank owns 99.9% of the limited partnership interests in Liberty Mews Limited Partnership, a Maryland limited partnership formed for the purpose of acquiring, developing and operating low-income housing units in Garrett County, Maryland, and a 99.9% non-voting membership interest in MCC FUBT Fund, LC, an Ohio limited liability company formed for the purpose of acquiring, developing and operating low-income housing units in Allegany County, Maryland. At March 31, 2022, the Corporation’s total assets were $1.8 billion, net loans were $1.2 billion, and deposits were $1.5 billion. Shareholders’ equity at March 31, 2022 was $137.1 million. The Corporation maintains an Internet site at www.mybank.com on which it makes available, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the foregoing as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the SEC. 39 Table of Contents SELECTED FINANCIAL DATA The following table sets forth certain selected financial data for the three month periods ended March 31, 2022 and 2021 and is qualified in its entirety by the detailed information and unaudited financial statements, including the notes thereto, included elsewhere in this quarterly report. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ As of the three months ended ​ ​ ​ March 31, ​ ​ 2022 2021 Per Share Data ​ ​ ​ ​ ​ ​ ​ Basic net income per common share (1) - as reported ​ $ 0.86 ​ $ 0.49 ​ Basic net income per common share (1) - non-GAAP ​ $ 0.86 ​ $ 0.86 ​ Diluted net income per common share (1) - as reported ​ $ 0.86 ​ $ 0.49 ​ Diluted net income per common share (1) - non-GAAP ​ $ 0.86 ​ $ 0.86 ​ Basic book value per common share - as reported ​ $ 20.22 ​ $ 18.46 ​ Diluted book value per common share - as reported ​ $ 20.19 ​ $ 18.45 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Significant Ratios: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Return on Average Assets (a) (1) - as reported ​ ​ 1.31 % ​ 0.79 % Settlement expenses, net of income tax ​ ​ — ​ ​ 0.59 % Adjusted Return on Average Assets (a) (1) (non-GAAP) ​ ​ 1.31 % ​ 1.38 % ​ ​ ​ ​ ​ ​ ​ ​ Return on Average Equity (a) (1) - as reported ​ ​ 16.49 % ​ 10.58 % Settlement expenses, net of income tax ​ ​ — ​ ​ 5.41 % Income tax effect of adjustment ​ ​ — ​ ​ 2.49 % Adjusted Return on Average Equity (a) (1) (non-GAAP) ​ ​ 16.49 % ​ 18.48 % ​ ​ ​ ​ ​ ​ ​ ​ Average Equity to Average Assets ​ ​ 7.94 % ​ 7.45 % ​ ​ ​ ​ ​ ​ ​ ​ Capital Ratios: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Consolidated Total Capital (to risk weighted assets) ​ ​ 15.67 % ​ 16.24 % Consolidated Tier 1 Capital (to risk weighted assets) ​ ​ 14.52 % ​ 14.99 % Consolidated Common Equity Tier 1 Capital (to risk weighted assets) ​ ​ 12.42 % ​ 12.76 % Consolidated Tier 1 Capital (to average assets) ​ ​ 10.94 % ​ 10.22 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (1) See reconciliation of this non-GAAP financial measure provided elsewhere herein associated with settlement expenses incurred during the first quarter of 2021. ​ ​ ​ ​ ​ ​ ​ ​ Note: (a) Annualized RESULTS OF OPERATIONS Overview Consolidated net income was $5.7 million for the first quarter of 2022 compared to $3.4 million for the first quarter of 2021. Basic and diluted net income per share for the first quarter of 2022 were both $0.86, compared to basic and diluted net income per share of $0.49 for the first quarter of 2021. The increase in earnings for the first quarter of 2022 was primarily driven by the reduction of $3.3 million in litigation settlement expenses recorded in the first quarter of 2021. Additionally, we experienced an increase in net interest income, a credit to provision expense, stable non-interest income and reduced professional fees, marketing 40 Table of Contents expenses and telephone related expenses offset by increases to salaries and employee benefits and other real estate owned (“OREO”) expenses. ​ Net interest income, on a non-GAAP, fully tax equivalent (“FTE”) basis, increased by $1.1 million (8.9%) for the first quarter 2022 when compared to the first quarter of 2021. This increase was driven by stable interest income and a 56% decrease in interest expense of $1.0 million. Interest income on loans decreased $0.3 million due to a decrease in average loan balances of $33.9 million and a reduction of unearned fees, primarily related to Paycheck Protection Program (“PPP”) loan forgiveness during 2021. Investment income increased $0.4 million due to an increase in average balances related to the deployment of excess cash balances to purchase investment securities late in the fourth quarter of 2021 and early in the first quarter of 2022. The reduction of interest expense resulted from the lowering of deposit rates throughout 2021, the declining balances in the higher cost CD portfolio and the prepayment of the Federal Home Loan Bank (“FHLB”) advances in 2021. The net interest margin for the first quarter of 2022 was 3.40%, compared to 3.11% for the first quarter of 2021. ​ Other operating income, including gains, for the first quarter of 2022 decreased by approximately $0.5 million when compared to the same period of 2021. An increase of $0.1 million in service charge and debit card income was offset by a decline of $0.1 million in trust and brokerage income due to the decline in the market value of assets under management during the first quarter of 2022, which was driven by the volatile stock market and the increase in interest rates during the quarter. Net gains decreased $0.5 million when comparing the first quarter of 2022 to the first quarter of 2021. This decrease was due to the slowing of refinance activity in the mortgage portfolio, which resulted in fewer gains on sales in 2022. ​ Non-GAAP, core operating expenses, exclusive of the $3.3 million in litigation settlement expense recorded in the first quarter of 2021, increased by $1.4 million when comparing the first quarter of 2022 to the first quarter of 2021. This increase was driven by an increase in salaries and benefits of $0.9 million related in part to a reduction in deferred loan origination costs in 2021 (primarily related to PPP activities) and increased incentive pay, offset by a decline in life and health insurance related to reduced claims. OREO expenses increased by $0.5 million due to an expense credit in the first quarter of 2021 related to gains on sales of properties. Equipment and data processing fees also increased $0.3 million quarter over quarter. These increases were offset by a decrease of $0.2 million in professional services and $0.1 million in telephone related expenses. ​ The provision for loan losses was a credit of $0.4 million for the quarter ended March 31, 2022 and an expense of $0.1 million for the quarter ended March 31, 2021. The credit to provision expense recorded in the first quarter of 2022 was attributable to reductions in the qualitative factors, particularly related to the continued payment performance of previously modified loans that began performing in accordance with their original payment terms. Net charge-offs of $0.2 million were recorded for the quarter ended March 31, 2022, compared to net charge offs of $42,000 for the same period of 2021. The ratio of the ALL to loans outstanding, including PPP loan balances, was 1.29% at March 31, 2022 compared to 1.38% at December 31, 2021. The ratio of ALL to loans outstanding, excluding PPP loan balances of $1.3 million and $7.7 million, respectively was 1.30% at March 31, 2022 and 1.39% at December 31, 2021, non-GAAP. ​ The effective income tax rates as a percentage of income for the three month periods ended March 31, 2022 and 2021 were 25.0% and 24.3%, respectively. The slight increase in the tax rate for the 2022 period was primarily due to the reduction in tax exempt income as well as the reduction in tax credits related to the expiration of a low-income housing tax credit in June 2021. A new 2021 investment in a low-income housing tax credit is expected to provide tax benefits later in 2022 and future years. ​ Non-GAAP Financial Measures The Corporation believes that certain non-GAAP financial measures are meaningful because they reflect adjustments commonly made by management, investors, regulators and analysts to evaluate performance trends and the adequacy of common equity. This non-GAAP disclosure has limitations as an analytical tool, should not be viewed as a substitute for performance and financial condition measures determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of results as reported under GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies. ​ 41 Table of Contents The following table presents a reconciliation of net income and basic and diluted earnings per share (as reported) to adjusted net income and adjusted basic and diluted earnings per share: ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended March 31, ​ 2022 2021 (in thousands, except for per share amount) ​ ​ ​ ​ ​ ​ Net income - as reported ​ $ 5,715 ​ $ 3,430 Adjustments: ​ ​ ​ ​ ​ ​ Settlement expense ​ ​ — ​ ​ 3,300 Income tax effect of adjustment ​ ​ — ​ ​ (735) Adjusted net income (non-GAAP) ​ $ 5,715 ​ $ 5,995 ​ ​ ​ ​ ​ ​ ​ Basic and Diluted earnings per share - as reported ​ $ 0.86 ​ $ 0.49 Adjustments: ​ ​ ​ ​ ​ ​ Settlement expense ​ ​ — ​ ​ 0.47 Income tax effect of adjustment ​ ​ — ​ ​ (0.10) Adjusted basic and diluted earnings per share (non-GAAP) ​ $ 0.86 ​ $ 0.86 ​ ​ ​ ​ ​ ​ ​ Significant Ratios: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Return on Average Assets (1) - as reported ​ ​ 1.31% ​ ​ 0.79% Settlement expenses, net of income tax effect ​ ​ — ​ ​ 0.59% Adjusted Return on Average Assets (1) (non-GAAP) ​ ​ 1.31% ​ ​ 1.38% ​ ​ ​ ​ ​ ​ ​ Return on Average Equity (1) - as reported ​ ​ 16.49% ​ ​ 10.58% Settlement expenses, net of income tax effect ​ ​ — ​ ​ 7.90% Adjusted Return on Average Equity (1) (non-GAAP) ​ ​ 16.49% ​ ​ 18.48% ​ ​ ​ ​ ​ ​ ​ ​ Net Interest Income Net interest income is our largest source of operating revenue. Net interest income is the difference between the interest that we earn on our interest-earning assets and the interest expense we incur on our interest-bearing liabilities. For analytical and discussion purposes, net interest income is adjusted to a FTE basis to facilitate performance comparisons between taxable and tax-exempt assets by increasing tax-exempt income by an amount equal to the federal income taxes that would have been paid if this income were taxable at the statutorily applicable rate. This is a non-GAAP disclosure and management believes it is not materially different than the corresponding GAAP disclosure. ​ The tables below summarizes net interest income for the three month periods ended March 31, 2022 and 2021. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ GAAP ​ Non-GAAP - FTE ​ ​ ​ Three Months Ended ​ Three Months Ended ​ ​ ​ March 31, ​ March 31, ​ (dollars in thousands) 2022 2021 2022 2021 ​ Interest income ​ $ 14,147 ​ $ 14,062 ​ $ 14,388 ​ $ 14,301 ​ Interest expense ​ ​ 806 ​ ​ 1,826 ​ ​ 806 ​ ​ 1,826 ​ Net interest income ​ $ 13,341 ​ $ 12,236 ​ $ 13,582 ​ $ 12,475 ​ Net interest margin % ​ ​ 3.34 % ​ 3.05 % ​ 3.40 % ​ 3.11 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 42 Table of Contents The following tables set forth the average balances, net interest income and expense, and average yields and rates of our interest-earning assets and interest-bearing liabilities for the three month periods ended March 31, 2022 and 2021: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ ​ March 31, ​ ​ ​ 2022 ​ 2021 ​ ​ ​ Average ​ ​ ​ Average ​ Average ​ ​ ​ Average ​ (dollars in thousands) Balance Interest Yield/Rate Balance Interest Yield/Rate Assets ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Loans ​ $ 1,168,803 ​ $ 12,450 ​ 4.32 % $ 1,202,677 ​ $ 12,754 ​ 4.30 % Investment Securities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Taxable ​ ​ 363,155 ​ ​ 1,406 ​ 1.57 % ​ 255,853 ​ ​ 990 ​ 1.57 % Non taxable ​ ​ 28,022 ​ ​ 505 ​ 7.31 % ​ 26,075 ​ ​ 492 ​ 7.65 % Total ​ ​ 391,177 ​ ​ 1,911 ​ 1.98 % ​ 281,928 ​ ​ 1,482 ​ 2.13 % Federal funds sold ​ ​ 53,321 ​ ​ 18 ​ 0.14 % ​ 135,458 ​ ​ 24 ​ 0.07 % Interest-bearing deposits with other banks ​ ​ 5,255 ​ ​ 1 ​ 0.08 % ​ 2,668 ​ ​ 1 ​ 0.15 % Other interest earning assets ​ ​ 1,029 ​ ​ 8 ​ 3.15 % ​ 4,459 ​ ​ 40 ​ 3.64 % Total earning assets ​ ​ 1,619,585 ​ ​ 14,388 ​ 3.60 % ​ 1,627,190 ​ ​ 14,301 ​ 3.56 % Allowance for loan losses ​ ​ (15,900) ​ ​ ​ ​ ​ ​ ​ (16,404) ​ ​ ​ ​ ​ ​ Non-earning assets ​ ​ 165,549 ​ ​ ​ ​ ​ ​ ​ 154,347 ​ ​ ​ ​ ​ ​ Total Assets ​ $ 1,769,234 ​ ​ ​ ​ ​ ​ $ 1,765,133 ​ ​ ​ ​ ​ ​ Liabilities and Shareholders’ Equity ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest-bearing demand deposits ​ $ 284,799 ​ $ 89 ​ 0.13 % $ 202,530 ​ $ 172 ​ 0.34 % Interest-bearing money markets ​ ​ 295,923 ​ ​ 63 ​ 0.09 % ​ 358,038 ​ ​ 170 ​ 0.19 % Savings deposits ​ ​ 243,919 ​ ​ 18 ​ 0.03 % ​ 202,968 ​ ​ 25 ​ 0.05 % Time deposits ​ ​ 154,811 ​ ​ 305 ​ 0.80 % ​ 227,548 ​ ​ 779 ​ 1.39 % Short-term borrowings ​ ​ 59,555 ​ ​ 18 ​ 0.12 % ​ 50,301 ​ ​ 24 ​ 0.19 % Long-term borrowings ​ ​ 30,929 ​ ​ 313 ​ 4.10 % ​ 100,929 ​ ​ 656 ​ 2.64 % Total interest-bearing liabilities ​ ​ 1,069,936 ​ ​ 806 ​ 0.31 % ​ 1,142,314 ​ ​ 1,826 ​ 0.65 % Non-interest-bearing deposits ​ ​ 530,672 ​ ​ ​ ​ ​ ​ ​ 465,476 ​ ​ ​ ​ ​ ​ Other liabilities ​ ​ 28,109 ​ ​ ​ ​ ​ ​ ​ 25,802 ​ ​ ​ ​ ​ ​ Shareholders’ Equity ​ ​ 140,517 ​ ​ ​ ​ ​ ​ ​ 131,541 ​ ​ ​ ​ ​ ​ Total Liabilities and Shareholders’ Equity ​ $ 1,769,234 ​ ​ ​ ​ ​ ​ $ 1,765,133 ​ ​ ​ ​ ​ ​ Net interest income and spread ​ ​ ​ ​ $ 13,582 ​ 3.29 % ​ ​ ​ $ 12,475 ​ 2.91 % Net interest margin ​ ​ ​ ​ ​ ​ ​ 3.40 % ​ ​ ​ ​ ​ ​ 3.11 % ​ (1) The above table reflects the average rates earned or paid stated on an FTE basis assuming a 21% tax rate for 2022 and 2021. Non-GAAP interest income on a fully taxable equivalent was $241 and $239, respectively. (2) Net interest margin is calculated as net interest income divided by average earning assets. (3) The average yields on investments are based on amortized cost. The stable interest income was driven by a reduction in interest and fees on loans related to reduced fees and average balances of $33.9 million, primarily PPP loans. This decline was offset by increased interest income on the investment portfolio driven by an increase in average balances of $109.2 million. ​ The decrease in interest expense was driven by further reductions in deposit rates during 2021 and reducing the cost of interest-bearing deposits by 27 basis points and a decline in average balances of $11.6 million. The prepayment of the $70.0 million of FHLB advances in 2021 also contributed to the reduced interest expense. ​ ​ 43 Table of Contents The following table sets forth an analysis of volume and rate changes in interest income and interest expense for our average interest-earning assets and average interest-bearing liabilities for the three month periods ended March 31, 2022 and 2021: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Three months ended March 31, 2022 ​ ​ compared to the three months ended March 31, 2021 (in thousands and tax equivalent basis) Volume Rate Net Interest Income: ​ ​ ​ ​ ​ ​ ​ ​ ​ Loans ​ $ (364) ​ $ 60 ​ $ (304) Taxable Investments ​ ​ 422 ​ ​ (6) ​ ​ 416 Non-taxable Investments ​ ​ 37 ​ ​ (24) ​ ​ 13 Federal funds sold ​ ​ (15) ​ ​ 9 ​ ​ (6) Interest-bearing deposits ​ ​ 1 ​ ​ (1) ​ ​ 0 Other interest earning assets ​ ​ (31) ​ ​ (1) ​ ​ (32) Total interest income ​ ​ 50 ​ ​ 37 ​ ​ 87 Interest Expense: ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest-bearing demand deposits ​ ​ 70 ​ ​ (153) ​ ​ (83) Interest-bearing money markets ​ ​ (30) ​ ​ (77) ​ ​ (107) Savings deposits ​ ​ 6 ​ ​ (13) ​ ​ (7) Time deposits ​ ​ (253) ​ ​ (221) ​ ​ (474) Short-term borrowings ​ ​ 5 ​ ​ (11) ​ ​ (6) Long-term borrowings ​ ​ (461) ​ ​ 118 ​ ​ (343) Total interest expense ​ ​ (663) ​ ​ (357) ​ ​ (1,020) Net interest income ​ $ 713 ​ $ 394 ​ $ 1,107 ​ ​ (1) The change in interest income/expense due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. Provision for Loan Losses Specific allocations have been made for impaired loans where management has determined that the collateral supporting the loans is not adequate to cover the loan balance, and the qualitative factors affecting the ALL have been adjusted based on the current economic environment and the characteristics of the loan portfolio. ​ Other Income The composition of other operating income for the three month periods ended March 31, 2022 and 2021 is illustrated in the following table: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Income as % of ​ ​ Total Other Income ​ ​ Three Months Ended ​ ​ March 31, (in thousands) 2022 2021 Service charges on deposit accounts ​ $ 465 10% ​ $ 405 9% Other service charges ​ ​ 213 ​ 5% ​ ​ 211 ​ 5% Trust department ​ ​ 2,189 ​ 50% ​ ​ 2,241 ​ 52% Debit card income ​ ​ 886 ​ 20% ​ ​ 810 ​ 19% Bank owned life insurance ​ ​ 292 ​ 7% ​ ​ 286 ​ 7% Brokerage commissions ​ ​ 220 ​ 5% ​ ​ 268 ​ 6% Other income ​ ​ 117 ​ 3% ​ ​ 117 ​ 2% ​ ​ $ 4,382 ​ 100% ​ $ 4,338 ​ 100% ​ 44 Table of Contents Other Operating Expenses The composition of other operating expenses for the three month periods ended March 31, 2022 and 2021 is illustrated in the following table: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Expense as % of ​ ​ Total Other Operating Expenses ​ ​ Three Months Ended ​ ​ March 31, (in thousands) 2022 2021 Salaries and employee benefits ​ $ 5,968 56% ​ $ 4,988 40% FDIC premiums ​ ​ 174 ​ 2% ​ ​ 183 ​ 1% Equipment ​ ​ 1,044 ​ 10% ​ ​ 851 ​ 7% Occupancy ​ ​ 727 ​ 7% ​ ​ 725 ​ 6% Data processing ​ ​ 821 ​ 8% ​ ​ 726 ​ 6% Marketing ​ ​ 106 ​ 1% ​ ​ 146 ​ 1% Professional services ​ ​ 520 ​ 5% ​ ​ 766 ​ 6% Contract labor ​ ​ 165 ​ 1% ​ ​ 148 ​ 1% Telephone ​ ​ 114 ​ 1% ​ ​ 215 ​ 2% Other real estate owned ​ ​ 95 ​ 1% ​ ​ (412) ​ (3)% Investor relations ​ ​ 96 ​ 1% ​ ​ 124 ​ 1% Settlement expense ​ ​ — ​ 0% ​ ​ 3,300 ​ 26% Contributions ​ ​ 21 ​ 0% ​ ​ 23 ​ 0% Other ​ ​ 727 ​ 7% ​ ​ 740 ​ 6% ​ ​ $ 10,578 ​ 100% ​ $ 12,523 ​ 100% ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Provision for Income Taxes In reporting interim financial information, income tax provisions should be determined under the procedures set forth in Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) Topic 740, Income Taxes (Section 740-270-30). This guidance provides that at the end of each interim period, an entity should make its best estimate of the effective tax rate expected to be applicable for the full fiscal year. The rate so determined should be used in providing for income taxes on a current year-to-date basis. The effective tax rate should reflect anticipated investment tax credits, capital gains rates, and other available tax planning alternatives. In arriving at this effective tax rate, however, no effect should be included for the tax related to significant, unusual or extraordinary items that will be separately reported or reported net of their related tax effect in reports for the interim period or for the fiscal year. FINANCIAL CONDITION Balance Sheet Overview Total assets at March 31, 2022 increased to $1.8 billion, representing a $30.5 million increase since December 31, 2021. During the first quarter of 2022, cash and interest-bearing deposits in other banks decreased by $39.6 million, the investment portfolio increased by $42.2 million and gross loans increased by $27.7 million. Management made a strategic decision to deploy excess cash balances early in the first quarter of 2022 by purchasing approximately $50.0 million in short-term treasury bonds. OREO balances remained stable during the first quarter although there continues to be interest in parcels of real estate that previously secured a large commercial participation loan. We anticipate further reductions to OREO balances during 2022 as we consummate additional sale contracts. ​ Total liabilities increased by $35.3 million when compared to liabilities at December 31, 2021. The increase in the first quarter of 2022 was attributable to core relationship deposit growth of $38.2 million. Balances in short-term borrowings related to our Treasury Management product increased slightly by $1.2 million. Total shareholders’ equity decreased by $4.8 million during the quarter, as net income of $5.7 million was offset by the payment of $1.0 million in dividends and the decline of $9.6 million in accumulated other comprehensive loss related to declining market values of our investment portfolio and pension plan assets. 45 Table of Contents ​ Loan Portfolio The following table presents the composition of our loan portfolio at the dates indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (dollars in thousands) March 31, 2022 December 31, 2021 Commercial real estate ​ $ 391,136 33% ​ $ 374,291 32% Acquisition and development ​ ​ 133,031 ​ 11% ​ ​ 128,077 ​ 11% Commercial and industrial * ​ ​ 194,914 ​ 17% ​ ​ 180,976 ​ 16% Residential mortgage ​ ​ 399,704 ​ 34% ​ ​ 404,686 ​ 35% Consumer ​ ​ 62,616 ​ 5% ​ ​ 65,657 ​ 6% Total Loans ​ $ 1,181,401 ​ 100% ​ $ 1,153,687 ​ 100% *Includes $1.3 million of PPP loans at March 31, 2022 and $7.7 million at December 31, 2021 ​ Outstanding loans of $1.2 billion at March 31, 2022 reflected an increase of $27.7 million during the first quarter of 2022. Core commercial loan growth was offset slightly by PPP loan forgiveness. Commercial real estate (:CRE”) loans increased by $16.8 million, acquisition and development (“A&D”) loans increased by $5.0 million and commercial and industrial loans increased by $14.0 million, as growth in core portfolio loans of $20.4 million was offset by $6.4 million of PPP loan forgiveness. Residential mortgage loans decreased $5.0 million resulting from amortization of the portfolio as well as paydowns and payoffs. The refinancing activity continued to slow in the first quarter and much of the production of residential mortgage loans was booked to the in-house portfolio. The consumer loan portfolio decreased by $3.0 million. ​ Commercial loan production for the three months ended March 31, 2022 was approximately $68.1 million. At March 31, 2022, unfunded, committed commercial construction loans totaled approximately $25.6 million. Commercial amortization and payoffs were approximately $45.1 million through March 31, 2022, exclusive of PPP loans. ​ Consumer mortgage loan production for the first quarter of 2022 was approximately $20.5 million with the vast majority of this production being comprised of in-house mortgages. The production and pipeline mix of in-house, portfolio loans and investor loans as of March 31, 2022 consisted of $13.4 million in portfolio loans and $1.0 million in investor loans. Production levels have slowed for residential mortgages as compared to the first quarter of 2021 based on the long-term interest rate increases that have occurred during the fourth quarter of 2021 and into the first quarter of 2022. ​ Non-accrual loans totaled $2.3 million at March 31, 2022 compared to $2.5 million at December 31, 2021. The slight decrease in non-accrual balances at March 31, 2022 was primarily related to $0.1 million of one commercial and industrial loan that paid off in the first quarter of 2022. ​ ​ 46 Table of Contents Risk Elements of Loan Portfolio The following table presents the risk elements of our loan portfolio at the dates indicated. Management is not aware of any potential problem loans other than those listed in this table or discussed below. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (dollars in thousands) March 31, 2022 % of Applicable Portfolio December 31, 2021 % of Applicable Portfolio Non-accrual loans: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Commercial real estate ​ $ 73 ​ 0.02% ​ $ 81 ​ 0.02% Acquisition and development ​ ​ 381 ​ 0.29% ​ ​ 390 ​ 0.30% Commercial and industrial ​ ​ — ​ 0.00% ​ ​ 90 ​ 0.05% Residential mortgage ​ ​ 1,878 ​ 0.47% ​ ​ 1,901 ​ 0.47% Total non-accrual loans ​ $ 2,332 ​ 0.20% ​ $ 2,462 ​ 0.21% Accruing Loans Past Due 90 days or more: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Residential mortgage ​ $ — ​ ​ ​ $ 148 ​ ​ Consumer ​ ​ 37 ​ ​ ​ ​ 152 ​ ​ Total loans past due 90 days or more ​ $ 37 ​ ​ ​ $ 300 ​ ​ Total non-accrual and accruing loans past due 90 days or more ​ $ 2,369 ​ ​ ​ $ 2,762 ​ ​ Restructured Loans (TDRs): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Performing ​ $ 2,934 ​ ​ ​ $ 2,997 ​ ​ Non-accrual (included above) ​ ​ 294 ​ ​ ​ ​ 300 ​ ​ Total TDRs ​ $ 3,228 ​ ​ ​ $ 3,297 ​ ​ Other real estate owned ​ $ 4,477 ​ ​ ​ $ 4,477 ​ ​ Total Non-performing assets ​ $ 6,846 ​ ​ ​ $ 7,239 ​ ​ Impaired loans without a valuation allowance ​ ​ 5,157 ​ ​ ​ ​ 5,248 ​ ​ Impaired loans with a valuation allowance ​ ​ 374 ​ ​ ​ ​ 480 ​ ​ Total impaired loans ​ $ 5,531 ​ ​ ​ $ 5,728 ​ ​ Valuation allowance related to impaired loans ​ $ 35 ​ ​ ​ $ 64 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Non-accrual loans to total loans (as %) ​ ​ 0.20% ​ ​ ​ ​ 0.21% ​ ​ Non-performing loans to total loans (as %) ​ ​ 0.20% ​ ​ ​ ​ 0.24% ​ ​ Non-performing assets to total assets (as %) ​ ​ 0.39% ​ ​ ​ ​ 0.42% ​ ​ Allowance for loan losses to non-accrual loans (as %) ​ ​ 655.75% ​ ​ ​ ​ 648.05% ​ ​ Allowance for loan losses to non-performing assets (as %) ​ ​ 223.37% ​ ​ ​ ​ 220.40% ​ ​ ​ Performing loans considered to be impaired (including performing troubled debt restructurings, or TDRs), as defined and identified by management, amounted to $2.9 million at March 31, 2022 and $3.0 million at December 31, 2021. Loans are identified as impaired when, based on current information and events, management determines that we will be unable to collect all amounts due according to contractual terms. These loans consist primarily of A&D loans and CRE loans. The fair values are generally determined based upon independent third-party appraisals of the collateral or discounted cash flows based upon the expected proceeds. Specific allocations have been made where management believes there is insufficient collateral to repay the loan balance if liquidated and there is no secondary source of repayment available. 47 Table of Contents The following table presents the details of impaired loans that are TDRs by class at March 31, 2022 and December 31, 2021: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, 2022 ​ December 31, 2021 ​ ​ Number of ​ Recorded ​ Number of ​ Recorded (dollars in thousands) Contracts Investment Contracts Investment Performing ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Commercial real estate ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Non owner-occupied ​ 1 ​ $ 105 ​ 1 ​ $ 106 All other CRE ​ 2 ​ ​ 2,138 ​ 2 ​ ​ 2,178 Acquisition and development ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 1-4 family residential construction ​ 1 ​ ​ 231 ​ 1 ​ ​ 239 All other A&D ​ — ​ ​ — ​ — ​ ​ — Commercial and industrial ​ — ​ ​ — ​ — ​ ​ — Residential mortgage ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Residential mortgage – term ​ 6 ​ ​ 460 ​ 6 ​ ​ 474 Residential mortgage – home equity ​ — ​ ​ — ​ — ​ ​ — Consumer ​ — ​ ​ — ​ — ​ ​ — Total performing ​ 10 ​ $ 2,934 ​ 10 ​ $ 2,997 Non-accrual ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Commercial real estate ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Non owner-occupied ​ — ​ $ — ​ — ​ $ — All other CRE ​ — ​ ​ — ​ — ​ ​ — Acquisition and development ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 1-4 family residential construction ​ — ​ ​ — ​ — ​ ​ — All other A&D ​ — ​ ​ — ​ — ​ ​ — Commercial and industrial ​ — ​ ​ — ​ — ​ ​ — Residential mortgage ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Residential mortgage – term ​ 2 ​ ​ 294 ​ 2 ​ ​ 300 Residential mortgage – home equity ​ — ​ ​ — ​ — ​ ​ — Consumer ​ — ​ ​ — ​ — ​ ​ — Total non-accrual ​ 2 ​ ​ 294 ​ 2 ​ ​ 300 Total TDRs ​ 12 ​ $ 3,228 ​ 12 ​ $ 3,297 ​ The level of TDRs was $3.2 million at March 31, 2022 compared to $3.3 million at December 31, 2021, with a slight reduction due to payments made during the first three months of 2022. There were no new TDRs during the first three months of 2022. Allowance and Provision for Loan Losses The ALL is maintained to absorb probable incurred credit losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans. The ALL is also based on estimates, and actual losses will vary from current estimates. These estimates are reviewed quarterly, and as adjustments, either positive or negative, become necessary, a corresponding increase or decrease is made in the ALL. The methodology used to determine the adequacy of the ALL is consistent with prior years. An estimate for probable losses related to unfunded lending commitments, such as letters of credit and binding but unfunded loan commitments is also prepared. This estimate is computed in a manner similar to the methodology described above, adjusted for the probability of actually funding the commitment. The ALL decreased to $15.3 million at March 31, 2022 compared to $16.0 million at December 31, 2021. ​ 48 Table of Contents The ratio of net charge offs to average loans for the quarter ended March 31, 2022 was an annualized 0.08%, compared to net charge offs to average loans of 0.01% for 2021. The decline was primarily driven by increased charge-offs on our portfolio. Our special assets team continues to aggressively collect on charged-off loans. The ALL at March 31, 2022 is adequate to provide for probable credit losses inherent in our loan portfolio. Amounts that will be recorded for the provision for loan losses in future periods will depend upon trends in the loan balances, including the composition of the loan portfolio, changes in loan quality and loss experience trends, potential recoveries on previously charged-off loans and changes in other qualitative factors. Management also applies interest rate risk, collateral value and debt service sensitivity analyses to the Commercial real estate loan portfolio and obtains new appraisals on specific loans under defined parameters to assist in the determination of the periodic provision for loan losses. The following table presents a summary of the activity in the ALL for the three months ended March 31: ​ ​ ​ ​ ​ ​ ​ ​ (dollars in thousands) 2022 2021 Balance, January 1 ​ $ 15,955 ​ $ 16,486 ​ Charge-offs: ​ ​ ​ ​ ​ ​ ​ Acquisition and development ​ ​ — ​ ​ (81) ​ Commercial and industrial ​ ​ (48) ​ ​ — ​ Residential mortgage ​ ​ (9) ​ ​ (82) ​ Consumer ​ ​ (246) ​ ​ (80) ​ Total charge-offs ​ ​ (303) ​ ​ (243) ​ Recoveries: ​ ​ ​ ​ ​ ​ ​ Commercial real estate ​ ​ 1 ​ ​ — ​ Acquisition and development ​ ​ 18 ​ ​ 101 ​ Commercial and industrial ​ ​ 3 ​ ​ 36 ​ Residential mortgage ​ ​ 15 ​ ​ 17 ​ Consumer ​ ​ 22 ​ ​ 47 ​ Total recoveries ​ ​ 59 ​ ​ 201 ​ Net recoveries/(losses) ​ ​ (244) ​ ​ (42) ​ Provision/(credit) for loan losses ​ ​ (419) ​ ​ 110 ​ Balance at end of period ​ $ 15,292 ​ $ 16,554 ​ ​ ​ ​ ​ ​ ​ ​ ​ Allowance for loan losses to gross loans outstanding (as %) ​ ​ 1.29 % ​ 1.38 % ​ ​ ​ ​ ​ ​ ​ ​ Net (Charge-offs)/Recoveries as a % of Average Applicable Portfolio ​ ​ ​ ​ ​ ​ ​ ​ ​ 2022 ​ 2021 Commercial real estate ​ ​ 0.00% ​ ​ 0.00% Acquisition and development ​ ​ 0.06% ​ ​ 0.07% Commercial and industrial ​ ​ (0.10)% ​ ​ 0.05% Residential mortgage ​ ​ 0.01% ​ ​ (0.07)% Consumer ​ ​ (1.42)% ​ ​ (0.37)% ​ ​ ​ ​ ​ ​ ​ ​ Investment Securities At March 31, 2022, the total amortized cost basis of the available-for-sale investment portfolio was $154.3 million, compared to a fair value of $143.6 million. Unrealized gains and losses on securities available-for-sale are reflected in accumulated other comprehensive loss, a component of shareholders’ equity. The amortized cost basis of the held to maturity portfolio was $241.7 million, compared to a fair value of $235.0 million. 49 Table of Contents The following table presents the composition of our securities portfolio at amortized cost and fair values at the dates indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, 2022 ​ December 31, 2021 ​ ​ Amortized ​ Fair Value ​ FV as % ​ Amortized ​ Fair Value ​ FV as % (dollars in thousands) Cost (FV) of Total Cost (FV) of Total Securities Available for Sale: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S. government agencies ​ $ 11,070 ​ $ 10,298 ​ 7% ​ $ 69,602 ​ $ 67,169 ​ 23% Residential mortgage-backed agencies ​ ​ 48,319 ​ ​ 44,298 ​ 31% ​ ​ 49,630 ​ ​ 48,661 ​ 17% Commercial mortgage-backed agencies ​ ​ 38,907 ​ ​ 36,233 ​ 25% ​ ​ 51,694 ​ ​ 50,868 ​ 19% Collateralized mortgage obligations ​ ​ 27,994 ​ ​ 25,997 ​ 18% ​ ​ 93,018 ​ ​ 90,077 ​ 31% Obligations of state and political subdivisions ​ ​ 8,351 ​ ​ 8,464 ​ 6% ​ ​ 12,439 ​ ​ 12,804 ​ 4% Corporate bonds ​ ​ 1,000 ​ ​ 1,000 ​ 1% ​ ​ — ​ ​ — ​ — Collateralized debt obligations ​ ​ 18,616 ​ ​ 17,319 ​ 12% ​ ​ 18,609 ​ ​ 17,192 ​ 6% Total available for sale ​ $ 154,257 ​ $ 143,609 ​ 100% ​ $ 294,992 ​ $ 286,771 ​ 100% Securities Held to Maturity: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S. treasuries ​ $ 37,012 ​ $ 36,059 ​ 15% ​ $ — ​ $ — ​ — U.S. government agencies ​ ​ 67,527 ​ ​ 63,005 ​ 27% ​ ​ — ​ ​ — ​ — Residential mortgage-backed agencies ​ ​ 29,068 ​ ​ 27,758 ​ 12% ​ ​ 30,634 ​ ​ 30,847 ​ 47% Commercial mortgage-backed agencies ​ ​ 26,525 ​ ​ 25,382 ​ 11% ​ ​ 5,456 ​ ​ 5,601 ​ 9% Collateralized mortgage obligations ​ ​ 58,490 ​ ​ 55,523 ​ 24% ​ ​ — ​ ​ — ​ — Obligations of state and political subdivisions ​ ​ 23,034 ​ ​ 27,299 ​ 11% ​ ​ 20,169 ​ ​ 28,921 ​ 44% Total held to maturity ​ $ 241,656 ​ $ 235,026 ​ 100% ​ $ 56,259 ​ $ 65,369 ​ 100% ​ Total fair value of investment securities available for sale decreased by $143.2 million since December 31, 2021 due to the transfer of investments from available-for-sale to held to maturity in the first quarter 2022. At March 31, 2022, the securities classified as available-for-sale included a net unrealized loss of $10.6 million, which represents the difference between the fair value and amortized cost of securities in the portfolio. The Corporation reassessed classification of certain investments and effective February 1, 2022, the Corporation transferred $139.0 million of callable agencies, obligation of state and political subdivisions, and collateralized mortgage obligations from available for sale to held to maturity securities. The transfer occurred at fair value. The related unrealized loss of $8.4 million included in other comprehensive loss remained in other comprehensive loss, to be amortized out of other comprehensive loss with an offsetting entry to interest income as a yield adjustment over the remaining term of the securities. No gain or loss was recorded at the time of transfer. The transfer of these securities was completed in an effort to mitigate further decline in fair market value in a rising rate environment. Management’s assessment of the portfolio included lower yielding bonds and the risk of extension in an up 300 basis point shock. ​ As discussed in Note 6 to the consolidated financial statements presented elsewhere in this report, the Corporation measures fair market values based on the fair value hierarchy established in ASC Topic 820, Fair Value Measurements and Disclosures . The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Level 3 prices or valuation techniques require inputs that are both significant to the valuation assumptions and are not readily observable in the market (i.e. supported with little or no market activity). These Level 3 instruments are valued based on both observable and unobservable inputs derived from the best available data, some of which is internally developed, and considers risk premiums that a market participant would require. Approximately $126.3 million of the available-for-sale portfolio was valued using Level 2 pricing and had net unrealized losses of $9.3 million at March 31, 2022. The remaining $17.3 million of the securities available-for-sale represents the entire collateralized debt obligation (“CDO”) portfolio, which was valued using significant unobservable inputs (Level 3 assets). The $1.3 million in net unrealized losses associated with this portfolio relates to nine pooled trust preferred securities that comprise the CDO portfolio. Net unrealized losses of $0.6 million represent non-credit related OTTI charges on seven of the securities, while $0.7 million of unrealized losses relates to two securities which have had no credit related OTTI. 50 Table of Contents The following table provides a summary of the trust preferred securities in the CDO portfolio and the credit status of these securities as of March 31, 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Level 3 Investment Securities Available for Sale (dollars in thousands) Investment Description ​ ​ First United Level 3 Investments ​ Security Credit Status ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Deferrals/ ​ ​ ​ ​ ​ Collateral ​ Number of ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Defaults ​ ​ ​ ​ ​ Support ​ Performing ​ ​ ​ ​ ​ ​ ​ Fair ​ Unrealized ​ Lower ​ ​ ​ as % of ​ ​ ​ ​ ​ as % of ​ Issuers/ ​ ​ ​ ​ Amortized ​ Market ​ Gain/ ​ Credit ​ Original ​ Original ​ Performing ​ Collateral ​ Performing ​ Total Deal Class Cost Value (Loss) Rating Collateral Collateral Collateral Support Collateral Issuers Preferred Term Security XVIII* ​ C ​ $ 1,894 ​ $ 1,547 ​ $ (347) ​ C ​ 676,565 ​ 14.82% ​ 267,395 ​ 22,044 ​ 8.24% ​ 40 / 56 Preferred Term Security XVIII ​ C ​ ​ 2,717 ​ ​ 2,320 ​ ​ (397) ​ C ​ 676,565 ​ 14.82% ​ 267,395 ​ 22,044 ​ 8.24% ​ 40 / 56 Preferred Term Security XIX* ​ C ​ ​ 1,843 ​ ​ 1,876 ​ ​ 33 ​ C ​ 700,535 ​ 6.57% ​ 407,420 ​ 32,950 ​ 8.09% ​ 45 / 51 Preferred Term Security XIX* ​ C ​ ​ 1,103 ​ ​ 1,125 ​ ​ 22 ​ C ​ 700,535 ​ 6.57% ​ 407,420 ​ 32,950 ​ 8.09% ​ 45 / 51 Preferred Term Security XIX* ​ C ​ ​ 2,557 ​ ​ 2,626 ​ ​ 69 ​ C ​ 700,535 ​ 6.57% ​ 407,420 ​ 32,950 ​ 8.09% ​ 45 / 51 Preferred Term Security XIX* ​ C ​ ​ 1,105 ​ ​ 1,126 ​ ​ 21 ​ C ​ 700,535 ​ 6.57% ​ 407,420 ​ 32,950 ​ 8.09% ​ 45 / 51 Preferred Term Security XXII* ​ C-1 ​ ​ 1,610 ​ ​ 1,519 ​ ​ (91) ​ C ​ 1,386,600 ​ 10.13% ​ 624,548 ​ 76,881 ​ 12.31% ​ 58 / 71 Preferred Term Security XXII* ​ C-1 ​ ​ 4,023 ​ ​ 3,796 ​ ​ (227) ​ C ​ 1,386,600 ​ 10.13% ​ 624,548 ​ 76,881 ​ 12.31% ​ 58 / 71 Preferred Term Security XXIII ​ C-1 ​ ​ 1,764 ​ ​ 1,384 ​ ​ (380) ​ C ​ 1,467,000 ​ 14.52% ​ 605,955 ​ 81,169 ​ 13.40% ​ 69 / 83 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total Level 3 Securities Available for Sale ​ ​ ​ $ 18,616 ​ $ 17,319 ​ $ (1,297) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ *Security has been deemed other-than-temporarily impaired and loss has been recognized in accordance with ASC Section 320-10-35. The terms of the debentures underlying trust preferred securities allow the issuer of the debentures to defer interest payments for up to 20 quarters, and, in such case, the terms of the related trust preferred securities allow their issuers to defer dividend payments for up to 20 quarters. Some of the issuers of the trust preferred securities in our investment portfolio have defaulted and/or deferred payments ranging from 8.09% to 13.40% of the total collateral balances underlying the securities. The securities were designed to include structural features that provide investors with credit enhancement or support to provide default protection by subordinated tranches. These features include over-collateralization of the notes or subordination, excess interest or spread which will redirect funds in situations where collateral is insufficient, and a specified order of principal payments. There are securities in our portfolio that are under-collateralized, which does represent additional stress on our tranche. However, in these cases, the terms of the securities require excess interest to be redirected from subordinate tranches as credit support, which provides additional support to our investment. Deposits The following table presents the composition of our deposits at the dates indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (dollars in thousands) March 31, 2022 December 31, 2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Non-interest-bearing demand deposits ​ $ 530,901 35% ​ $ 501,627 ​ 34% ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest-bearing deposits: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Demand ​ ​ 284,582 ​ 19% ​ ​ 228,175 ​ 16% Money Market ​ ​ 292,401 ​ 19% ​ ​ 339,748 ​ 23% Savings deposits ​ ​ 251,378 ​ 17% ​ ​ 236,595 ​ 16% Time deposits ​ ​ 148,293 ​ 10% ​ ​ 163,229 ​ 11% Total Deposits ​ $ 1,507,555 ​ 100% ​ $ 1,469,374 ​ 100% ​ Total deposits at March 31, 2022 increased by $38.2 million when compared to deposits at December 31, 2021. During the first quarter of 2022, non-interest-bearing deposits increased by $29.3 million, driven by retail commercial account growth. Traditional savings accounts increased by $14.8 million as we continued to see significant growth in our Prime Saver product, and total demand deposits increased by $56.4 million. Total money market accounts decreased by $47.3 million as some of our municipal accounts are shifting balances to state offered account products paying higher rates. Time deposits decreased by $14.9 million as we continued to hold rates low due to our higher cash balances. ​ 51 Table of Contents Borrowed Funds The following table presents the composition of our borrowings at the dates indicated: ​ ​ ​ ​ ​ ​ ​ (in thousands) March 31, 2022 December 31, 2021 Securities sold under agreements to repurchase ​ $ 58,902 ​ $ 57,699 Total short-term borrowings ​ ​ 58,902 ​ ​ 57,699 Junior subordinated debt ​ ​ 30,929 ​ ​ 30,929 Total long-term borrowings ​ $ 30,929 ​ $ 30,929 ​ Total short-term borrowings increased by $1.2 million during the first three months of 2022. This increase was due to increased cash balances from existing Treasury Management accounts. Liquidity Management Liquidity is a financial institution’s capability to meet customer demands for deposit withdrawals while funding all credit-worthy loans. The factors that determine the institution’s liquidity are: ● Reliability and stability of core deposits; ● Cash flow structure and pledging status of investments; and ● Potential for unexpected loan demand. We actively manage our liquidity position through regular meetings of a sub-committee of executive management, known as the Treasury Team, which looks forward 12 months at 30-day intervals. The measurement is based upon the projection of funds sold or purchased position, along with ratios and trends developed to measure dependence on purchased funds and core growth. Monthly reviews by management and quarterly reviews by the Asset and Liability Committee under prescribed policies and procedures are designed to ensure that we will maintain adequate levels of available funds. It is our policy to manage our affairs so that liquidity needs are fully satisfied through normal Bank operations. That is, the Bank will manage its liquidity to minimize the need to make unplanned sales of assets or to borrow funds under emergency conditions. The Bank will use funding sources where the interest cost is relatively insensitive to market changes in the short run (periods of one year or less) to satisfy operating cash needs. The remaining normal funding will come from interest-sensitive liabilities, either deposits or borrowed funds. When the marginal cost of needed wholesale funding is lower than the cost of raising this funding in the retail markets, the Corporation may supplement retail funding with external funding sources such as: 1. Unsecured Fed Funds lines of credit with upstream correspondent banks (M&T Bank, Pacific Coast Banker’s Bank, PNC Financial Services, Atlantic Community Bankers Bank, Community Bankers Bank and Zions National Bank). 2. Secured advances with the FHLB, which are collateralized by eligible one to four family residential mortgage loans, home equity lines of credit, commercial real estate loans, various securities and pledged cash. 3. Secured line of credit with the Fed Discount Window for use in borrowing funds up to 90 days, using municipal securities as collateral. 4. Brokered deposits, including CDs and money market funds, provide a method to generate deposits quickly. These deposits are strictly rate driven but often provide the most cost-effective means of funding growth. 5. One Way Buy CDARS/ICS funding – a form of brokered deposits that has become a viable supplement to brokered deposits obtained directly. ​ Management believes that we have adequate liquidity available to respond to current and anticipated liquidity demands and is not aware of any trends or demands, commitments, events or uncertainties that are likely to materially affect our ability to maintain liquidity at satisfactory levels. 52 Table of Contents Market Risk and Interest Sensitivity Our primary market risk is interest rate fluctuation. Interest rate risk results primarily from the traditional banking activities that we engage in, such as gathering deposits and extending loans. Many factors, including economic and financial conditions, movements in interest rates and consumer preferences affect the difference between the interest earned on our assets and the interest paid on our liabilities. Interest rate sensitivity refers to the degree that earnings will be impacted by changes in the prevailing level of interest rates. Interest rate risk arises from mismatches in the repricing or maturity characteristics between interest-bearing assets and liabilities. Management seeks to minimize fluctuating net interest margins, and to enhance consistent growth of net interest income through periods of changing interest rates. Management uses interest sensitivity gap analysis and simulation models to measure and manage these risks. The interest rate sensitivity gap analysis assigns each interest-earning asset and interest-bearing liability to a time frame reflecting its next repricing or maturity date. The differences between total interest-sensitive assets and liabilities at each time interval represent the interest sensitivity gap for that interval. A positive gap generally indicates that rising interest rates during a given interval will increase net interest income, as more assets than liabilities will reprice. A negative gap position would benefit us during a period of declining interest rates. At March 31, 2022, we were asset sensitive. Our interest rate risk management goals are: ● Ensure that the Board of Directors and senior management will provide effective oversight and ensure that risks are adequately identified, measured, monitored and controlled; ● Enable dynamic measurement and management of interest rate risk; ● Select strategies that optimize our ability to meet our long-range financial goals while maintaining interest rate risk within policy limits established by the Board of Directors; ● Use both income and market value oriented techniques to select strategies that optimize the relationship between risk and return; and ● Establish interest rate risk exposure limits for fluctuation in net interest income (“NII”), net income and economic value of equity. To manage interest sensitivity risk, management formulates guidelines regarding asset generation and pricing, funding sources and pricing, and off-balance sheet commitments. These guidelines are based on management’s outlook regarding future interest rate movements, the state of the regional and national economy, and other financial and business risk factors. Management uses computer simulations to measure the effect on net interest income of various interest rate scenarios. Key assumptions used in the computer simulations include cash flows and maturities of interest rate sensitive assets and liabilities, changes in asset volumes and pricing, and management’s capital plans. This modeling reflects interest rate changes and the related impact on net interest income over specified periods. We evaluate the effect of a change in interest rates of +/-100 basis points to +/-400 basis points on both NII and Net Portfolio Value (“NPV”) / Economic Value of Equity (“EVE”). We concentrate on NII rather than net income as long as NII remains the significant contributor to net income. NII modeling allows management to view how changes in interest rates will affect the spread between the yield paid on assets and the cost of deposits and borrowed funds. Unlike traditional Gap modeling, NII modeling takes into account the different degree to which installments in the same repricing period will adjust to a change in interest rates. It also allows the use of different assumptions in a falling versus a rising rate environment. The period considered by the NII modeling is the next eight quarters. NPV / EVE modeling focuses on the change in the market value of equity. NPV / EVE is defined as the market value of assets less the market value of liabilities plus/minus the market value of any off-balance sheet positions. By effectively looking at the present value of all future cash flows on or off the balance sheet, NPV / EVE modeling takes a longer-term view of interest rate risk. This complements the shorter-term view of the NII modeling. Measures of NII at risk produced by simulation analysis are indicators of an institution’s short-term performance in alternative rate environments. These measures are typically based upon a relatively brief period, usually one year. They do not necessarily indicate the long-term prospects or economic value of the institution. 53 Table of Contents Based on the simulation analysis performed at March 31, 2022 and December 31, 2021, management estimated the following changes in net interest income, assuming the indicated rate changes: ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) March 31, 2022 ​ December 31, 2021 +400 basis points ​ $ 3,381 ​ $ 4,072 +300 basis points ​ $ 3,640 ​ $ 3,233 +200 basis points ​ $ 1,847 ​ $ 2,315 +100 basis points ​ $ 970 ​ $ 1,160 -100 basis points ​ $ (3,497) ​ $ (3,110) ​ This estimate is based on assumptions that may be affected by unforeseeable changes in the general interest rate environment and any number of unforeseeable factors. Rates on different assets and liabilities within a single maturity category adjust to changes in interest rates to varying degrees and over varying periods of time. The relationships between lending rates and rates paid on purchased funds are not constant over time. Management can respond to current or anticipated market conditions by lengthening or shortening the Bank’s sensitivity through loan repricings or changing its funding mix. The rate of growth in interest-free sources of funds will influence the level of interest-sensitive funding sources. In addition, the absolute level of interest rates will affect the volume of earning assets and funding sources. As a result of these limitations, the interest-sensitive gap is only one factor to be considered in estimating the net interest margin. Management believes that no material changes in our market risks, our procedures used to evaluate and mitigate those risks, or our actual or simulated sensitivity positions have occurred since December 31, 2021. Our NII simulation analysis as of December 31, 2021 is included in Item 7 of Part II Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2021 under the heading “Market Risk and Interest Sensitivity. Impact of Inflation – Our assets and liabilities are primarily monetary in nature, and as such, future changes in prices do not affect the obligations to pay or receive fixed and determinable amounts of money. During inflationary periods, monetary assets lose value in terms of purchasing power and monetary liabilities have corresponding purchasing power gains. The concept of purchasing power is not an adequate indicator of the impact of inflation on financial institutions because it does not incorporate changes in our earnings. Capital Resources We require capital to fund loans, satisfy our obligations under the Bank’s letters of credit, meet the deposit withdrawal demands of the Bank’s customers, and satisfy our other monetary obligations. To the extent that deposits are not adequate to fund our capital requirements, we can rely on the funding sources identified above under the heading “Liquidity Management”. At March 31, 2022, the Bank had $130.0 million available through unsecured lines of credit with correspondent banks, and approximately $187.5 million available through the FHLB. Management is not aware of any demands, commitments, events or uncertainties that are likely to materially affect our ability to meet our future capital requirements. In addition to operational requirements, the Bank is subject to risk-based capital regulations, which were adopted and are monitored by federal banking regulators. These regulations are used to evaluate capital adequacy and require an analysis of an institution’s asset risk profile and off-balance sheet exposures, such as unused loan commitments and stand-by letters of credit. Based on capital ratios at March 31, 2022, the Bank was considered to be well-capitalized. ​ 54 Table of Contents The following table presents the Bank’s capital ratios as of the dates indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, 2022 December 31, 2021 Required for Capital Adequacy Purposes Required to be Well Capitalized Total Capital (to risk-weighted assets) ​ ​ ​ ​ ​ ​ ​ ​ ​ First United Bank & Trust ​ 14.77 % 14.97 % 8.00 % 10.00 % Tier 1 Capital (to risk-weighted assets) ​ ​ ​ ​ ​ ​ ​ ​ ​ First United Bank & Trust ​ 13.59 % 13.72 % 6.00 % 8.00 % Common Equity Tier 1 Capital (to risk-weighted assets) ​ ​ ​ ​ ​ ​ ​ ​ ​ First United Bank & Trust ​ 13.59 % 13.72 % 4.50 % 6.50 % Tier 1 Capital (to average assets) ​ ​ ​ ​ ​ ​ ​ ​ ​ First United Bank & Trust ​ 10.14 % 10.00 % 4.00 % 5.00 % ​ Contractual Obligations, Commitments and Off-Balance Sheet Arrangements Contractual Obligations The Corporation enters into contractual obligations in the normal course of business. Among these obligations are FHLB advances and junior subordinated debentures, operating lease agreements for banking and subsidiaries’ offices and for data processing and telecommunications equipment. Comparing March 31, 2022 to December 31, 2021, short-term borrowings increased by $1.2 million during the first three months of 2022. This increase was due to increased cash balances from existing Treasury Management accounts. Commitments Loan commitments are made to accommodate the financial needs of our customers. Letters of credit commit us to make payments on behalf of customers when certain specified future events occur. The credit risks inherent in loan commitments and letters of credit are essentially the same as those involved in extending loans to customers, and these arrangements are subject to our normal credit policies. We are not a party to any other off-balance sheet arrangements. Commitments to extend credit in the form of consumer, commercial and business at the dates indicated were as follows: ​ ​ ​ ​ ​ ​ ​ (in thousands) March 31, 2022 December 31, 2021 Residential Mortgage - home equity ​ $ 68,078 ​ $ 66,874 Residential Mortgage - construction ​ ​ 20,498 ​ ​ 18,657 Commercial ​ ​ 129,141 ​ ​ 136,897 Consumer - personal credit lines ​ ​ 4,494 ​ ​ 4,551 Standby letters of credit ​ ​ 15,643 ​ ​ 15,711 Total ​ $ 237,854 ​ $ 242,690 ​ The decrease of $4.8 million in commitments at March 31, 2022 when compared to December 31, 2021 was due to utilization of funds and balances moving to outstanding balances in the loan portfolio.