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Item 8. Financial Statements and Supplementary Data

2023-03-24 compared with 2022-03-25 · 282 added, 305 removed, 1436 unchanged (29% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firms (PCAOB ID:

173 ) and (PCAOB ID:

Report of Independent Registered Public Accounting Firm (PCAOB ID:

Consolidated Statements of Financial Condition at December 31, 2022 and 2021

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Notes to Consolidated Financial Statements for the years ended December 31, 2022 and 2021

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and Board of Directors of First United Corporation

Shareholders and the Board of Directors of First United Corporation

Oakland, Maryland

Opinion on the Financial Statements

We have audited the accompanying consolidated statement of financial condition of First United Corporation (the "Company") as of December 31, 2021, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the year then ended , in conformity with accounting principles generally accepted in the United States of America.

We have audited the accompanying consolidated statements of financial condition of First United Corporation (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the two year period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the two year period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's financial statements based on our audit.

Our responsibility is to express an opinion on the Company's financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Loan Losses – Qualitative Factors

As more fully described in Note 9 to the consolidated financial statements, the Company estimates and records an allowance for loan losses for loans collectively evaluated for impairment by developing a loss rate based on historical losses and qualitative factors.

Qualitative factors are used to adjust historical loss rates considering relevant factors such as national and local economic trends and conditions;

levels and trends in delinquency rates and non-accrual loans;

As more fully described in Note 6 to the consolidated financial statements, the Company estimates and

records an allowance for loan losses for loans collectively evaluated for impairment by developing a loss

rate based on historical losses and qualitative factors.

Qualitative factors are used to adjust historical loss

rates considering relevant factors such as national and local economic trends and conditions;

trends in delinquency rates and non-accrual loans;

trends in volumes and terms of loans;

effects of changes in lending policies;

effects of changes

in lending policies;

experience, ability, and depth of lending staff;

value of underlying collateral;

and concentrations of credit.

The application of the adjustments for qualitative factors to the historical loss rate calculation is subjective.

The principal considerations for our determination that auditing the qualitative factors is a critical audit matter is the high degree of judgment involved in the assessment of the risk of loss associated with each risk factor.

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concentrations of credit.

The application of the adjustments for qualitative factors to the historical loss rate

calculation is subjective.

The principal considerations for our determination that auditing the qualitative factors is a critical audit

matter is the high degree of judgment involved in the assessment of the risk of loss associated with each

Our audit procedures included substantive testing related to the qualitative factors.

Procedures included, among others:

included, among others:

● Evaluation of relevance and reliability of the data used to determine the qualitative factors and agreed to source documentation.

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March 24, 2023

Report of Independent Registered Public Accounting Firms

To the Shareholders and Board of Directors of

First United Corporation and Subsidiaries

Opinion on the Financial Statements

We have audited the accompanying consolidated statement of financial condition of First United Corporation and Subsidiaries (Corporation) as of December 31, 2020, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the year then ended, and the related notes (collectively, the consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Corporation as of December 31, 2020, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Corporation’s management.

Our responsibility is to express an opinion on the Corporation's consolidated financial statements based on our audit.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Corporation in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

The Corporation is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Corporation's internal control over financial reporting.

Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audit provides a reasonable basis for our opinion.

/s/ Baker Tilly US, LLP

We served as the Corporation’s auditor from 2006 to 2021.

Pittsburgh, Pennsylvania

March 25, 2021

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First United Corporation and Subsidiaries

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See notes to consolidated financial statements

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First United Corporation and Subsidiaries

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Net interest income

Provision/(credit) for loan losses

Credit for loan losses

Net interest income after provision for loan losses

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Contract labor

(Gains)/losses on sales and write downs of foreclosed real estate, net

Total OREO expense/(income), net

Investor relations

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See notes to consolidated financial statements

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First United Corporation and Subsidiaries

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Comprehensive Income

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

Other comprehensive income, net of tax and reclassification adjustments

Available for sale securities:

Unrealized holding gains/(losses) on investments with OTTI

Unrealized holding (losses)/gains on investments with OTTI

Reclassification adjustment for gains realized in income

Other comprehensive income/(losses) on investments with OTTI

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

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

Other comprehensive losses on all other AFS investments

Held to maturity securities:

Unrealized holding gains/(losses) on HTM investments

Unrealized holding losses on securities transferred to held to maturity

Reclassification adjustment for gains realized in income

Other comprehensive income on HTM investments

Reclassification adjustment for amortization realized in income

Other comprehensive (losses)/income on HTM investments

Cash flow hedges:

Unrealized holding gains/(losses) on cash flow hedges

Unrealized holding gains on cash flow hedges

Reclassification adjustment for gains realized in income

Other comprehensive income/(losses) on cash flow hedges

Other comprehensive income on cash flow hedges

Pension plan liability:

Unrealized holding gains/(losses) on pension plan liability

Reclassification adjustment for (gains) realized in income

Other comprehensive income/(losses) on pension plan liability

Unrealized holding gains on pension plan liability

Reclassification adjustment for amortization of unrecognized loss realized in income

Other comprehensive income on pension plan liability

SERP liability:

Unrealized holding losses on SERP liability

Reclassification adjustment for (gains) realized in income

Other comprehensive losses on SERP liability

Other comprehensive income/(losses) before income tax

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

Other comprehensive income/(loss), net of tax

Unrealized holding losses/(gains) on SERP liability

Reclassification adjustment for amortization of unrecognized loss realized in income

Other comprehensive gains/( losses) on SERP liability

Other comprehensive income before income tax

Income tax expense related to other comprehensive income

Other comprehensive (loss)/income, net of tax

Comprehensive Income

See notes to consolidated financial statements

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First United Corporation and Subsidiaries

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Balance at January 1, 2021

Other comprehensive loss, net of tax

Other comprehensive income, net of tax

Common stock issued - 28,044 shares

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Balance at December 31, 2021

Other comprehensive income, net of tax

Other comprehensive loss, net of tax

Common stock issued- 45,473 shares

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Stock based compensation

Stock repurchase - 400,000 shares

Balance at December 31, 2022

See notes to consolidated financial statements

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First United Corporation and Subsidiaries

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

Provision/(credit) for loan losses

Credit for loan losses

Stock based compensation

Gains on sales of other real estate owned

Amortization of intangible assets

Gains on sales of other real estate owned, net

Write-downs of other real estate owned

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Gains on sales of loans held for sale

(Gain)/loss 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

Net gain on sales of investment securities – available-for-sale

Net losses on calls of investment securities – held to maturity

Loss on equity investment

Net gain on calls of investment securities – available-for-sale

Net (gains)/losses on calls of investment securities – held to maturity

Amortization of deferred loan fees

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Operating lease liability

Increase in accrued interest receivable and other assets

Increase in accrued interest payable and other liabilities

Decrease/(increase) in accrued interest receivable and other assets

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

Net cash provided by operating activities

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Proceeds from disposal of fixed assets

Proceeds from BOLI

Net decrease/(increase) in FHLB stock

Net decrease/(increase) in loans

Net decrease in FHLB stock

Net (increase)/decrease in loans

Purchases of loans

Purchase of wealth portfolio

Acquisition of mortgage company

Purchases of premises and equipment

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Payments on long-term borrowings

Net cash (used)/provided by financing activities

(Decrease)/increase in cash and cash equivalents

Net cash provided by/(used in) financing activities

Decrease in cash and cash equivalents

Cash and cash equivalents at beginning of the year

Cash and cash equivalents at end of period

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Supplemental information

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Transfers from loans to other real estate owned

Transfers from securities available for sale to held-to-maturity

See notes to consolidated financial statements

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First United Corporation and Subsidiaries

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Summary of Significant Accounting Policies

First United Corporation is a Maryland corporation chartered in 1985 and a bank holding company registered with the Board of Governors of the Federal Reserve System (the “FRB”) under the Bank Holding Company Act of 1956, as amended, that elected financial holding company status in 2021.

The Corporation’s primary business is serving as the parent company of First United Bank & Trust, a Maryland trust company (the “Bank”), First United Statutory Trust I (“Trust I”) and First United Statutory Trust II (“Trust II” and together with Trust I, the “Trusts”), both Connecticut statutory business trusts.

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, that elected financial holding company status in 2021.

The Trusts were formed for the purpose of selling trust preferred securities that qualified as Tier 1 capital.

FULA was formed to provide investment advice and related services, but it is not yet active.

The Bank has two consumer finance company subsidiaries - 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.

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Basis of Presentation

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

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

All significant intercompany transactions and accounts have been eliminated.

Certain reclassifications have been made to prior year amounts to conform with current year classifications.

These reclassifications did not have a material impact on the Corporation’s consolidated financial condition or results of operations.

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.

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

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Significant Concentrations of Credit Risk

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At December 31, 2022, approximately 6 %, or $ 70.6 million, of total loans were secured by real estate acquisition, construction and development projects, with $ 70.4 million performing according to their contractual terms and $ 0.2 million considered to be impaired based on management’s concerns about the borrowers’ ability to comply with present repayment terms.

Of the $ 0.6 million in impaired loans, $ 0.4 million were performing, and $ 0.2 million were classified as troubled debt restructurings (“TDRs”) performing in accordance with their modified terms.

There were no

non-performing loans at December 31, 2021.

The $ 0.2 million in impaired loans were all classified as troubled debt restructurings (“TDRs”) performing in accordance with their modified terms.

There were no non-performing loans at December 31, 2022.

Additionally, loans collateralized by commercial rental properties represented 21 % of the total loan portfolio as of December 31, 2022.

Note 5 discusses the types of securities in which the Corporation invests and Note 6 discusses the Corporation’s lending activities.

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

The investment portfolio is classified and accounted for based on the guidance of Accounting Standards Codification (“ASC”) Topic 320, Investments – Debt and Equity Securities .

Securities bought and held principally for the purpose of selling them in the near term are classified as trading account securities and reported at fair value with unrealized gains and losses included in net gains/losses in other operating income.

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Management systematically evaluates securities for other than temporary 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 (i) the Corporation has the intent to sell a security being evaluated and (ii) it is more likely than not that the Corporation will be required to sell the security prior to its anticipated recovery.

Based upon application of accounting guidance for subsequent measurement in ASC Topic 320 (ASC Section 320-10-35) issued by the Financial Accounting Standards Board (“FASB”), management assesses whether (i) the Corporation has the intent to sell a security being evaluated and (ii) 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 values of securities below their cost that are considered other-than-temporary declines are split into two components.

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

Management performs due diligence on the third-party processes and believes that it 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 they are 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.

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.

Restricted Investment in Bank Stock

Restricted stock, which represents required investments in the common stock of the Federal Home Loan Bank (“FHLB”) of Atlanta, Atlantic Community Bankers Bank and Community Banker’s Bank, is carried at cost and is considered a long-term investment.

Management evaluates the restricted stock for OTTI in accordance with ASC Industry Topic 942, Financial Services – Depository and Lending (942-325-35).

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Management evaluates the restricted stock for OTTI in accordance with ASC Topic 942, Financial Services – Depository and Lending (942-325-35).

Management’s evaluation of potential impairment is based on its assessment of the ultimate recoverability of the cost of the restricted stock rather than by recognizing temporary declines in value.

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Management has evaluated the restricted stock for impairment and believes that no impairment charge is necessary as of December 31, 2022 or 2021.

The Corporation recognizes dividends on a cash basis.

The Corporation recognizes dividends on an accrual basis.

For the years ended December 31, 2022 and December 31, 2021, dividends of $ 36,558 and $ 134,836 , respectively, were recorded in other operating income.

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Loans that management has the intent to sell are reported at the lower of cost or fair value determined on an individual basis.

Loans held for sale were $ 0.1 million at December 31, 2021 and $ 3.5 million at December 31, 2020.

There were no loans held for sale at December 31, 2022, and $ 0.1 million loans were held for sale at December 31, 2021.

The segments of the Bank’s loan portfolio are disaggregated to a level that allows management to monitor risk and performance.

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The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification.

Loans in the Substandard category have well-defined weaknesses that jeopardize

the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected.

Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected.

All loans greater than 90 days past due are considered Substandard.

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Loan fees in excess of the costs incurred to originate the loan are recognized as income over the life of the loan utilizing either the interest method or the straight-line method, depending on the type of loan.

Generally, fees on loans with a specified maturity date, such as residential mortgages, are recognized using the interest method.

Generally, fees on loans

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with a specified maturity date, such as residential mortgages, are recognized using the interest method.

Loan fees for lines of credit are recognized using the straight-line method.

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otherwise loans in these segments are considered impaired when they are classified as non-accrual.

Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan

using one of three methods:

(i) the present value of expected future cash flows discounted at the loan’s effective interest rate;

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The discount rates in the appraisal discount grid are updated at least annually to reflect the most current knowledge that management has available, including the results of current appraisals.

If there is a delay in receiving an updated appraisal or if the appraisal is found to be deficient in our internal appraisal review process and re-ordered, the Bank continues to use a discount factor from the appraisal discount grid based on the collateral location and current appraisal age in order to determine the estimated fair value.

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grid based on the collateral location and current appraisal age in order to determine the estimated fair value.

If the general market conditions in that geographic market have changed considerably, the property has deteriorated or perhaps lost an income stream, or a recent appraisal for a similar property indicates a significant change, then management may adjust the fair value indicated by the existing appraisal until a new appraisal is obtained.

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Other intangible assets have finite lives and are reviewed for impairment annually.

At December 31, 2021, other intangible assets included $ 1.0 million for the purchase of a wealth book of business.

At December 31, 2022, other intangible assets included $ 0.8 million for the purchase of certain assets from a wealth company and $ 0.6 million for the purchase of certain assets of a mortgage company.

These assets are amortized over their estimated useful lives either on a straight-line or sum-of-the-years basis over varying periods that initially did not exceed 5 years .

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Bank-Owned Life Insurance (“BOLI”)

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Under the provisions of Topic 715, the defined benefit pension plan and the supplemental executive retirement plan are recognized as liabilities in the Consolidated Statement of Financial Condition, and unrecognized net actuarial losses, prior service costs and a net transition asset are recognized as a separate component of other comprehensive loss, net of tax.

Actuarial gains and losses in excess of 10 percent of the greater of plan

assets or the pension benefit obligation are amortized over a blend of future service of active employees and life expectancy of inactive participants.

Actuarial gains and losses in excess of 10 percent of the greater of plan assets or the pension benefit obligation are amortized over a blend of future service of active employees and life expectancy of inactive participants.

Refer to Note 16 for a further discussion of the pension plan and supplemental executive retirement plan obligations.

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Net cash flows are reported for customer loan and deposit transactions and interest-bearing deposits in banks.

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Trust Assets and Income

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When a share of capital stock is repurchased, the payment of the repurchase price reduces stated capital by the par value of that share (currently, $ 0.01 for common stock), and any excess over par value reduces capital surplus.

The Corporation repurchased 400,000 shares of common stock at a weighted average price of $ 17.95 during 2021 and 145,291 shares of common stock at a weighted average price of $ 18.96 during 2020.

The Corporation did not repurchase shares of common stock during 2022.

In 2021, the Corporation repurchased 400,000 shares of common stock at a weighted average price of $ 17.95 per share.

Recent Accounting Pronouncements

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2016-13 for smaller reporting companies, as defined by the Securities and Exchange Commission, including the Corporation, resulting in a required implementation date for the Corporation of January 1, 2023.

Management has formed a focus group consisting of multiple members from areas, including credit, finance, loan servicing, reporting, and information systems.

The Corporation is completing its data and model validation analyses, with parallel processing of our existing allowance for loan losses model with the CECL model to follow.

The Corporation is currently evaluating the provisions of ASU No.

2016-13 to determine the potential impact the new standard will have on the financial condition or results of operations.

The Corporation has completed its data and model valuation analyses as well as parallel processing of current ALL and CECL calculation.

The Corporation has largely completed its assessment of related processes, internal controls, and data sources and has developed, documented, and validated a discounted cash flows model utilizing a third-party software provider.

The Corporation anticipates that the Corporation and the Bank will continue to be well capitalized after the negative impact resulting from the adoption of CECL.

In March 2020, the FASB issued ASU No.

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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.

Subsequent Event

Subsequent to December 31, 2021, the Company transferred investments that were classified as available for sale to the held to maturity classification.

The investment securities had a cost basis of approximately $ 149.0 million and a fair market value of approximately $ 139.0 million at the time of transfer.

There was no impact to the income statement as a result of the reclassification.

This transfer was to mitigate the potential future impact to capital through accumulated other comprehensive loss in consideration of a rising interest rate environment and the impact of rising rates on the market value of the fixed income bond portfolio.

The Company believes that it maintains sufficient liquidity for future business needs.

Paycheck Protection Program (“PPP”)

The Corporation continued to actively participate in the PPP administered by the Small Business Administration (the “SBA”).

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

During 2020, a total of $ 148.9 million in PPP loans were originated under the first two rounds of funding, consisting of 1,174 loans with an average loan size of $ 162 thousand.

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

Net fees recognized in 2021 were $ 4.0 million due to amortization and forgiveness, compared to $ 2.0 million in 2020.

During 2020, 290 loans, totaling $ 34.5 million were forgiven, resulting in 884 loans with a remaining balance of $ 114.0 million at December 31, 2020.

During 2021, an additional 1,631 loans with an aggregate principal balance of $ 172.6 million, were forgiven, resulting in 65 loans with a remaining balance of $ 7.7 million at December 31, 2021.

Of the 2,044 PPP loans originated by the Bank since the PPP’s inception, 1,978 loans, totaling $ 207.5 million, have been forgiven through December 31, 2021 representing 97 % of the number of loans originated and 96 % 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 Coronavirus Aid, Relief, and Economic Security Act and related regulatory pronouncements, we have not accounted for modifications of loans affected by the pandemic as troubled debt restructurings nor have we designated them as past due or nonaccrual.

As of December 31, 2021, total loan modifications of $ 9.4 million were performed in accordance with the CARES Act.

This amount included 13 commercial loans related to real estate rental, food services and health care sectors.

These loans are scheduled to return to contractual payment terms within the first quarter of 2022.

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

Troubled Debt Restructurings and Vintage Disclosures.

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

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

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

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

The Corporation’s current plan is to adopt ASU 2016-13 effective January 1, 2023 at which time it will also implement ASU 2022-02.

The Corporation has determined that ASU 2022-02 will have minimal impact to its financial condition or results of operations.

Earnings Per Common Share

Basic earnings per common share is derived by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period and does not include the effect of any

potentially dilutive common stock equivalents.

Diluted earnings per share is derived by dividing net income available to common shareholders by the weighted-average number of shares outstanding, adjusted for the dilutive effect of outstanding common stock equivalents.

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Restricted stock units

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The following table summarizes the gain/(loss) activity for the years ended December 31, 2022 and 2021:

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Available-for-sale securities:

Realized gains

Realized gains from sales and calls

Realized losses

Held-to-Maturity:

Realized gains on calls

Realized losses

Loss on equity investment

Gains on sale of consumer loans

Gain/(loss) on disposal of fixed assets

Gains on sale of loans held for sale

Gain on disposal of fixed assets

Regulatory Capital Requirements

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 a number of funding sources, including an unsecured Fed Funds lines of credit with upstream correspondent banks;

secured advances with the FHLB of Atlanta, which are collateralized by eligible one to four family residential mortgage loans, home equity lines of credit, and commercial real estate loans.

Cash and securities may also be pledged as collateral.

In addition, First United Corporation has a secured line of credit with the Fed Discount Window for use in borrowing funds up to 90 days, using municipal securities as collateral;

brokered deposits, including CDs;

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

At December 31, 2021, the Bank had $ 130.0 million available through unsecured lines of credit with correspondent banks, $ 1.0 million through a secured line of credit with the Fed Discount Window and approximately $ 188.2 million at 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.

The following table presents our capital ratios for years ended December 31, 2021 and 2020:

Banks and holding companies are subject to regulatory capital requirements administered by federal banking agencies.

Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices.

Capital amounts and classifications are also subject to qualitative judgments by regulators.

Failure to meet capital requirements can initiate regulatory action.

The net unrealized gain or loss on available for sale securities is included in computing regulatory capital.

Management believes that, as of December 31, 2022, the Corporation and Bank met all capital adequacy requirements to which they are subject.

Prompt corrective action regulations provide five classifications:

well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition.

If adequately capitalized, regulatory approval is required to accept brokered deposits.

If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.

As of December 31, 2022, the most recent regulatory notification categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.

There are no conditions or events since that notification that management believes have changed the Bank’s category.

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The following table presents First United Bank & Trust’s capital ratios for years ended December 31, 2022 and 2021:

For Capital Adequacy

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Total Capital (to risk-weighted assets)

First United Bank & Trust

Tier 1 Capital (to risk-weighted assets)

First United Bank & Trust

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

First United Bank & Trust

Tier 1 Capital (to average assets)

First United Bank & Trust

For Capital Adequacy

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Total Capital (to risk-weighted assets)

First United Bank & Trust

Tier 1 Capital (to risk-weighted assets)

First United Bank & Trust

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

First United Bank & Trust

Tier 1 Capital (to average assets)

First United Bank & Trust

As of December 31, 2021 and 2020, the most recent notifications from the regulators categorized First United Corporation and the Bank as “well capitalized” under the regulatory framework for prompt corrective action.

Federal and state banking regulations place certain restrictions on the amount of dividends paid and loans or advances made by the Bank to First United Corporation.

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In addition, dividends paid by the Bank to First United Corporation would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements.

Cash and Cash Equivalents

Cash and due from banks, which represents vault cash in the retail offices and invested cash balances at the Federal Reserve, is carried at fair value.

(in thousands)

December 31, 2021

December 31, 2020

Cash and due from banks, weighted average interest rate of 0.10 % and 0.18 % (at December 31, 2021 and 2020)

Interest bearing deposits in banks, which represent funds invested at a correspondent bank, are carried at fair value and, as of December 31, 2021 and 2020, consisted of daily funds invested at the FHLB of Atlanta.

In addition, at December 31, 2021, cash was pledged at Raymond James for the interest rate swap.

(in thousands)

December 31, 2021

December 31, 2020

FHLB daily investments, interest rate of 0.01 % and 0.36 % (at December 31, 2021 and 2020)

Raymond James pledged cash, interest rate of 0.07 % and 0.09 % (at December 31, 2021 and 2020)

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Investment Securities

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Obligations of states and political subdivisions

Corporate Bonds

Collateralized debt obligations

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Held to Maturity:

government agencies

Residential mortgage-backed agencies

Commercial mortgage-backed agencies

Collateralized mortgage obligations

Obligations of states and political subdivisions

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Commercial mortgage-backed agencies

Collateralized mortgage obligations

Obligations of states and political subdivisions

Total held to maturity

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Proceeds from sales of available-for-sale securities and the realized gains and losses for the years ended December 31, 2022 and 2021 are as follows:

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Obligations of states and political subdivisions

Corporate Bonds

Collateralized debt obligations

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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

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Less than 12 months

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Collateralized mortgage obligations

Obligations of states and political subdivisions

Collateralized debt obligations

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Total held to maturity

Each of these investment securities has been evaluated for OTTI.

In performing a detailed cash flow analysis of each investment security, 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”)

There were no other than temporary impairment charges related to credit losses or sales of these securities during the years ended December 31, 2021 or 2020.

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 they are qualified to provide the analysis and pricing determinations.

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 was realized during the time period 2009 through 2011 on the CDO portfolio remaining at December 31, 2021.

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 December 31, 2021 and December 31, 2020.

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 December 31, 2021 was not active and markets for similar securities were also not active.

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

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

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

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

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

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

Given the conditions in the current debt markets and the absence of observable transactions in the secondary and new issue markets, management has determined that (a) the few observable transactions and market quotations that are available are not reliable for the purpose of obtaining fair value at December 31, 2021, (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, 2020 and December 31, 2021.

Management systematically evaluates securities for impairment on a quarterly basis.

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

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

The first is the loss attributable to declining credit quality.

Credit losses are recognized in earnings as realized losses in the period in which the impairment determination is made.

The second component consists of all other losses.

The other losses are recognized in other comprehensive income.

In estimating OTTI charges, management considers (a) the length of time and the extent to which the fair value has been less than cost, (b) adverse conditions specifically related to the security, an industry, or a geographic area, (c) the historic and implied volatility of the security, (d) changes in the rating of a security by a rating agency, (e) recoveries or additional declines in fair value subsequent to the balance sheet date, (f) failure of the issuer of the security to make scheduled interest payments, and (g) 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.

Management has concluded that no OTTI occurred for the years ended December 31, 2022 and 2021.

The following table presents a cumulative roll-forward of the amount of OTTI charges related to credit losses which have been recognized in earnings for the trust preferred securities in the CDO portfolio held and not intended to be sold for the years ended December 31, 2022 and 2021:

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Balance of credit-related OTTI at December 31

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

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Available for sale:

Due in one year or less

Due after one year through five years

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Held to Maturity:

Due after one year through five years

Due after five years through ten years

Due after ten years

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Total held to maturity

At December 31, 2021 and 2020, investment securities with a value of $ 158.7 million and $ 137.1 million, respectively, were pledged as permitted or required to secure public deposits, for securities sold under agreements to repurchase as required or permitted by law and as collateral for borrowing capacity.

At December 31, 2022 and 2021, investment securities with a fair value of $ 209.8 million and $ 158.7 million, respectively, were pledged as permitted or required to secure public deposits, for securities sold under agreements to repurchase as required or permitted by law and as collateral for borrowing capacity.

Loans and Related Allowance for Loan Losses

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Loans or advances

Changes due to change in status

Balance at December 31

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The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention and Substandard.

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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 $ 7.5 million in non-owner occupied offset the decreases in the commercial and industrial and all other commercial real estate categories of $ 3.8 million and $ 3.3 million, respectively.

In accordance with the CARES Act, as of December 31, 2021, total loan modifications were $ 9.4 million.

This amount included 13 commercial loans related to real estate rental, food services and health care sectors.

These loans are scheduled to return to contractual payment terms within the first quarter of 2022.

Of these 13 loans, five are classified as pass, six are classified as special mention, and two classified as substandard.

The pandemic triggered the Bank to proactively communicate with borrowers initially based on types of industry deemed to be at a higher risk level (i.e.

hospitality, accommodations, etc.).

This was then expanded to our top borrowers regardless of industry.

Discussions evolved into weekly meetings between borrowers and Bank personnel;

with the goal being to provide assistance to the communities we serve.

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

Loans under modification are reported as current in accordance with CARES Act requirements:

(in thousands)

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Non-accrual loans that have been subject to partial charge-offs totaled $ 0.1 million at December 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 December 31, 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.

There were no loans secured by 1-4 family residential real estate properties in the process of foreclosure at December 31, 2022.

Loans secured by 1-4 family residential real estate properties in the process of foreclosure totalled $ 0.2 million at 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 increased to 0.31 % at December 31, 2021 compared to 0.20 % at December 31, 2020.

As a percentage of the loan portfolio, accruing loans past due 30 days or more decreased to 0.16 % at December 31, 2022 compared to 0.31 % at December 31, 2021.

The ALL is maintained to absorb losses from the loan portfolio.

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The Bank’s methodology for determining the ALL is based on the requirements of ASC Section 310-10-35, Receivables-Overall-Subsequent Measurement , for loans individually evaluated for impairment and ASC Subtopic 450-20, Contingencies - Loss Contingencies , for loans collectively evaluated for impairment, as well as the Interagency

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Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance.

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All other A&D

Commercial and industrial

Residential mortgage

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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.

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.

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“Pass” rated credits are segregated from “Criticized” credits for the application of qualitative factors.

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ALL balance at January 1, 2022

Provision (credit)

ALL balance at December 31, 2022

ALL balance at January 1, 2021

Provision (credit)

ALL balance at December 31, 2021

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The granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the

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application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date.

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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.

See Note 3 for more details on loan modifications and the CARES Act.

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

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The following table presents the volume and recorded

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investment at the time of modification of TDRs by class and type of modification that occurred during the periods indicated:

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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

For the year ended December 31, 2021

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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 years ended December 31, 2022 and 2021, there were no payment defaults.

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(in thousands)

Commercial real estate

Acquisition and development

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Rental and other income

Total OREO (income)/ expenses, net

Total OREO expenses/(income), net

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Premises and Equipment

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Less accumulated depreciation

The Corporation recorded depreciation expense of $ 3.3 million for each of the years ended December 31, 2021 and 2020.

The Corporation recorded depreciation expense of $ 3.1 million and $ 3.3 million for the years ended December 31, 2022 and 2021, respectively.

Substantially all of the leases in which the Corporation is the lessee are comprised of real estate property for branches, ATM locations, and office equipment with terms extending through 2030.

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The present value of lease payments is reported as a lease liability and right of use asset on the Corporation’s Consolidated Statement of Financial Condition.

The following table represents the Consolidated Statements of Financial Condition classification of the Corporation’s ROU assets and lease liabilities.

The following table represents the Consolidated Statements of Financial Condition classification of the Corporation’s right-of-use assets and lease liabilities.

The Corporation elected not to include short-term leases (i.e., leases with remaining terms of 12 months or less), or equipment leases that were deemed immaterial on the Consolidated Statement of Financial Condition.

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The Corporation elected, for all classes of underlying assets, to separate lease and non-lease components.

Total operating lease expense was $ 0.5 million for the year ended December 31, 2021 and December 31, 2020.

Total operating lease expense was $ 0.5 million for each of the years ended December 31, 2022 and December 31, 2021.

Short-term lease expense was $ 20 thousand for the year ended December 31, 2022 and December 31, 2021.

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Future minimum payments for operating leases with initial or remaining terms of one year or more at December 31, 2022 were as follows:

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Time deposits that exceed the FDIC insurance limit of $250,000 at December 31, 2022 and 2021 were $ 37.5 million and $ 44.6 million, respectively.

At December 31, 2021 and 2020, $ 0.9 million and $ 0.2 million of deposit overdrafts were re-classified as loans respectively.

At December 31, 2022 and 2021, $ 0.3 million and $ 0.9 million, respectively, of deposit overdrafts were re-classified as loans.

The following is a summary of the scheduled maturities of all time deposits maturing within years ended December 31:

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Repurchase agreements were secured by $ 74.6 million in investment securities at December 31, 2022 and $ 69.3 million at December 31, 2021.

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In March 2004 , Trust I and Trust II issued preferred securities with an aggregate liquidation amount of $ 30.0 million to third-party investors and issued common equity with an aggregate liquidation amount of $ 0.9 million to First United Corporation.

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(In thousands)

FHLB advances, 0.00 % at December 31, 2021 and bearing fixed interest rates ranging from 1.37 % to 2.90 % at December 31, 2020

Junior subordinated debt

Total long-term debt

The contractual maturities of long-term borrowings at December 31, 2021 are as follows:

(in thousands)

Total long-term debt

The contractual maturities of the long-term borrowings outstanding at December 31, 2022 is 2034.

The Bank has a borrowing capacity agreement with the FHLB in an amount equal to 30 % of the Bank’s assets.

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FHLB Advances - During 2021, the Company prepaid the $ 70.0 million of FHLB advances for a prepayment penalty of $ 2.4 million

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Goodwill and Other Intangible Assets

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Amortizing intangible assets:

Other intangibles

Intangible assets associated with purchase of wealth portfolio

Intangible assets associated with acquisition of mortgage company

Total Other intangibles

The following table presents the estimated future amortization expense for amortizing intangible assets within the years ending December 31:

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Total amortizing intangible assets

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Accumulated Other Comprehensive Loss (“AOCL”)

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Balance - December 31, 2022

The following tables present the components of other comprehensive loss for the years ended December 31, 2021 and 2020:

Components of Other Comprehensive Income

The following tables present the components of other comprehensive (loss)/income for the years ended December 31, 2022 and 2021:

Components of Other Comprehensive Loss

(in thousands)

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Available for sale (AFS) securities with OTTI:

Unrealized holding gains

Unrealized holding losses

accretable yield recognized in income

Net unrealized gains on investments with OTTI

Net unrealized losses on investments with OTTI

Available for sale securities – all other:

Unrealized holding losses

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

gains recognized in income

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Held to maturity securities:

Unrealized holding gains

Unrealized holding losses on securities transferred to held to maturity

gains recognized in income

amortization recognized in income

Net unrealized gains on HTM securities

Net unrealized losses on HTM securities

Cash flow hedges:

Unrealized holding gains

amortization recognized in income

Net unrealized gains on cash flow hedges

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amortization of unrecognized loss

amortization of prior service costs

Net pension plan liability adjustment

Unrealized net actuarial loss

Unrealized net actuarial gain

amortization of unrecognized loss

amortization of prior service costs

Net SERP liability adjustment

Other comprehensive income

Components of Other Comprehensive Loss

Other comprehensive loss

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Components of Other Comprehensive Income

(in thousands)

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Available for sale (AFS) securities with OTTI:

Unrealized holding losses

Unrealized holding gains

accretable yield recognized in income

Net unrealized losses on investments with OTTI

Net unrealized gains on investments with OTTI

Available for sale securities – all other:

Unrealized holding gains

Unrealized holding losses

gains recognized in income

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Held to maturity securities:

Unrealized holding gains

amortization recognized in income

1 unchanged sentence

Cash flow hedges:

Unrealized holding losses

amortization recognized in income

Net unrealized losses on cash flow hedges

Unrealized holding gains

Net unrealized gains on cash flow hedges

Pension Plan:

Unrealized net actuarial loss

Unrealized net actuarial gain

amortization of unrecognized loss

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amortization of unrecognized loss

amortization of prior service costs

Net SERP liability adjustment

Other comprehensive loss

Other comprehensive income

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The following tables present the details of accumulated other comprehensive loss components for the years ended December 31, 2022 and 2021:

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Interest income on taxable investment securities

Gains recognized

Net gain/(losses)

Provision for income tax expense

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Total reclassifications for the period

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Details of Accumulated Other Comprehensive Loss Components

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Income tax expense for the year

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The reconciliation between the statutory federal income tax rate and effective income tax rate for the years ended December 31, 2022 and 2021 is as follows:

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Lease right-of-use asset

Derivative contract

Total deferred tax liabilities

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If the Corporation were to determine that it will not be able to realize a portion of its net deferred tax asset in the future for which there is currently no valuation allowance, an adjustment to the net deferred tax asset would be charged to earnings in the period such determination was made.

Conversely, if the Corporation were to make a

determination that it is more likely than not that the deferred tax assets for which there is a valuation allowance will be realized, the related valuation allowance would be reduced and a benefit would be recorded.

Conversely, if the Corporation were to make a determination that it is more likely than not that the deferred tax assets for which there is a valuation allowance will be realized, the related valuation allowance would be reduced and a benefit would be recorded.

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At December 31, 2022, the Corporation had Maryland net operating losses (“NOLs”) and other MD carryforwards of $ 41.0 million for which a deferred tax asset of $ 2.9 million has been recorded.

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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 $ 15,000 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.

In May 2022, a total of 14,940 fully vested shares of common stock were issued to directors, which had a grant date fair value of $ 18.92 per share.

Director stock compensation expense was $ 266,920 for the year ended December 31, 2022 and $ 250,575 for the year ended December 31, 2021.

During the year ended December 31, 2022, employee stock compensation was $ 79,464 .

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 and (b) a time-vesting award that will vest ratably over a three year period.

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

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

Threshold performance is the minimum level of acceptable performance as defined by the Committee

and maximum performance represented a level potentially achievable under ideal circumstances.

Achievement of the threshold performance level would result in each executive participant earning a payout at 50 % of his or her respective target award opportunity.

Threshold performance is the minimum level of acceptable performance as defined by the Committee and maximum performance represented a level potentially achievable under ideal circumstances.

Achievement of the threshold performance level would result in each executive participant earning a payout at 50 % of his or her respective

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target award opportunity.

Achievement of the target performance level would result in the executive participant earning the target award and achievement at or above the maximum performance level would result in the executive participant earning 150 % of the target opportunity.

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

For the performance period ending December 31, 2024, the RSUs performance goals are based on earnings per share for the year ending December 31, 2024 and growth in tangible book value per share during the performance period.

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

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On March 26, 2021, 1,690 of the 5,070 time vesting shares were issued to participants.

On March 28, 2022, 1,688 of the 5,070 time vesting shares were issued to participants.

Stock compensation expense was $ 73,816 and $ 98,842 for the years ended 2022 and 2021, respectively.

Unrecognized compensation expense at December 31, 2021 related to unvested RSUs was $ 89,710 .

Unrecognized compensation expense as of December 31, 2022 related to unvested RSUs was $ 15,895 .

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 $ 44,190 for the year ended December 31, 2021.

Unrecognized compensation expense as of December 31, 2021 related to unvested units was $ 154,664 .

The time-vesting RSUs will vest ratably over a three year period that began on May 5, 2022.

On May 5, 2022, 1,230 of the 3,693 time vested shares were issued to participants.

Stock compensation expense was $ 66,285 and $ 44,190 for the year ended December 31, 2022 and 2021, respectively.

Unrecognized compensation expense as of December 31, 2022 related to unvested RSUs was $ 88,380 .

In March 2022, RSUs relating to 8,096 performance vesting shares and 6,238 time vesting shares (target level) for the 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 three year period ending December 31, 2024.

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

Stock compensation expense was $ 78,436 for the year ending December 31, 2022.

Unrecognized compensation expense as of December 31, 2022 related to unvested RSUs was $ 235,307 .

Employee Benefit Plans

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Pension benefits for these participants will be managed through discretionary contributions to the First United Corporation 401(k) Profit Sharing Plan (the “401(k) Plan”).

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During 2001, the Bank established an unfunded Defined Benefit Supplemental Executive Retirement Plan (“Defined Benefit SERP”).

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In addition, the Contribution Agreement conditions entitlement to the amounts held in the Employer Account on the participant (a) refraining from engaging in Competitive Employment (as defined in the Contribution Agreement) for three years following his or her Separation from Service, (b) refraining from injurious disclosure of confidential information concerning the Corporation, and (c) 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 (b) 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 $ 63,029 of related compensation expense for the year ended December 31, 2021 and $ 63,029 for the year ended December 31, 2020.

The contributions had a two year vesting period that ended on December 31, 2021.

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

The Corporation recorded $ 50,628 of related compensation expense for 2021 related to these contributions.

The Corporation recorded $ 50,628 of related compensation expense for 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 $ 51,844 of related compensation expense for 2022.

Each discretionary contribution has a two year vesting period.

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The following tables summarize benefit obligation and funded status, plan asset activity, components of net pension cost, and weighted average assumptions for the Pension Plan and the Defined Benefit SERP:

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Change in discount rate and mortality assumptions

Actuarial losses

Actuarial (gains)/losses

Benefits paid

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To address the variability over time of both risk and return, the plan investment strategy entails a dynamic approach to asset allocation, providing for normalized targets for major asset classes, with the ability to tactically adjust within the following specified ranges around those targets.

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Decisions regarding tactical adjustments within the above noted ranges for asset classes are based on a top down review of factors expected to have material impact on the risk and reward dynamics of the portfolio as a whole.

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For example, current investment policies restrict initial investments in debt securities to be rated investment grade at the time of purchase.

Also, with the exception of the highest rated securities (e.g.

Also, with the exception of the highest rated securities (e.g., U.S.

Treasury or government-backed agency securities), no more than 10% of the portfolio may be invested in a single entity’s securities.

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The Large cap equities includes 194,124 shares of First United Corporation common stock at December 31, 2022 and 2021

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December 31, 2021

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As of December 31, 2022, the 25-year average return on pension portfolio assets was 6.60 %, exceeding the expected long-term return of 6.50 % utilized for 2022.

Considering that future equity returns are partially a function of

current starting valuations and the general level of interest rates, return expectations and forecasts by the majority of market analysts have been lowered.

With equity valuations that have exceeded pre-pandemic highs, elevated inflation, and the prospect of policy normalization going forward, it is considered appropriate to maintain the forward expected long-term rate of return at 6.50 %.

Considering that future equity returns are partially a function of current starting valuations and the general level of interest rates, return expectations by market analysts have risen due to the large equity pullback and interest rates rising to multiyear highs.

With equity valuations near historical averages and the monetary policy normalization process likely being near conclusion, it is considered appropriate to maintain the expected long-term rate of return of 6.5 % for 2023.

Estimated cash flows related to expected future benefit payments from the Pension Plan and Defined Benefit SERP are as follows:

(In thousands)

First United Corporation made no contributions to the Pension Plan in 2021 and contributed $ 1.0 million in 2020.

First United Corporation made no contributions to the Pension Plan in 2022 or 2021.

First United Corporation will continue to evaluate future annual contributions to the Pension Plan based upon its funded status and an evaluation of the future benefits to be provided thereunder.

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(In thousands)

Net actuarial loss

Net actuarial loss (gains)

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401(k) Profit Sharing Plan

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This match is accrued for all participants, including executive officers, immediately upon entering the plan on the first day of the month following the completion of 30 days of employment.

The employee must be a plan participant and be actively employed on the last day of the plan year to share in the employer matching contribution, except in the case of death, disability or retirement of the participant.

Additionally, First United Corporation accrued a non-elective employer contribution during 2022 for all employees other than employees who participate in the Defined Benefit SERP and Defined Contribution SERP and those employees meeting the age plus service requirement in the Pension Plan equal to 4.0 % of each employee’s salary, and 0.5 % of each employee’s salary hired before January 1, 2010, which will be paid in the first quarter of 2023.

The employee must be a plan participant and be actively employed on the last day of the plan year to share in the discretionary profit sharing contribution, except in the case of death, disability, or retirement of the participant.

Expense charged to operations for the 401(k) Plan was $ 1.3 million in 2022 and $ 1.2 million in 2021.

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The Bank is required to maintain cash reserves with the Federal Reserve Bank of Richmond based on specified deposit liabilities.

Effective March 26, 2020, the Federal Reserve Board reduced reserve requirement ratios to 0 %.

Effective March 26, 2020, the FRB reduced reserve requirement ratios to 0 %.

This action eliminated reserve requirements for all depository institutions.

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Standby letters of credit

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We do not issue any guarantees that would require liability recognition or disclosure other than the standby letters of credit issued by the Bank.

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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.

Their fair values were determined based

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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.

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

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

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Obligations of states and political subdivisions

Corporate bonds

Collateralized debt obligations

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Impaired loans

Equity investment

Equity investments

Other real estate owned

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Impaired loans

Equity investment

Other real estate owned

There were no transfers of assets between any of the levels of the fair value hierarchy for the years ended December 31, 2022 or December 31, 2021.

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

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Discount Rate

Libor + 3.25 %

Range of low to mid 300 and low to high 400

Non-recurring:

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10.0 % to 15.0 %

(weighted avg 13.2 %)

Equity Investment

Equity Investments

Market Method

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(weighted avg 13.2 %)

Equity Investment

Market Method

Revenue Multiples

Other Real Estate Owned

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

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The following tables show a reconciliation of the beginning and ending balances for fair valued assets measured using Level 3 significant unobservable inputs for the years ended December 31, 2022 and 2021:

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Accordingly, the aggregate fair values presented do not represent the underlying value of the Corporation.

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The following table presents fair value information about financial instruments, whether or not recognized in the statement of financial condition, for which it is practicable to estimate that value.

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Restricted bank stock

Financial derivative

Accrued interest receivable

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Deposits – time deposits

Financial derivative

Short-term borrowed funds

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Off balance sheet financial instruments

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Derivative Financial Instruments

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The Corporation’s performance obligation is generally satisfied over

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time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate.

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Total Noninterest Income

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Parent Company Only Financial Information

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Unrealized losses on AFS Securities, net of tax

Unrealized gains/(losses) on cash flow hedges, net of tax

Other comprehensive loss, net of tax

Unrealized gains on cash flow hedges, net of tax

Other comprehensive income/(loss), net of tax

Comprehensive income

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Condensed Statements of Cash Flows

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Increase in other assets

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

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

Stock compensation

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Net cash used in financing activities

Increase/(decrease) in cash and cash equivalents

Increase in cash and cash equivalents

Cash and cash equivalents at beginning of year

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Accumulated Other Comprehensive Loss

Components of Other Comprehensive Loss (in thousands)

Components of Other Comprehensive Income/(Loss) (in thousands)

Tax (Expense)

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Unrealized holding gains

Other comprehensive loss

Other comprehensive income

For the year ended December 31, 2021

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Cash flow hedges:

Unrealized holding losses

Unrealized holding gains

Other comprehensive loss

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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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-K

Item 8. Financial Statements and Supplementary Data