What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2023-05-12 compared with 2022-11-10 · 613 added, 708 removed, 708 unchanged (65% of the section changed)

3 unchanged sentences

(In thousands, except share data - Unaudited)

September 30,

Cash and due from banks

2 unchanged sentences

Investment securities – available for sale (at fair value)

Investment securities – held to maturity (fair value $ 205,745 at September 30, 2022 and $ 65,369 at December 31, 2021)

Investment securities – held to maturity (fair value $ 204,541 at March 31, 2023 and $ 203,080 at December 31, 2022)

Restricted investment in bank stock, at cost

1 unchanged sentence

Unearned fees

Allowance for loan losses

Allowance for credit losses

Premises and equipment, net

4 unchanged sentences

Right of use assets

Trust receivable

Pension asset

8 unchanged sentences

SERP deferred compensation

Pension Liability

Allowance for credit losses on off-balance sheet credit exposures

Accrued interest payable and other liabilities

4 unchanged sentences

Authorized 25,000,000 shares;

issued and outstanding 6,659,390 shares at September 30, 2022 and 6,620,955 at December 31, 2021

issued and outstanding 6,688,710 shares at March 31, 2023 and 6,666,428 at December 31, 2022

Retained earnings

6 unchanged sentences

(In thousands, except per share data)

Nine Months Ended

September 30,

Three Months Ended

Interest income

13 unchanged sentences

Net Interest income

Provision for loan losses

Net interest income after provision for loan losses

Credit loss expense/(credit) - loans

Credit loss expense/(credit) - off-balance sheet credit exposures

Credit loss expense/(credit)

Net interest income after provision for credit losses

Other operating income

Net gains on investments, available for sale

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

Net gains on sale of residential mortgage loans

17 unchanged sentences

Contract labor

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

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

Investor relations

Settlement expense

FHLB prepayment penalty

Contributions

9 unchanged sentences

First United Corporation and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share data)

Three Months Ended

September 30,

Interest income

Interest and fees on loans

Interest on investment securities

Exempt from federal income tax

Total investment income

Total interest income

Interest expense

Interest on deposits:

Interest-bearing transaction accounts

Time deposits

Total interest on Deposits

Interest on short-term borrowings

Interest on long-term borrowings

Total Interest Expense

Net Interest income

Provision for loan losses

Net interest income after provision for loan losses

Other operating income

Net gains on investments, held to maturity

Gains on sale of residential mortgage loans

Service charges on deposit accounts

Other service charges

Trust department

Debit card income

Bank owned life insurance

Brokerage commissions

Total other income

Total other operating income

Other operating expenses

Salaries and employee benefits

FDIC premiums

Data processing

Professional services

Contract labor

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

Investor relations

Contributions

FHLB prepayment penalty

Total other operating expenses

Income before income tax expense

Provision for income tax expense

Basic net income per common share

Diluted net income per common share

Weighted average number of basic shares outstanding

Weighted average number of diluted shares outstanding

Dividends declared per common share

See accompanying notes to the consolidated financial statements

First United Corporation and Subsidiaries

Consolidated Statements of Comprehensive (Loss)/Income

(In thousands)

Nine Months Ended

September 30,

Comprehensive (Loss)/Income

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

Available for sale securities:

Unrealized holding (losses)/gains on investments with OTTI

Reclassification adjustment for accretable yield realized in income

Other comprehensive (loss)/income on investments with OTTI

Unrealized holding losses on all other AFS investments

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

Reclassification adjustment for gains realized in income

Other comprehensive losses on all other AFS investments

Held to Maturity Securities

Unrealized holding losses on securities transferred to held to maturity

Reclassification adjustment for gains/(losses) realized in income

Reclassification adjustment for amortization realized in income

Other comprehensive (losses)/income on HTM investments

Cash flow hedges:

Unrealized holding gains on cash flow hedges

Reclassification adjustment for gains realized in income

Other comprehensive income on cash flow hedges

Pension plan liability:

Unrealized holding (losses)/gains on pension plan liability

Reclassification adjustment for amortization of unrecognized loss realized in income

Other comprehensive (loss)/income on pension plan liability

SERP liability:

Unrealized holding losses on SERP liability

Reclassification adjustment for amortization of unrealized loss realized in income

Other comprehensive income on SERP liability

Other comprehensive (losses)/gains before income tax

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

Other comprehensive (loss)/income, net of tax

Comprehensive (loss)/income

See accompanying notes to the consolidated financial statements

First United Corporation and Subsidiaries

Consolidated Statements of Comprehensive (Loss)/Income

Consolidated Statements of Comprehensive Income/ (Loss)

(In thousands)

Three Months Ended

September 30,

Comprehensive Income (in thousands)

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

Comprehensive Income/(Loss)

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

Available for sale securities:

2 unchanged sentences

Other comprehensive (loss)/income on investments with OTTI

Unrealized holding losses on all other AFS investments

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

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

Reclassification adjustment for gains realized in income

Other comprehensive losses on all other AFS investments

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

Held to Maturity Securities

Unrealized holding losses on securities transferred to held to maturity

Reclassification adjustment for gains realized in income

Reclassification adjustment for amortization realized in income

Other comprehensive income on HTM investments

Other comprehensive income/(losses) on HTM investments

Cash flow hedges:

Unrealized holding gains on cash flow hedges

Reclassification adjustment for gains realized in income

Other comprehensive income on cash flow hedges

Unrealized holding (losses)/gains on cash flow hedges

Reclassification adjustment for (losses)/gains realized in income

Other comprehensive (loss)/income on cash flow hedges

Pension plan liability:

Unrealized holding losses on pension plan liability

Unrealized holding gains/(losses) on pension plan liability

Reclassification adjustment for amortization of unrecognized loss realized in income

Other comprehensive losses on pension plan liability

Other comprehensive income/(loss) on pension plan liability

SERP liability:

1 unchanged sentence

Reclassification adjustment for amortization of unrealized loss realized in income

Other comprehensive income on SERP liability

Other comprehensive losses before income tax

Income tax benefit related to other comprehensive income

Other comprehensive loss, net of tax

Comprehensive income

Other comprehensive (loss)/income on SERP liability

Other comprehensive gains/(losses) before income tax

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

Other comprehensive income/(loss), net of tax

Comprehensive income/(loss)

See accompanying notes to the consolidated financial statements

5 unchanged sentences

Balance at January 1, 2023

Other comprehensive loss

Adoption of ASC 326- Financial Instruments- Credit Losses

Other comprehensive income

Stock based compensation

2 unchanged sentences

Balance at March 31, 2023

Other comprehensive loss

Stock based compensation

Common stock issued - 18,416 shares

Common stock dividend declared - $ 0.15 per share

Balance at June 30, 2022

Other comprehensive loss

Stock based compensation

Common stock issued - 4,563 shares

Common stock dividend declared -

$ 0.15 per share

Balance at September 30, 2022

First United Corporation and Subsidiaries

9 unchanged sentences

Balance at March 31, 2022

Other comprehensive income

Stock based compensation

Common stock issued - 3,261 shares

Common stock repurchase - 400,000 shares

Common stock dividend declared - $ 0.15 per share

Balance at June 30, 2021

Other comprehensive loss

Stock based compensation

Common stock issued - 3,337 shares

Common stock dividend declared -

$ 0.15 per share

Balance at September 30, 2021

See accompanying notes to the consolidated financial statements

2 unchanged sentences

(In thousands)

Nine Months Ended

September 30,

Three Months Ended

Operating activities

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

Provision for loan losses

Provision/(credit) for credit/loan losses

Stock based compensation

6 unchanged sentences

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

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

Net accretion of investment securities discounts and premiums- HTM

Amortization of intangible assets

Gains on sales/calls of investment securities – AFS

Losses/(gains) on investment securities – HTM

Earnings on bank owned life insurance

Amortization of deferred loan fees

Amortization of deferred loan costs/(fees), net

Amortization of operating lease right of use asset

Increase in accrued interest receivable and other assets

Deferred tax benefit

Decrease in accrued interest receivable and other assets

Deferred tax (benefit)/expense

Operating lease liability

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

Decrease in accrued interest payable and other liabilities

Net cash provided by operating activities

7 unchanged sentences

Proceeds from disposal of fixed assets

Net decrease in restricted stock

Net (increase)/decrease in loans

Purchases of loans

Net (increase)/decrease in restricted stock

Net increase in loans

Purchases of premises and equipment

Net cash (used in)/provided by investing activities

Net cash used in by investing activities

Financing activities

2 unchanged sentences

Cash dividends paid on common stock

Net increase in short-term borrowings

Stock repurchase

Net decrease in long-term borrowings

Net(decrease)/increase in short-term borrowings

Proceeds from long-term borrowings

Net cash provided by/(used in) financing activities

Decrease in cash and cash equivalents

Increase/(decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of the year

3 unchanged sentences

Non-cash investing activities:

Transfers from loans to other real estate owned

Transfers from securities available for sale to held to maturity

4 unchanged sentences

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

The Company has prepared these unaudited condensed consolidated financial statements in accordance with GAAP for interim financial information, SEC rules that permit reduced disclosure for interim periods, and Article 10 of Regulation S-X.

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

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

Operating results for the three month period ended March 31, 2023 are not necessarily indicative of the results that may be expected for the full year or for any future interim period.

These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in First United Corporation’s Annual Report on Form 10-K for the year ended December 31, 2022.

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

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

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

Principles of Consolidation

1 unchanged sentence

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

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

Operating results for the nine and three month periods ended September 30, 2022 are not necessarily indicative of the results that may be expected for the full year or for any future interim period.

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

The Corporation has evaluated events and transactions occurring subsequent to the statement of financial condition date of September 30, 2022 and through the date these consolidated financial statements were issued, for items of potential recognition or disclosure.

The Corporation has evaluated events and transactions occurring subsequent to the statement of financial condition date of March 31, 2023 and through the date these consolidated financial statements were issued, for items of potential recognition or disclosure.

Newly Adopted Pronouncements in 2023

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.

2016-13, Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments , universally referred to as CECL.

The amendments in the ASU, among other things, requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.

Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates.

Many of the loss estimation techniques applied previously are still permitted, although the inputs to those techniques changed to reflect the full amount of expected credit losses.

In addition, the ASU amends the accounting for credit losses on purchased financial assets with credit deterioration.

For periodic report filers that are smaller reporting companies, such as the Company, this standard (Topic 326) was effective as of January 1, 2023.

As part of its process of adopting the CECL accounting method, management implemented a third party software solution and determined the appropriate loan segments, methodologies, model assumptions and qualitative components.

Our CECL model includes portfolio loan segmentation based upon similar risk characteristics and both a quantitative and qualitative component of the calculation which incorporates a forecasting component of certain economic variables.

Our implementation plan also includes the assessment and documentation of appropriate processes, policies and internal controls.

Management had a third party independent consultant review and validate our CECL model.

In addition, Topic 326 amends the accounting for credit losses on certain debt securities.

The Company did not record any ACL on its debt securities as a result of adopting Topic 326.

The ultimate impact of adopting Topic 326, and at each subsequent reporting period, is highly dependent on credit quality, macroeconomic forecasts and conditions, compensation of our loan portfolio, and other management judgments.

The Company adopted Topic 326 using the modified retrospective method.

Results beginning after January 1, 2023 are presented under Topic 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP.

We made the accounting policy election to not measure an ACL for accrued interest receivables for loans and securities.

Accrued interest deemed uncollectible will be written off through interest income.

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

January 1, 2023

(Dollars in thousands)

As Reported Under Topic 326

Impact of Topic 326 Adoption

Allowance for credit losses on loans

Commercial real estate

Acquisition and development

Commercial and industrial

Residentail mortgage

Allowance for Credit Losses on Loans

Investment securities- available for sale (at fair value)

Investment securities- held to maturity

Total loans held for investments, net

Net deferred tax asset

Life-of-loss reserve on unfunded loan commitments

Retained earnings

In connection with our adoption of Topic 326, we made changes to our loan portfolio segments to align with the methodology of CECL.

Refer to Note 5, Loans and Related Allowance for Credit Losses, for further discussion of these portfolio segments.

The adoption of Topic 326 resulted in a Day 1 adjustment of $ 2.9 million to our ACL, including an increase of $ 2.0 million to the ACL for loans and $ 0.9 million to the ACL for unfunded commitments.

The Company did not record any ACL on its available-for-sale or held-to-maturity investments upon adoption of ASC 326.

Our Company recorded a net decrease to retained earnings of $ 2.2 million as of January 1, 2023 for the cumulative effect of adopting Topic 326.

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

Troubled Debt Restructurings and Vintage Disclosures .

ASU 2022-02, which eliminates the troubled debt restructuring (TDR) accounting model for creditors that have adopted Topic 326, “Financial Instruments – Credit Losses.” Due to the removal of the TDR accounting model, all loan modifications were evaluated to determine if they resulted in a new loan or a continuation of the existing loan.

The amendments in this ASU also required that entities disclose current-period gross chare-offs by year of origination for loans and leases.

The amendments in this ASU were effective January 1, 2023.

This change did not have a material effect on our consolidated financial statements.

Refer to Note 5, Loans and Related Allowance for Credit Losses for disclosures for debtors experiencing financial difficulty and for vintage disclosures related to gross charge-offs by loan segment by year of origination.

Allowance for Credit Losses Policy

The ACL represents an amount which, in management’s judgment, is adequate to absorb expected losses on outstanding loans at the balance sheet date based on the evaluation of the size and current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts of future economic conditions and prepayment experience.

The ACL is measured and recorded upon the initial recognition of a financial asset.

The ACL is reduced by charge-offs, net of recoveries of previous losses, and is increased or decreased by a provision for credit losses, which is recorded as a current period operating expense.

Determination of an appropriate ACL is inherently complex and requires the use of significant and highly subjective estimates.

The reasonableness is reviewed quarterly by management.

Management believes it uses relevant information available to make determinations about the ACL and that it has established the existing allowance in accordance with GAAP.

However, the determination of the ACL requires significant judgment, and estimates of expected losses in the loan portfolio can vary significantly from the amounts actually observed.

While management uses available information to recognize losses, future additions to the ACL may be necessary based on changes in the loans comprising the portfolio, changes in the current and forecasted economic conditions, changes to the interest rate environment which may directly impact prepayment and curtailment rate assumptions, and changes in the financial condition of borrowers.

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

The Company’s methodology for estimating the ACL includes:

Segmentation .

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

Specific Analysis .

A specific reserve analysis is applied to certain individually evaluated loans.

These loans are evaluated quarterly generally based on collateral value, observable market value or the present value of expected future cash flows.

A specific reserve is established if the fair value is less than the loan balance.

A charge-off is recognized when the loss is quantifiable.

Individually evaluated loans not specifically analyzed reside in the Quantitative Analysis.

Quantitative Analysis.

The Company elected to use Discounted Cash Flow (“DCF”).

Economic forecasts include but are not limited to unemployment, the Consumer Price Index, the Housing Affordability Index and Gross State Product.

These forecasts are assumed to revert to the long term average and are utilized in the model to estimate the probability of default and loss given default through regression.

Model assumptions include, but are not limited to the discount rate, prepayments and curtailments.

The product of the probability of default and the loss given default is the estimated loss rate, which varies over time.

The estimated loss rate is applied within the appropriate periods in the cash flow model to determine net present value.

Net present value is also impacted by assumptions related to the duration between default and recovery.

The reserve is based on the differences between the summation of the principal balances taking amortized costs into consideration and the summation of the net present values.

Qualitative Analysis.

Based on management’s review and analysis of internal, external and model risks, management may adjust the model output.

Management reviews the peaks and troughs of the model’s calibration, taking into account economic forecasts to develop guardrails that serve as the basis for determining the reasonableness of the model’s output and makes adjustments as necessary.

This process challenges unexpected variability resulting from outputs beyond the model’s calibration that appear to be unreasonable.

Additionally, management may adjust the economic forecast if it is incompatible with known market conditions based on mangement’s experience and perspective.

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

Financial instruments include off-balance sheet credit instruments such as commitments to make loans and commercial letters of credit issued to meet customer financing needs.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments.

Such financial instruments are recorded when they are funded.

The Company records a reserve for unfunded commitments (“RUC”) on off-balance sheet credit exposures through a charge to provision for credit loss expense in the Company’s Consolidated Statement of Income.

The RUC on off-balance sheet credit exopsures is estimated by loan segment at each balance sheet date under the CECL model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur, and is included in the RUC on the Company’s Consolidated Balance Sheet.

Loan Restructurings

In situations where, for economic or legal reasons related to a borrower’s financial condition, management may grant a concession to the borrower that it would not otherwise consider, the related loan is classified as a restructured loan.

Management strives to identify borrowers in financial difficulty early and work with them to modify the loan to more affordable terms before their loan reaches nonaccrual status.

These modified terms that result in a direct change in the timing or amount of contractual cash flows have historically included interest only periods, extended amortization periods beyond what management would typically offer for a similar loan or a below market interest rate when compared to management’s underwriting standards for a similar loan type.

These concessions are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral.

In cases where borrowers are granted new terms that provide for a reduction of interest, management measures any impairment on the restructuring as noted above for loans experiencing financial difficulty.

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

The Company utilizes ASC 326 to evaluate its available-for-sale (“AFS”) and held-to-maturity (“HTM”) debt security portfolio for expected credit losses.

For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis.

If either criterion is met, the security’s amortized cost basis is written down to fair value through income.

For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors.

In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors.

If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security.

If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for that credit loss, limited by the amount that the fair value is less than the amortized cost basis.

Any impairment that has not been recorded through an ACL is recognized in other comprehensive income, as a non-credit-related impairment.

The Company adopted ASC 326 using the prospective transition approach for debt securities for which other than temporary impairment (“OTTI”) had been recognized prior to January 1, 2023, such as AFS collateralized debt obligations.

As a result, the amortized cost basis for such debt securities remained the same before and after the effective date of ASC 326.

The effective interest rate on these debt securities was not changed.

Amounts previously written recognized in OCI as of January 1, 2023 relating to improvements in cash flows expected to be collected are accreted into income over the remaining life of the asset.

Recoveries of amounts previously written off relating to improvements in cash flows after January 1, 2023 are recorded in earnings when received.

The entire amount of an impairment loss is recognized in earnings only when:

1) the Company intends to sell the security or;

2) it is more likely than not that the Company will have to sell the security before recovery of its amortized cost basis;

or 3) the Company does not expect to recover the entire amortized cost basis of the security.

In all other situations, only the portion of the impairment loss representing the credit loss must be recognized in eanings, with the remaining portion being recognized in shareholders’ equity as comprehensive income, net of deferred taxes.

Changes in the allowance for credit losses are not recorded as a provision for (or credit to) credit losses.

Losses are charged against the allowance when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Any impairment not recorded through the an allowance for credit loss is recognized in other comprehensive income as a non-credit-related impairment.

We have made a policy election to exclude accrued interest form the amortized cost basis of AFS debt securities and report accrued interest separately on the Consolidated Balance Sheet.

AFS debt securities are placed on nonaccrual status when we no longer expect to receive all contractual amounts due, which is generally at 90 days past due.

Accrued interest receivable is reversed

against interest income when a security is placed on nonaccrual status.

Accordingly, we do not recognized an allowance for credit loss against accrued interest receivable.

The Company separately evaluates its HTM investment securities for any credit losses.

The Company pools like securiites and calculates expected credit losses through an estimate based on a security’s credit rating, which is recognized as part of the allowance for credit losses for held-to-maturity securities and included in the balance of investment securities held-to-maturity on the Consolidated Balance Sheets.

If the Company determines that a security indicates evidence of deteriorated credit quality, the security is individually-evaluated and a discounted cash flow analysis is performed and compared to the armotized cost basis.

Note 2 – Accounting Statements Issued but Not Yet Adopted

In March 2020, the FASB issued ASU No.

2020-04, “Reference Rate Reform (Topic 848):

Facilitation of Reference Rate Reform on Financial Reporting.” The amendments in this ASU provide optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting.

The amendments provide optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from the London Interbank Offered Rate (“LIBOR”) toward new interest rate benchmarks.

Modified contracts that meet certain scope guidance are eligible for relief from these modification accounting requirements in GAAP.

The optional guidance generally allows for the modified contract to be accounted for as a continuation of the existing contract and does not require contract remeasurement at the modification date or reassessment of a previous accounting determination.

The amendments in this ASU are effective for all entities between March 12, 2020 and December 31, 2022.

In December 2022, the FASB issued ASU No.

“Reference Rate Reform (Topic 848):

Deferral of the Sunset Date of Topic 848.” The amendments in this ASU defer the sunset date for applying the reference rate reform relief by two years to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848.

Note 3 – Earnings Per Common Share

1 unchanged sentence

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

There were no anti-dilutive shares outstanding at September 30, 2022 or 2021.

The following table sets forth the calculation of basic and diluted earnings per common share for the nine and three month periods ended September 30, 2022 and 2021:

Nine months ended September 30,

(in thousands, except for per share amount)

Basic Earnings Per Share:

Diluted Earnings Per Share:

Restricted stock units

Three months ended September 30,

There were no anti-dilutive shares outstanding at March 31, 2023 or 2022.

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

Three months ended March 31,

(in thousands, except for per share amount)

3 unchanged sentences

Note 4 – Investments

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

The following tables show a comparison of amortized cost and fair values of investment securities at March 31, 2023 and December 31, 2022:

(in thousands)

September 30, 2022

Allowance for Credit Losses

Estimated Fair Value

March 31, 2023

Available for Sale:

8 unchanged sentences

(in thousands)

September 30, 2022

Estimated Fair Value

Allowance for Credit Losses

March 31, 2023

Held to Maturity:

13 unchanged sentences

Obligations of states and political subdivisions

Corporate Bonds

Collateralized debt obligations

3 unchanged sentences

Held to Maturity:

government agencies

Residential mortgage-backed agencies

Commercial mortgage-backed agencies

Collateralized mortgage obligations

Obligations of states and political subdivisions

4 unchanged sentences

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

The following table shows the Corporation’s investment securities with gross unrealized and unrecognized losses and fair values at September 30, 2022 and December 31, 2021, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position:

The following table shows the Corporation’s investment securities with gross unrealized and unrecognized losses and fair values at March 31, 2023 and December 31, 2022, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position:

Less than 12 months

1 unchanged sentence

(in thousands)

September 30, 2022

March 31, 2023

Available for Sale:

10 unchanged sentences

(in thousands)

September 30, 2022

March 31, 2023

Held to Maturity:

15 unchanged sentences

Obligations of states and political subdivisions

Corporate Bonds

Collateralized debt obligations

5 unchanged sentences

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

Management systematically evaluates securities for impairment on a quarterly basis.

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

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

The first is the loss attributable to declining credit quality.

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

The second component consists of all other losses.

The other losses are recognized in other comprehensive income.

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

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

The following table presents a cumulative roll-forward of the amount of non-cash OTTI charges related to credit losses that have been recognized in earnings for the trust preferred securities held in the CDO portfolio during the nine and three month periods ended September 30, 2022 and 2021 that the Corporation does not intend to sell:

Nine Months Ended

September 30,

(in thousands)

Balance of credit-related OTTI at January 1

Reduction for increases in cash flows expected to be collected

Balance of credit-related OTTI at September 30

The Company utilizes ASC 326 to evaluate its available-for sale (“AFS”) and held-to-maturity (“HTM”) debt security portfolio for expected credit losses.

If either criteria is met, the security’s amortized cost basis is written down to fair value through income.

For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors.

If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security.

If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis.

Any impairment that has not been recorded through an ACL is recognized in other comprehensive income, as a non-credit-related impairment.

The entire amount of an impairment loss is recognized in earnings only when:

1) the Company intends to sell the security;

or 2) it is more likely than not that the Company will have to sell the security before recovery of its amortized cost basis;

or 3) the Company does not expect to recover the entire amortized cost basis of the security.

In all other situations, only the portion of the impairment loss representing the credit loss must be recognized in earnings, with the remaining portion being recognized in shareholders’ equity as comprehensive income, net of deferred taxes.

Changes in the allowance for credit losses are recorded as a provision for (or reversal of) credit losses.

Losses are charged against the allowance when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Any impairment not recorded through an allowance for credit loss is recognized in other comprehensive income as a non-credit-related impairment.

The Company has made the policy election to exclude accrued interest from the amortized cost basis of available-for-sale debt securities and report accrued interest separately in other assets in the Consolidated Balance Sheets.

Available-for-sale debt securities are placed on nonaccrual status when we no longer expect to receive all contractual amounts due, which is generally at 90 days past due.

Accrued interest receivable is reversed against interest income when a security is placed on nonaccrual status.

Accordingly, we do not recognize an allowance for credit loss against accrued interest receivable.

The Company separately evaluates its HTM investment securities for any credit losses.

The Company pools like securities and calculates expected credit losses through an estimate based on a security’s credit rating, which is recognized as part of the allowance for credit losses for held-to-maturity securities and is included in the balance of investment securities held to maturity on the Consolidated Balance Sheets.

If the Company determines that a security indicates evidence of deteriorated credit quality, the security is individually evaluated and a discounted cash flow analysis is performed and compared to the amortized cost bais.

As of March 31, 2023, the Company recorded no ACL related to its AFS or HTM security portfolio.

The following table presents a cumulative roll-forward of the amount of non-cash OTTI charges related to credit losses that have been previously recognized in earnings for the trust preferred securities held in the CDO portfolio during the three month periods ended March 31, 2023 and 2022 that the Corporation does not intend to sell:

Three Months Ended

September 30,

(in thousands)

Balance of credit-related OTTI at July 1

Balance of credit-related OTTI at January 1

Reduction for increases in cash flows expected to be collected

Balance of credit-related OTTI at September 30

The amortized cost and estimated fair value of securities by contractual maturity at September 30, 2022 are shown in the following table.

Balance of credit-related OTTI at March 31

The amortized cost and estimated fair value of securities by contractual maturity at March 31, 2023 are shown in the following table.

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

September 30, 2022

March 31, 2023

(in thousands)

Available for Sale:

Due in one year or less

Due after one year through five years

6 unchanged sentences

Held to Maturity:

Due in one year or less

Due after one year through five years

5 unchanged sentences

Total held to maturity

Note 4 – Loans and Related Allowance for Loan Losses

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

Note 5 – Loans and Related Allowance for Credit Losses

The following table summarizes the primary segments of the loan portfolio at March 31, 2023 and December 31, 2022:

(in thousands)

September 30, 2022

March 31, 2023

Individually evaluated for impairment

3 unchanged sentences

Collectively evaluated for impairment

The commercial and industrial portfolio in the table above includes $ 0.4 million and $ 7.7 million of Paycheck Protection Program (“PPP”) loans at September 30, 2022 and December 31, 2021, respectively, which are 100 % guaranteed by the SBA, and no allowance for loan loss (“ALL”) has been assigned to them.

The following table presents the classes of the loan portfolio summarized by the aggregate pass and the criticized categories of special mention and substandard within the internal risk rating system at September 30, 2022 and December 31, 2021:

(in thousands)

September 30, 2022

Commercial real estate

Non owner-occupied

All other CRE

Acquisition and development

1-4 family residential construction

All other A&D

Commercial and industrial

Residential mortgage

Residential mortgage - term

Residential mortgage - home equity

December 31, 2021

Commercial real estate

Non owner-occupied

All other CRE

Acquisition and development

1-4 family residential construction

All other A&D

Commercial and industrial

Residential mortgage

Residential mortgage - term

Residential mortgage - home equity

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 $ 9.9 million in the substandard category was related to one large relationship in the nursing care sector that was downgraded from special mention in the first quarter of 2022 and one large relationship in the airline sector that was added to the substandard portfolio in the third quarter of 2022.

These relationships continue to perform according to their contractual terms and are not considered impaired.

The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and non-accrual loans at September 30, 2022 and December 31, 2021:

The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and non-accrual loans at March 31, 2023 and December 31, 2022:

(in thousands)

September 30, 2022

March 31, 2023

Commercial real estate:

19 unchanged sentences

Residential mortgage - home equity

Non-accrual loans that have been subject to partial charge-offs totaled $ 0.2 million at September 30, 2022 and $ 0.5 million at December 31, 2021.

There were no loans secured by 1-4 family residential real estate properties in the process of foreclosure at September 30, 2022 compared to $ 0.2 million of such loans at December 31, 2021.

As a percentage of the loan portfolio, accruing loans past due 30 days or more decreased to 0.27 % compared to 0.37 % at June 30, 2022 and 0.31 % as of December 31, 2021.

The following table summarizes the primary segments of the ALL at September 30, 2022 and December 31, 2021, segregated by the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment:

Non-accrual loans that have been subject to partial charge-offs totaled $ 0.2 million at March 31, 2023 and $ 0.1 million at December 31, 2022.

Loans secured by 1-4 family residential real estate properties in the process of foreclosure totaled $ 2.0 million at March 31, 2023.

There were no loans subject to foreclosure at December 31, 2022.

As a percentage of the loan portfolio, accruing loans past due 30 days or more was 0.17 % at March 31, 2023 compared to 0.16 % at December 31, 2022 and 0.19 % as of March 31, 2022.

Effective January 1, 2023, the Company adopted the accounting guidance in ASU No.

2022-02, which eliminates the recognition and measurement of troubled debt restructurings (TDRs).

Due to the removal of the TDR designation, the Company evaluates all loan restructurings according to the accounting guidance for loan modifications to determine if the restructuring results in a new loan or a continuation of the existing loan.

Loan modifications to borrowers experiencing financial difficulty that result in a direct change in the timing or amount of contractual cash flows include situations where there is principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, and combinations of the above.

Therefore, the disclosures related to loan restructurings are only for modifications that directly affect cash flows.

A loan that is considered a restructured loan may be subject to the individually evaluated loan analysis if the commitment is $ 0.1 million or greater;

otherwise, the restructured loan remains in the appropriate segment in the ACL model and associated reserves are adjusted based on changes in the discounted cash flows resulting from the modification of the restructured loan.

For a discussion with respect to reserve calculations regarding individually evaluated loans, refer to the “Nonrecurring Loans” section in Note 6, Fair Value Measurements.

There were no loan modifications made to borrowers facing financial difficulties in the period ending March 31, 2023.

The Company maintains an ACL at a level determined to be adequate to absorb expected credit losses associated with the Company’s financial instruments over the life of those instruments as of the balance sheet date.

The Company develops and documents a systematic ACL methodology based on the following portfolio segments:

1) commercial real estate, 2) acquisition and development, 3) commercial and industrial, 4) residential mortgage, and 5) consumer.

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

The segmentation in the current expected credit losses (“CECL”) model is different from the segmentation in the Incurred Loss model.

The following is a discussion of the key risks by portfolio segment that management assesses in preparing the ACL.

Commercial Real Estate- loans are secured by commercial purpose real estate, including both owner occupied properties and investment properties, for various purposes such as hotels, strip malls and apartments.

Operations of the individual projects as well as global cash flows of the debtors are the primary source of repayment of these loans.

The condition of the local economy is an important indicator of risk, but there are more specific risks depending on the collateral type as well as the business.

Acquisition and Development- loans include both commercial and consumer.

Commercial loans are made to finance construction of buildings or other structures, as well as to finance the acquisition and development of raw land for various purposes.

While the risk of these loans is generally confined to the construction period, if there are problems, the project may not be completed, and as such, may not provide sufficient cash flow on its own to service the debt or have sufficient value in a liquidation to cover the outstanding principal.

The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the type of project and the experience and resources of the developer.

Consumer loans are made for the construction of residential homes for which a binding sales contract exists and generally are for a period of time sufficient to complete construction.

Residential construction loans to individuals generally provide for the payment of interest only during the construction phase.

Credit risk for residential real estate construction loans can arise from construction delays, cost overruns, failure of the contractor to complete the project to specifications and economic conditions that could impact demand for supply of the property being constructed.

Commercial and Industrial- loans are made to operating companies or manufacturers for the purpose of production, operating capacity, accounts receivable, inventory or equipment financing.

Cash flow from the operations of the borrower is the primary source of repayment for these loans.

The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the industry of the borrower.

Collateral for these types of loans often do not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt.

These loans are also made to local municipalities for various purposes including refinancing existing obligations, infrastructure up-fit and expansion, or to purchase new equipment.

The primary repayment source for local municipalities include the tax base of the municipality, specific revenue streams related to the infrastructure financed, and other business operations of the municipal authority.

The health and stability of state and local

economies directly impacts each municipality’s tax basis and are important indicators of risk for this segment.

The ability of each municipality to increase taxes and fees to offset service requirements give this type of loan a very low risk profile in the continuum of the Company’s loan portfolio.

Residential mortgage- loans are secured by first and second liens such as home equity lines of credit and 1-4 family residential mortgages.

The primary source of repayment for these loans is the income of the borrower.

The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment.

The state of the local housing market can also have a significant impact on this segment because low demand and/or declining home values can limit the ability of borrowers to sell a property and satisfy debt.

Consumer- loans are made to individuals and may be either secured by assets other than 1-4 family residences or unsecured.

This segment includes automobile loans and unsecured loans and lines of credit.

The primary source of repayment for these loans is the income and assets of the borrower.

The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment.

The value of the collateral, if there is any, is less likely to be a source of repayment due to less certain collateral values.

The following table summarizes the primary segments of the ACL at March 31, 2023 and ALL at December 31, 2022, segregated by the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment:

(in thousands)

September 30, 2022

March 31, 2023

Individually evaluated

7 unchanged sentences

for impairment

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

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not required at September 30, 2022 and December 31, 2021:

Impaired Loans with

Specific Allowance

Total Impaired Loans

(in thousands)

Investment (1)

September 30, 2022

Changes in the fair value of the types of collateral for individually evaluated loans are reported as provision for credit loss in the period of change.

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

The following table presents the amortized cost basis of collateral-dependent individually evaluated loans as of March 31, 2023.

March 31, 2023

(dollars in thousands)

Non-Accrual Loans with No Allowance

Commercial real estate

Non owner-occupied

All other CRE

Acquisition and development

1-4 family residential construction

All other A&D

Commercial and industrial

Residential mortgage

Residential mortgage – term

Residential mortgage – home equity

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not required at December 31, 2022:

Impaired Loans with

Specific Allowance

Total Impaired Loans

(in thousands)

Investment (1)

December 31, 2022

11 unchanged sentences

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

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

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

These historical loss amounts are modified by other qualitative factors.

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

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

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

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

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

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

(a) national and local economic trends and conditions;

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

(d) effects of changes in lending policies;

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

(f) value of underlying collateral;

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

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

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

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

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

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

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

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

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

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

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

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

The following tables present the activity in the ALL for the nine and three month periods ended September 30, 2022 and 2021:

Nine months ended (in thousands)

ALL balance at January 1, 2022

ALL balance at September 30, 2022

ALL balance at January 1, 2021

ALL balance at September 30, 2021

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

Three months ended (in thousands)

ALL balance at July 1, 2022

ALL balance at September 30, 2022

ALL balance at July 1, 2021

ALL balance at September 30, 2021

The ALL is based on estimates, and actual losses may vary from current estimates.

Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date.

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

Nine months ended

September 30, 2022

September 30, 2021

Beginning balance at January 1, 2023 prior to adoption of ASC 326

Impact of adopting ASC 326

Credit Loss Expense

Loan Charge-offs

Recoveries collected

ACL balance at March 31, 2023

ALL balance at January 1, 2022

Loan Charge-offs

Recoveries collected

ALL balance at March 31, 2022

The Company’s methodology for estimating the ACL includes:

Segmentation.

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

Specific Analysis.

A specific reserve analysis is applied to certain individually evaluated loans.

These loans are evaluated quarterly generally based on collateral value, observable market value or the present value of expected future cash flows.

A specific reserve is established if the fair value is less than the loan balance.

A charge-off is recognized when the loss is quantifiable.

Individually evaluated loans not specifically analyszed reside in the Quantitative Analysis.

Quantitative Analysis.

The Company elected to use Discounted Cash Flow (“DCF”).

Economic forecasts include but are not limited to unemployment, the Consumer Price Index, the Housing Affordability Index, and Gross State Product.

These forecasts are assumed to revert to the long term average and are utilized in the model to estimate the probability of default and the loss given default is the estimated loss rate, which varies over time.

The estimated loss rate is applied within the appropriate periods in the cash flow model to determine the net present value.

Net present value is also impacted by assumption related to the duration between default and recovery.

The reserve is based on the difference between the summation of the principal balances taking amortized costs into consideration and the summation of the net present values.

Qualitative Analysis.

Based on management’s review and analysis of internal, external and model risks, management may adjust the model output.

Management reviews the peaks and troughs of the model’s calibrations, taking into account economic forecasts to develop guardrails that serve as the basis for determining the reasonableness of the model’s output and makes adjustments as necessary.

This process challenges unexpected variability resulting from outputs beyond the model’s calibrations that appear to be unreasonable.

Additionally, management may adjust the economic forecast if it is incompatible with known market conditions based on management’s experience and perspective.

The ACL is based on estimates, and actual losses may vary from current estimates.

Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ACL that is representative of the risk found in the components of the portfolio at any given date.

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

(in thousands)

Interest income

recognized on

an accrual basis

Interest income

recognized on

Interest income

recognized on

an accrual basis

Interest income

recognized on

2018 and Prior

Total Portfolio Loans

March 31, 2023

Commercial real estate:

Non owner-occupied

Special Mention

Total non-owner occupied

Current period gross charge-offs

All other CRE

Special Mention

Total all other CRE

Current period gross charge-offs

Acquisition and development:

1-4 family residential construction

Special Mention

Total acquisition and development

Current period gross charge-offs

All other A&D

Special Mention

Total all other A&D

Current period gross charge-offs

Commercial and industrial:

Special Mention

Total commercial and industrial

Current period gross charge-offs

Residential mortgage:

Residential mortgage - term

Special Mention

Total residental mortgage - term

Current period gross charge-offs

Residential mortgage - home equity

Three months ended

September 30, 2022

September 30, 2021

Special Mention

Total residental mortgage - home equity

Current period gross charge-offs

Special Mention

Total consumer

Current period gross charge-offs

Total Portfolio Loans

Special Mention

Total Portfolio Loans

Current YTD Period:

Current period gross charge-offs

(in thousands)

Interest income

recognized on

an accrual basis

Interest income

recognized on

Interest income

recognized on

an accrual basis

Interest income

recognized on

2017 and Prior

Total Portfolio Loans

December 31, 2022

Commercial real estate:

Non owner-occupied

Special Mention

Total non-owner occupied

Current period gross charge-offs

All other CRE

Special Mention

Total all other CRE

Current period gross charge-offs

Acquisition and development:

1-4 family residential construction

Special Mention

Total acquisition and development

Current period gross charge-offs

All other A&D

Special Mention

Total all other A&D

Current period gross charge-offs

Commercial and industrial:

Special Mention

Total commercial and industrial

Current period gross charge-offs

Residential mortgage:

Residential mortgage - term

Special Mention

Total residental mortgage - term

Current period gross charge-offs

Residential mortgage - home equity

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

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

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

experiencing financial difficulties) and a concession has been granted.

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

modification.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

There were 12 loans totaling $ 3.1 million and $ 3.3 million that were classified as TDRs at September 30, 2022 and December 31, 2021, respectively.

During the nine month period ended September 30, 2022, there were no new TDRs and no existing TDRs that were re-modified.

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

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

These modifications did not impact the ALL.

During the nine month periods ended September 30, 2022 and 2021, there were no payment defaults.

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

Temporary Rate

Extension of Maturity

Modification of Payment

and Other Terms

Special Mention

Total residental mortgage - home equity

Current period gross charge-offs

Special Mention

Total consumer

Current period gross charge-offs

Total Portfolio Loans

Special Mention

Total Portfolio Loans

Current YTD Period:

Current period gross charge-offs

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.

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

(in thousands)

Nine months ended September 30, 2021

2018 and Prior

Total Portfolio Loans

March 31, 2023

Commercial real estate:

Non owner-occupied

Nonperforming

Total non-owner occupied

All other CRE

Nonperforming

Total all other CRE

Acquisition and development:

1-4 family residential construction

Nonperforming

Total acquisition and development

All other A&D

Nonperforming

Total all other A&D

Commercial and industrial:

Nonperforming

Total commercial and industrial

Residential mortgage:

Residential mortgage - term

Nonperforming

Total residental mortgage - term

Residential mortgage - home equity

During the three month period ended September 30, 2022, there were no new TDRs and no existing TDRs that were re-modified.

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

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

These re-modifications did not impact the ALL.

During the three months ended September 30, 2022 and 2021, there were no payment defaults under TDRs.

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

Temporary Rate

Extension of Maturity

Modification of Payment

and Other Terms

Nonperforming

Total residental mortgage - home equity

Nonperforming

Total consumer

Total Portfolio Loans

Nonperforming

Total Portfolio Loans

(in thousands)

Three months ended September 30, 2021

2017 and Prior

Total Portfolio Loans

December 31, 2022

Commercial real estate:

Non owner-occupied

Nonperforming

Total non-owner occupied

All other CRE

Nonperforming

Total all other CRE

Acquisition and development:

1-4 family residential construction

Nonperforming

Total acquisition and development

All other A&D

Nonperforming

Total all other A&D

Commercial and industrial:

Nonperforming

Total commercial and industrial

Residential mortgage:

Residential mortgage - term

Nonperforming

Total residental mortgage - term

Residential mortgage - home equity

Nonperforming

Total residental mortgage - home equity

Nonperforming

Total consumer

Total Portfolio Loans

Nonperforming

Total Portfolio Loans

Note 6 - Other Real Estate Owned, net

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

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

(in thousands)

September 30,

Acquisition and development

1 unchanged sentence

Total OREO, net

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

Nine Months Ended

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

Three Months Ended

September 30,

(in thousands)

3 unchanged sentences

Balance at end of period

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

Nine Months Ended

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

Three Months Ended

September 30,

(in thousands)

3 unchanged sentences

Rental and other income

Total OREO expenses/(income), net

Total OREO expenses, net

Note 7 – Fair Value of Financial Instruments

17 unchanged sentences

supported with little or no market activity).

Level 3 instruments are valued based on the best available data, some of which is internally developed, and consider risk premiums that a market participant would require.

Level 3 instruments are valued based on

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

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

2 unchanged sentences

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

As of September 30, 2022, the U.S.

As of March 31, 2023, the U.S.

Government agencies and treasuries, residential and commercial mortgage-backed securities, collateralized mortgage obligations, and state and political subdivisions bonds, excluding the tax increment financing (“TIF”) bonds, were classified as Level 2 within the valuation hierarchy.

5 unchanged sentences

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

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

Fair value consists of the loan balance less its valuation allowance and is generally determined based on independent third-party appraisals of the collateral or discounted cash flows based upon the expected proceeds.

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

Nonrecurring Basis –

Individually Evaluated Loans- Individual loans with borrowers experiencing financial difficulty and with a remaining principal balance of $ 0.1 million or more are evaluated for potential specific reserves and adjusted, if a shortfall exists, to fair value less costs to sell.

Fair value is measured based on the value of the value of the underlying collateral securing the loan if repayment is expected solely from the sale of operation of the collateral or present value of estimated future cash flows discounted at the loan’s contractual interest rate if the loan is not determined to be collateral dependent.

Fair value for individually evaluated loans is determined using several methods.

Generally, the fair value of real estate is determined based on appraisals by qualified licensed appraisals.

These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.

Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available.

These routine adjustments are made to adjust the value of a specific property relative to comparable properties for variations in qualitities such as location, size, and income production capacity relative to the subject property of the appraisal.

Subsequent to the initial impairment date, existing individually evaluated loans are reevaluated quarterly for additional impairment and adjustments to fair value less costs to sell are made, where appropriate.

For individually evaluated loans, the first state of our impairment analysis involves inspection of the property in question to affirm the condition has not deteriorated since the previous impairment analysis date.

Management also engages in conversations with local real estate professionals and market participants to determine the likely marketing time and value range for the property.

The second state involves an assessment of current trends in the regional market.

After thorough consideration of these factors, management will order a new appraisal.

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

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

5 unchanged sentences

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

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

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

Fair Value Measurements

at September 30, 2022 Using

at March 31, 2023 Using

Active Markets

11 unchanged sentences

Non-recurring:

Impaired loans, net

Equity Investment

Other real estate owned

Fair Value Measurements

10 unchanged sentences

Obligations of states and political subdivisions

Corporate bonds

Collateralized debt obligations

4 unchanged sentences

Other real estate owned

At September 30, 2022, the fair value of impaired loans with a valuation allowance or partial charge-off was $ 0.5 million, net of valuation allowances of $ 29,781 and partial charge-offs of $ 0.1 million.

During the nine months ended September 30, 2022, changes to the valuation allowance or additional charge off activity was recorded on loans with a net balance of approximately $ 0.1 million.

At March 31, 2023, individually evaluated loans had a net carrying amount of $ 2.3 million with no valuation allowance.

At December 31, 2022, the fair value of impaired loans with a valuation allowance or charge-off was $ 1.0 million, net of valuation allowances of $ 64,700 and charge-offs of $ 1.3 million.

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

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

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

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

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

(in thousands)

Fair Value at

September 30,

Investment Securities – available for sale -CDO

3 unchanged sentences

Non-recurring:

Impaired Loans, net

Individually Evaluated Loans, net

Market Comparable Properties

3 unchanged sentences

Revenue Multiples

Other Real Estate Owned

Market Comparable Properties

Marketability Discount

(in thousands)

3 unchanged sentences

Discount Rate

Libor + 3.25 %

Range of low to mid

300 and low to high 400

Non-recurring:

2 unchanged sentences

Marketability Discount

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

10.0% - 15.0%

Equity Investment

5 unchanged sentences

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

The following tables show a reconciliation of the beginning and ending balances for fair valued assets measured on a recurring basis using Level 3 significant unobservable inputs for the nine and three month periods ended September 30, 2022 and 2021:

Fair Value Measurements

6 unchanged sentences

Included in other comprehensive loss

Ending balance September 30, 2022

Fair Value Measurements

Using Significant Unobservable Inputs

(in thousands)

Investment Securities

Available for Sale

Beginning balance July 1, 2022

Total gains realized/unrealized:

Included in other comprehensive income

Ending balance September 30, 2022

Ending balance March 31, 2023

Fair Value Measurements

6 unchanged sentences

Included in other comprehensive loss

Ending balance September 30, 2021

Fair Value Measurements

Using Significant Unobservable Inputs

(in thousands)

Investment Securities

Available for Sale

Beginning balance July 1, 2021

Total losses realized/unrealized:

Included in other comprehensive income

Ending balance September 30, 2021

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

Ending balance March 31, 2022

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

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

6 unchanged sentences

The actual carrying amounts and estimated fair values of the Corporation’s financial instruments that are included in the Consolidated Statement of Financial Condition are as follows:

September 30, 2022

March 31, 2023

Fair Value Measurements

8 unchanged sentences

Restricted bank stock

Loans held for sale

Financial derivatives

6 unchanged sentences

Accrued interest payable

Off balance sheet financial instruments

December 31, 2022

10 unchanged sentences

Loan held for sale

Financial derivative

Accrued interest receivable

7 unchanged sentences

Note 8 – Accumulated Other Comprehensive Loss

The following table presents the changes in each component of accumulated other comprehensive loss for the 12 months ended December 31, 2021 and the three month periods ended March 31, 2022, June 30, 2022 and September 30, 2022:

The following table presents the changes in each component of accumulated other comprehensive loss for the 12 months ended December 31, 2022 and the three month period ended March 31, 2023:

(in thousands)

7 unchanged sentences

Balance - March 31, 2023

Other comprehensive income/(loss) before reclassifications

Amounts reclassified from accumulated other comprehensive loss

Balance - June 30, 2022

Other comprehensive

income/(loss) before

reclassifications

Amounts reclassified from

accumulated other

comprehensive loss

Balance - September 30, 2022

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

Components of Other Comprehensive Loss

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

Components of Other Comprehensive Income

(in thousands)

For the nine months ended September 30, 2022

For the three months ended March 31, 2023

Available for sale (AFS) securities with OTTI:

3 unchanged sentences

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

Net unrealized losses on all other AFS securities

Held to maturity securities:

Unrealized holding losses on securities transferred to held to maturity

gains recognized in income

amortization recognized in income

Net unrealized losses on HTM securities

Cash flow hedges:

Unrealized holding gains

Pension Plan:

Unrealized net actuarial loss

amortization of unrecognized loss

Net pension plan liability adjustment

Unrealized net actuarial loss

amortization of unrecognized loss

Net SERP liability adjustment

Other comprehensive loss

Components of Other Comprehensive Income

(in thousands)

For the nine months ended September 30, 2021

Available for sale (AFS) securities with OTTI:

Unrealized holding gains

accretable yield recognized in income

Net unrealized gains on investments with OTTI

Available for sale securities – all other:

Unrealized holding losses

gains recognized in income

Net unrealized losses on all other AFS securities

Held to maturity securities:

Unrealized holding gains

gains recognized in income

Unrealized holding losses on securities transferred to held to maturity

amortization recognized in income

1 unchanged sentence

Cash flow hedges:

Unrealized holding gains

Unrealized holding losses

Pension Plan:

3 unchanged sentences

Unrealized net actuarial loss

amortization of unrecognized loss

amortization of prior service costs

amortization of unrecognized gain

Net SERP liability adjustment

2 unchanged sentences

(in thousands)

For the three months ended September 30, 2022

Available for sale (AFS) securities with OTTI:

Unrealized holding losses

accretable yield recognized in income

Net unrealized losses on investments with OTTI

Available for sale securities – all other:

Unrealized holding losses

gains recognized in income

Net unrealized losses on all other AFS securities

Held to maturity securities:

Unrealized holding gains

gains recognized in income

amortization recognized in income

Net unrealized gains on HTM securities

Cash flow hedges:

Unrealized holding gains

Pension Plan:

Unrealized net actuarial loss

amortization of unrecognized loss

Net pension plan liability adjustment

Unrealized net actuarial loss

amortization of unrecognized loss

Net SERP liability adjustment

Other comprehensive loss

Components of Other Comprehensive Loss

(in thousands)

For the three months ended September 30, 2021

For the three months ended March 31, 2022

Available for sale (AFS) securities with OTTI:

4 unchanged sentences

Unrealized holding losses

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

gains recognized in income

1 unchanged sentence

Held to maturity securities:

Unrealized holding gains

gains recognized in income

Unrealized holding losses on securities transferred to held to maturity

amortization recognized in income

Net unrealized gains on HTM securities

Net unrealized loss on HTM securities

Cash flow hedges:

3 unchanged sentences

amortization of unrecognized loss

amortization of prior service costs

Net pension plan liability adjustment

Unrealized net actuarial loss

amortization of unrecognized loss

2 unchanged sentences

Other comprehensive loss

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

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

Amounts Reclassified from

Nine Months Ended

Three Months Ended

Accumulated Other Comprehensive Loss

September 30,

Affected Line Item in the Statement

4 unchanged sentences

Interest income on taxable investment securities

Provision for income tax expense

Credit for income tax expense

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

3 unchanged sentences

Interest income on taxable investment securities

Gains/(losses) recognized

Net gains/(losses)

Provision for income tax expense

4 unchanged sentences

Net SERP liability adjustment:

Amortization of unrecognized loss

Other Expense

Amortization of prior service costs

Salaries and employee benefits

Provision for income tax expense

Total reclassifications for the period

Amounts Reclassified from

Three Months Ended

Accumulated Other Comprehensive Loss

September 30,

Affected Line Item in the Statement

(in thousands)

Where Net Income is Presented

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

Accretable Yield

Interest income on taxable investment securities

Provision for income tax expense

Net unrealized losses on held to maturity securities:

Interest income on taxable investment securities

Gains/(losses) recognized

Net gains/(losses)

Provision for income tax expense

Net pension plan liability adjustment:

Amortization of unrecognized loss

Other expense

Amortization of prior service costs

Salaries and employee benefits

Provision for income tax expense

Net SERP liability adjustment:

Amortization of unrecognized loss

Amortization of unrecognized gain/(loss)

Other Expense

Amortization of prior service costs

Salaries and employee benefits

Provision for income tax expense

(Credit)/provision for income tax expense

Total reclassifications for the period

Note 8 – Employee Benefit Plans

The following tables present the components of the net periodic pension plan cost for First United Corporation’s noncontributory Defined Benefit Pension Plan (the “Pension Plan”) and the Bank’s Defined Benefit Supplemental Executive Retirement Plan (“Defined Benefit SERP”) for the periods indicated:

Nine Months Ended

Three Months Ended

September 30,

(in thousands)

Interest cost

Expected return on assets

Amortization of net actuarial loss

Net pension credit included in employee benefits and other expense

The market value of the pension plan decreased $ 12.5 million during the first nine months of 2022.

This decrease was due to the increasing rate environment and market volatility, which resulted in a pension plan liability of $ 7.7 million at September 30, 2022 compared to a pension plan asset of $ 4.8 million at December 31, 2021.

Nine Months Ended

Three Months Ended

Defined Benefit SERP

September 30,

(in thousands)

Interest cost

Amortization of recognized loss

Amortization of prior service cost

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

The service cost component of net periodic benefit cost is included in salaries and benefits and all other components of net periodic benefit cost are included in other expense in the Consolidated Statement of Operations for the Pension Plan and the Defined Benefit SERP.

The Pension Plan is a noncontributory defined benefit pension plan that covers our employees who were hired prior to the freeze and others who were grandfathered into the plan.

The benefits are based on years of service and the employees’ compensation during the last five years of employment.

Effective April 30, 2010, the Pension Plan was amended, resulting in a “soft freeze”, the effect of which prohibits new entrants into the plan and ceases crediting of additional years of service after that date.

Effective January 1, 2013, the Pension Plan was amended to unfreeze it for those employees for whom the sum of their (a) ages, at their closest birthday plus (b) years of service for vesting purposes equals 80 or greater.

The “soft freeze” continues to apply to all other plan participants.

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

The Bank established the Defined Benefit SERP in 2001 as an unfunded supplemental executive retirement plan.

The Defined Benefit SERP is available only to a select group of management or highly compensated employees to provide supplemental retirement benefits in excess of limits imposed on qualified plans by federal tax law.

Concurrent with the establishment of the Defined Benefit SERP, the Bank acquired Bank Owned Life Insurance (“BOLI”) policies on the senior management personnel and officers of the Bank.

The benefits resulting from the favorable tax treatment accorded the earnings on the BOLI policies are intended to provide a source of funds for the future payment of the Defined Benefit SERP benefits as well as other employee benefit costs.

The benefit obligation activity for both the Pension Plan and the Defined Benefit SERP was calculated using an actuarial measurement date of January 1.

Plan assets and the benefit obligations were calculated using an actuarial measurement date of December 31.

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

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

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

On January 9, 2015, First United Corporation and members of management who do not participate in the Defined Benefit SERP entered into participation agreements under the Deferred Compensation Plan, each styled as a Defined Contribution SERP Agreement (the “Contribution Agreement”).

Pursuant to each Contribution Agreement, First United Corporation agreed, for each Plan Year (as defined in the Deferred Compensation Plan) in which it determines that it has been Profitable (as defined in the Contribution Agreement), to make a discretionary contribution to the participant’s Employer Account in an amount equal to 15 % of the participant’s base salary level for such Plan Year, with the first Plan Year being the year ending December 31, 2015.

The Contribution Agreement provides that the participant will become 100% vested in the amount maintained in his or her Employer Account upon the earliest to occur of the following events:

(a) Normal Retirement (as defined in the Contribution Agreement);

(b) Separation from Service (as defined in the Contribution Agreement) following a Change of Control (as defined in the Deferred Compensation Plan) and subsequent Triggering Event (as defined in the Contribution Agreement);

(d) with respect to a particular award of Employer Contribution Credits, the participant’s completion of 2 consecutive Years of Service (as defined in the Contribution Agreement) immediately following the Plan Year for which such award was made;

or (e) death.

Notwithstanding the foregoing, however, a participant will

lose entitlement to the amount maintained in his or her Employer Account in the event employment is terminated for Cause (as defined in the Contribution Agreement).

In addition, the Contribution Agreement conditions entitlement to the amounts held in the Employer Account on the participant (1) refraining from engaging in Competitive Employment (as defined in the Contribution Agreement) for three years following his or her Separation from Service, (2) refraining from injurious disclosure of confidential information concerning the Corporation, and (3) remaining available, at the First United Corporation’s reasonable request, to provide at least six hours of transition services per month for 12 months following his or her Separation from Service (except in the case of death or Disability), except that only item (2) will apply in the event of a Separation from Service following a Change of Control and subsequent Triggering Event.

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

The Corporation recorded $ 37,971 of related compensation expense for the first nine months of 2022 and 2021 related to these contributions.

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

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

The Corporation recorded $ 38,883 of related compensation expense for the first nine months of 2022 and $ 12,961 of related compensation expense for the third quarter of 2022 related to these contributions.

Each discretionary contribution has a two year vesting period.

Note 9 - Equity Compensation Plan Information

4 unchanged sentences

Pursuant to First United Corporation’s director compensation policy, each director receives an annual retainer of 1,000 shares of First United Corporation common stock, plus $ 15,000 to be paid, at the director’s election, in cash or additional shares of common stock.

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

In May 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 $ 196,254 for the nine months ended September 30, 2022 and $ 191,717 for the nine months ended September 30, 2021.

Director stock compensation expense was $ 70,666 for the third quarter of 2022 and $ 58,857 for the third quarter of 2021.

In January 2023, a total of 333 fully vested shares of common stock were issued to a new director, which had a grant date fair value of $ 19.36 per share.

Director stock compensation expense was $ 75,501 for the three months ended March 31, 2023 and $ 58,858 for the three months ended March 31, 2022.

Restricted Stock Units

6 unchanged sentences

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

Actual results for any goal that

falls between performance levels would be interpolated to calculate a proportionate award.

For the performance period ending December 31, 2021, the RSUs’ performance goal is based on earnings per share for the year ending December 31, 2021.

Actual results for any goal that falls between performance levels would be interpolated to calculate a proportionate award.

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

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

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

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

1 unchanged sentence

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

On March 9, 2022, 14,688 shares of the 2019 LTIP performance plan were issued at maximum performance level.

On March 8, 2023, 15,216 shares relating to the 2020 performance plan (maximum level) were issued.

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

On March 28, 2022, 1,688 shares of the 3,380 remaining time vesting shares were issued to participants.

In the third quarter of 2022, it was projected that the growth metric will not be met at 50%;

therefore, the stock compensation expense was adjusted accordingly.

Stock compensation expense was ($ 5,299 ) and $ 78,381 for the nine month periods ended September 30, 2022 and 2021.

Stock compensation expense was ($ 37,091 ) and $ 26,127 for the third quarter of 2022 and 2021, respectively.

Unrecognized compensation expense at September 30, 2022 related to unvested RSUs was $ 21,195 .

On March 26, 2023, 1,692 shares of the remaining time vesting shares were issued to participants.

Stock compensation expense was $ 15,896 for the three months ended March 31, 2023 and $ 26,127 for the three month period ended March 31, 2022.

All compensation expense related to the 2019 LTIP was recognized as of March 31, 2022.

All compensation expense related to the 2020 LTIP plans has been recognized as of March 31, 2023.

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

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

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

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

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

Stock compensation expense was $ 49,714 and $ 27,619 for the first nine months of 2022 and 2021, respectively.

Stock compensation expense was $ 16,571 for both the third quarter of 2022 and 2021, respectively.

Unrecognized compensation expense as of September 30, 2022 related to unvested units was $ 104,951 .

Stock compensation expense was $ 16,571 for both of the three month periods ended March 31, 2023 and 2022.

Unrecognized compensation expense as of March 31, 2023 related to unvested units was $ 71,809 .

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

1 unchanged sentence

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

Stock compensation expense was $ 52,290 and $ 26,145 for the nine and three month periods ended September 30, 2022, respectively.

Unrecognized compensation expense as of September 30, 2022 related to unvested units was $ 261,453 .

On March 9, 2023 2,079 shares of the 6,238 time-vesting RSUs were issued to participants.

Stock compensation expense was $ 26,145 for the three months ended March 31, 2023.

Unrecognized compensation expense as of March 31, 2023 related to unvested units was $ 209,162 .

In March 2023, RSUs relating to 10,214 performance vesting shares and 7,920 time vesting shares (target level) for plan year 2023 were granted, which had a grant date fair market value of $ 18.25 per share of common stock underlying each RSU.

The performance period for the performance-vesting RSUs is the three year period ending December 31, 2025.

The time-vesting RSUs will vest ratably over a three year period beginning on March 15, 2024.

Unrecognized compensation expense as of March 31, 2023 related to unvested units was $ 331,018 .

Note 10 – Derivative Financial Instruments

3 unchanged sentences

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

As of September 30, 2022, $ 20.0 million notional amount remains.

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

For the nine months ended September 30, 2022, the Corporation recorded an increase in the value of the derivatives of $ 1.6 million and the related deferred tax of $ 0.5 million in net accumulated other comprehensive loss to reflect the effective portion of cash flow hedges.

For the three months ended September 30, 2022, the Corporation recorded an increase in the value of the derivatives of $ 0.5 million and the related deferred tax of $ 0.1 million in net accumulated other comprehensive loss to reflect the effective portion of cash flow hedges.

As of March 31, 2023, $ 15.0 million notional amount remains.

The fair value of the interest rate swap contracts was $ 0.9 million and $ 1.1 million at March 31, 2023 and December 31, 2022, respectively.

For the three months ended March 31, 2023, the Corporation recorded an decrease in the value of the derivatives of $ 0.2 million and the related deferred tax of $ 0.1 million in net accumulated other comprehensive income to reflect the effective portion of cash flow hedges.

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

There was no hedge ineffectiveness recorded for the six or three months ended September 30, 2022.

There was no hedge ineffectiveness recorded for the three months ended March 31, 2023.

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

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

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

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

Derivative in Cash Flow Hedging Relationships

15 unchanged sentences

Interest rate contracts:

Nine months ended:

September 30, 2022

September 30, 2021

Three months ended:

September 30, 2022

September 30, 2021

March 31, 2023

March 31, 2022

(a) Reported as interest expense

(b) Reported as other income

Note 11 – Revenue Recognition

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

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

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

Wealth Management – Trust and Brokerage

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

The Corporation’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate.

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

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

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

Payment is received shortly after services are rendered.

Service Charges on Deposit Accounts

Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, and other deposit account related fees.

The Corporation’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided.

Check orders and other deposit account related fees are largely transactional based, and therefore, the Corporation’s performance obligation is satisfied, and related revenue recognized, at a point in time.

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

Other Service Charges

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

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

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

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

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

Interchange Fees – Debit and Credit Card Income

Debit and credit card income is primarily comprised of interchange fees earned whenever the Corporation’s debit cards are processed through card payment networks such as Visa.

Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees.

Payment is typically received immediately or in the following month.

The following presents noninterest income, segregated by revenue streams that are within and outside the scope of ASC Topic 606, for the nine and three month periods ended September 30, 2022 and September 30, 2021:

Nine Months Ended

Three Months Ended

September 30,

(in thousands)

Noninterest income

In-scope of Topic 606:

Service charges on deposit accounts

Other service charges

Trust department

Debit card income

Brokerage commissions

Noninterest income (in-scope of Topic 606)

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

Total Noninterest Income

Note 11 – Regulatory Capital Requirements

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

September 30,

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

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

As of March 31, 2023 and December 31, 2022, the Bank was considered “well capitalized” under the regulatory framework for prompt corrective action.

We adopted CECL effective January 1, 2023 and elected not to implement the regulatory agencies’ capital transition and instead opted to record the impact to ouc capital ratios immediately upon implementation.

Effective with the implementation of CECL, a $ 2.2 million, net of tax, adjustment was made to retained earnings.

The adjustment did not have a material impact to our capital ratios.

Note 12 – Deposits

The following table summarizes deposits as of March 31, 2023 and December 31, 2022.

(dollars in thousands)

March 31, 2023

December 31, 2022

Non-Interest-bearing deposits:

Interest-bearing deposits:

Savings deposits

Time deposits- retail

Time deposits- brokered

Total Deposits

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

March 31, 2023

December 31, 2022

(dollars in thousands)

Insured/collateralized deposits

Uninsured deposits

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

March 31, 2023

December 31, 2022

(dollars in thousands)

Retail deposits

Business deposits

Deposit outflows experienced in the latter half of 2022 and in January 2023 were due to the competitive pricing landscape and inflationary spending.

Changes in deposit levels were not directly related to recent market disruptions.

Note 13 – Borrowed Funds

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

The following is a summary of borrowings:

(Dollars in thousands)

September 30, 2022

March 31, 2023

December 31, 2022

Overnight borrowings, weighted average interest rate of 3.25 % at September 30, 2022

Securities sold under agreements to repurchase:

4 unchanged sentences

Approximate weighted average rate during the period

Short term borrowings increased $ 32.0 million since December 31, 2021, driven by $ 20.0 million in overnight borrowings and an increase in our overnight investments Treasury product of $ 12.0 million during the quarter.

The increase in overnight borrowings at September 30, 2022 was primarily driven by the strong loan growth and a timing delay of the receipt of deposit funding from a large customer driven transaction.

These funds were received shortly after quarter end and subsequently repaid the $ 20.0 million in overnight borrowings in full.

At September 30, 2022, the repurchase agreements were secured by $ 85.4 million in investment securities issued by government related agencies.

FHLB advances, bearing fixed interest at rates ranging from 4.53 % to 4.69 % at March 31, 2023

Junior subordinated debt, bearing variable interest rate of 7.66 % at March 31, 2023 and 7.49 % at December 31, 2022

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

At March 31, 2023, the repurchase agreements were secured by $ 67.3 million in investment securities issued by government related agencies.

A minimum of 102 % of fair value is pledged against account balances.

Note 14 – Recent Accounting Pronouncements

Recently issued but not yet effective Accounting Pronouncements

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

Measurement of Credit Losses on Financial Instruments .

ASU 2016-13 introduces an approach based on expected losses to

estimate credit losses on certain types of financial instruments.

It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchases financial assets with credit deterioration since their origination.

The new model referred to as current expected credit losses (“CECL”) model, will apply to:

(a) financial assets subject to credit losses and measured at amortized cost;

and (b) certain off-balance sheet credit exposures.

This includes loans, held to maturity debt securities, loan commitments, financial guarantees and net investments in leases as well as reinsurance and trade receivables.

The estimate of expected credit losses should consider historical information, current information, and supportable forecasts, including estimates of prepayments.

ASU 2016-13 was originally effective for SEC filers for annual periods beginning after December 15, 2019, and interim periods within those annual periods.

In November 2019, the FASB approved a delay of the required implementation date of ASU No.

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

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

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

The Corporation is currently evaluating the provisions of ASU No.

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

In March 2020, the FASB issued ASU No.

2020-04, “Reference Rate Reform (Topic 848).” The ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.

The amendment only applies to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of the reference rate reform.

The ASU is effective as of March 12, 2020 and through December 31, 2022.

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

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

Troubled Debt Restructurings and Vintage Disclosures.

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

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

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

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

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

Long-term borrowings increased by $ 80.0 million due to management’s decision to implement the contingency funding plan in regards to the market disruption.

Two new borrowings totaling $ 80.0 million with maturities of 12 and 18 months in FHLB advances were obtained in the first quarter.

Note 14 – Segment Reporting

Currently, the Company conducts business in two operating segments:

(i) Community Banking and (ii) Trust and Investment Services.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies provided earlier in this report.

Business activity for the operating segments are as follows:

Community Banking :

The Community Banking segment is conducted through the Bank and involves delivering a broad range of financial products and services, including various loan and deposit products, to consumer, business, and not-for-profit customers.

Parent company income and assets are included in the Community Banking segment, as the majority of parent company functions are related to this segment.

Major revenue sources include net interest income, gains on sales of mortgage loans, and service charges on deposit accounts.

Expenses include personnel, occupancy, marketing, equipment, and other expenses.

Non-cash charges other than depreciation of fixed assets were immaterial for the three months ended March 31, 2023 and 2022.

Trust and Investment Services :

The Trust and Investment Services segment is conducted through the Bank and offers corporate trustee services, trust and estate administration, IRA administration and custody services.

Revenues for this segment is generated from administration, service and custody fees, as well as management fees that are derived from Assets Under Management.

Expenses include personnel, occupancy, marketing, equipment, and other expenses.

Non-cash charges associated with amortization of intangibles were approximately $ 52,000 thousand for the three months ended March 31, 2023 and 2022.

Information for the operating segments for the periods indicated are presented in the following tables:

Three Months Ended

March 31, 2023

(in thousands)

Interest income

Interest expense

Credit loss expense

Non-interest income

Non-interest expense

Income before income taxes and intercompany fees

Intercompany management fee income (expense)

Income before income taxes

Income tax expense

Three Months Ended

March 31, 2022

(in thousands)

Interest income

Interest expense

Credit for loan losses

Non-interest income

Non-interest expense

Income before income taxes and intercompany fees

Intercompany management fee income (expense)

Income before income taxes

Income tax expense

Total non-fiduciary assets of the trust and investment services segment were $ 0.9 million (including $ 0.8 million in intangible assets) as of March 31, 2023 and $ 1.1 million (including $ 1.0 million in intangible assets) as of March 31, 2022.

All other assets were allocated to the Community Banking segment.

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

What changed 10-Q

Item 1. Financial Statements