What changed in this filing

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Item 1. Financial Statements

2023-08-09 compared with 2023-05-12 · 504 added, 255 removed, 1066 unchanged (42% of the section changed)

7 unchanged sentences

Investment securities – available for sale (at fair value)

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

Investment securities – held to maturity (fair value $ 199,071 at June 30, 2023 and $ 203,080 at December 31, 2022)

Restricted investment in bank stock, at cost

8 unchanged sentences

Right of use assets

Trust receivable

Pension asset

15 unchanged sentences

Authorized 25,000,000 shares;

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

issued and outstanding 6,711,422 shares at June 30, 2023 and 6,666,428 at December 31, 2022

Retained earnings

6 unchanged sentences

(In thousands, except per share data)

Three Months Ended

Six Months Ended

Interest income

13 unchanged sentences

Net Interest income

Credit loss expense/(credit) - loans

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

Credit loss expense/(credit)

Credit loss expense - loans

Credit loss expense - off-balance sheet credit exposures

Credit loss expense

Net interest income after provision for credit losses

20 unchanged sentences

Contract labor

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

Total OREO expenses, net

Investor relations

10 unchanged sentences

First United Corporation and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share data)

Three Months Ended

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

Credit loss expense - loans

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

Credit loss expense

Net interest income after provision for credit losses

Other operating income

Gains on sale of residential mortgage loans

Gains on disposal of fixed assets

Service charges on deposit accounts

Other service charges

Trust department

Debit card income

Bank owned life insurance

Brokerage commissions

Total other income

Total other operating income

Other operating expenses

Salaries and employee benefits

FDIC premiums

Data processing

Professional services

Contract labor

Total OREO expenses, net

Investor relations

Contributions

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

First United Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income/ (Loss)

(In thousands)

Three Months Ended

Six Months Ended

Comprehensive Income/(Loss)

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

Other comprehensive loss, net of tax and reclassification adjustments:

Available for sale securities:

Unrealized holding (losses)/gains on investments with OTTI

Unrealized holding losses on investments with OTTI

Reclassification adjustment for accretable yield realized in income

Other comprehensive (loss)/income on investments with OTTI

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

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

Other comprehensive losses on all other AFS investments

Held to Maturity Securities

3 unchanged sentences

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

Unrealized holding gains on cash flow hedges

Other comprehensive income on cash flow hedges

Pension plan liability:

6 unchanged sentences

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

Other comprehensive losses before income tax

Income tax benefit related to other comprehensive income

Other comprehensive loss, net of tax

Comprehensive income/(loss)

1 unchanged sentence

First United Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income/(Loss)

(In thousands)

Three Months Ended

Comprehensive Income/(Loss)

Other comprehensive loss, net of tax and reclassification adjustments:

Available for sale securities:

Unrealized holding gains/(losses) on investments with OTTI

Reclassification adjustment for accretable yield realized in income

Other comprehensive income/(losses) on investments with OTTI

Unrealized holding losses on all other AFS investments

Reclassification adjustment for gains realized in income

Other comprehensive losses on all other AFS investments

Held to Maturity Securities

Unrealized holding losses on HTM investments

Reclassification adjustment for amortization realized in income

Other comprehensive income on HTM investments

Cash flow hedges:

Unrealized holding gains on cash flow hedges

Other comprehensive income on cash flow hedges

Pension plan liability:

Unrealized holding losses on pension plan liability

Reclassification adjustment for amortization of unrecognized loss realized in income

Other comprehensive gains/(losses) on pension plan liability

SERP liability:

Unrealized holding losses on SERP liability

Reclassification adjustment for amortization of unrealized loss realized in income

Other comprehensive (loss)/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/(loss)

First United Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

9 unchanged sentences

Balance at March 31, 2023

Other comprehensive loss

Stock based compensation

Common stock issued - 18,416 shares

Common stock dividend declared - $ 0.20 per share

Balance at June 30, 2023

First United Corporation and Subsidiaries

9 unchanged sentences

Balance at March 31, 2022

See accompanying notes to the consolidated financial statements

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

See accompanying notes to the consolidated financial statement

First United Corporation and Subsidiaries

1 unchanged sentence

(In thousands)

Three Months Ended

Six Months Ended

Operating activities

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

Provision/(credit) for credit/loan losses

Provision for credit losses

Stock based compensation

Gains on sales of other real estate owned

Write-downs of other real estate owned

Gain on sales of other real estate owned

Write-ups of other real estate owned, net

Originations of loans held for sale

9 unchanged sentences

Amortization of operating lease right of use asset

Decrease in accrued interest receivable and other assets

Deferred tax (benefit)/expense

(Increase)/decrease in accrued interest receivable and other assets

Deferred tax expense/(benefit)

Operating lease liability

Decrease in accrued interest payable and other liabilities

Increase in accrued interest payable and other liabilities

Net cash provided by operating activities

17 unchanged sentences

Proceeds from long-term borrowings

Net cash provided by/(used in) financing activities

Net cash provided by financing activities

Increase/(decrease) in cash and cash equivalents

4 unchanged sentences

Non-cash investing activities:

Transfers from loans to other real estate owned

Transfers from securities available for sale to held to maturity

See accompanying notes to the consolidated financial statements

FIRST UNITED CORPORATION

2 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.

First United Corporation has prepared these unaudited condensed consolidated financial statements in accordance with GAAP for interim financial information, rules of the Securities and Exchange Commission that permit reduced disclosure for interim periods, and Article 8 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.

Operating results for the three- and six-month periods ended June 30, 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.

6 unchanged sentences

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 March 31, 2023 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 June 30, 2023 and through the date these consolidated financial statements were issued, for items of potential recognition or disclosure.

Newly Adopted Pronouncements in 2023

1 unchanged sentence

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

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

Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), 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.

2 unchanged sentences

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.

For periodic report filers that are smaller reporting companies, such as the Corporation, ASU 2016-13 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.

2 unchanged sentences

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.

In addition, ASU 2016-13 amends the accounting for credit losses on certain debt securities.

The Corporation did not record any allowance for credit losses (“ACL”) on its debt securities as a result of adopting this ASU.

The ultimate impact of adopting ASU 2016-13, 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 Corporation adopted ASU 2016-13 using the modified retrospective method.

Results beginning after January 1, 2023 are presented under ASU 2016-13, 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.

The following table illustrates the day-one impact of adopting ASU 2016-13.

January 1, 2023

(Dollars in thousands)

As Reported Under Topic 326

Impact of Topic 326 Adoption

As Reported Under ASU 2016-13

Impact of ASU 2016-13 Adoption

Allowance for credit losses on loans

10 unchanged sentences

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.

In connection with our adoption of ASU 2016-13, 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):

The adoption of ASU 2016-13 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 Corporation did not record any ACL on its available-for-sale or held-to-maturity investments upon adoption of ASC 326.

The Corporation recorded a net decrease to retained earnings of $ 2.2 million as of January 1, 2023 for the cumulative effect of adopting ASU 2016-13.

In March 2022, the FASB issued ASU No.

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.

ASU 2022-02, which eliminates the troubled debt restructuring (“TDR”) accounting model for creditors that have adopted ASU 2016-13, “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 ASU 2022-02 also required that entities disclose current-period gross charge-offs by year of origination for loans and leases.

The amendments in ASU 2022-02 were effective January 1, 2023.

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

1 unchanged sentence

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 represents an amount that, 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.

6 unchanged sentences

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:

The Corporation’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.

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

Specific Analysis .

5 unchanged sentences

Quantitative Analysis.

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

The Corporation 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.

9 unchanged sentences

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

Management also enhances the calculation through the use of Moody’s economic forecast data in its calculation.

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

1 unchanged sentence

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.

The Corporation’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.

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

The RUC on off-balance sheet credit exposures 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 Corporation’s Consolidated Balance Sheet.

Loan Restructurings

1 unchanged sentence

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.

The Corporation modifies loans to borrowers in financial distress by providing principal forgiveness, term extension, an other-than-insignificant payment delay, or interest rate reductions.

When principal forgiveness is provided, the amount of forgiveness is charged-off against the allowance for credit losses.

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

1 unchanged sentence

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.

The Corporation utilizes Accounting Standards Codification (“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 Corporation 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.

For AFS debt securities that do not meet the aforementioned criteria, the Corporation 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.

2 unchanged sentences

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.

The Corporation 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.

Amounts previously written recognized in other comprehensive income (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.

(i) the Corporation intends to sell the security or;

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

or (iii) the Corporation 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 not recorded as a provision for (or credit to) credit losses.

1 unchanged sentence

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.

We have made a policy election to exclude accrued interest from 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.

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.

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

The Corporation 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 included in the balance of investment securities held-to-maturity on the Consolidated Balance Sheets.

If the Corporation 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 basis.

Note 2 – Accounting Statements Issued but Not Yet Adopted

12 unchanged sentences

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 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,

There were no anti-dilutive shares outstanding at June 30, 2023 or 2022.

The following table sets forth the calculation of basic and diluted earnings per common share for the six and three month periods ended June 30, 2023 and 2022:

Six months ended June 30,

(in thousands, except for per share amount)

2 unchanged sentences

Restricted stock units

Three months ended June 30,

(in thousands, except for per share amount)

Basic Earnings Per Share:

Diluted Earnings Per Share:

Restricted stock units

Note 4 – Investments

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

The following tables show a comparison of amortized cost and fair values of investment securities at June 30, 2023 and December 31, 2022:

(in thousands)

1 unchanged sentence

Estimated Fair Value

March 31, 2023

June 30, 2023

Available for Sale:

10 unchanged sentences

Allowance for Credit Losses

March 31, 2023

June 30, 2023

Held to Maturity:

29 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 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:

The following table shows the Corporation’s investment securities with gross unrealized and unrecognized losses and fair values at June 30, 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)

March 31, 2023

June 30, 2023

Available for Sale:

10 unchanged sentences

(in thousands)

March 31, 2023

June 30, 2023

Held to Maturity:

29 unchanged sentences

Total held to maturity

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

The Corporation 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.

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

2 unchanged sentences

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.

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

1 unchanged sentence

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.

The Corporation 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.

1 unchanged sentence

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:

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

The Corporation 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 Corporation 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 basis.

As of June 30, 2023, the Corporation 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 credit-related impairment charges related to credit losses that have been previously recognized in earnings for the trust preferred securities held in the collateralized debt obligation (“CDO”) portfolio during the six and three month periods ended June 30, 2023 and 2022 that the Corporation does not intend to sell:

Six Months Ended

(in thousands)

Balance of credit-related impairment at January 1

Reduction for increases in cash flows expected to be collected

Balance of credit-related impairment at June 30

Three Months Ended

(in thousands)

Balance of credit-related OTTI at January 1

Balance of credit-related impairment at April 1

Reduction for increases in cash flows expected to be collected

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.

Balance of credit-related impairment at June 30

The amortized cost and estimated fair value of securities by contractual maturity at June 30, 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.

March 31, 2023

June 30, 2023

(in thousands)

18 unchanged sentences

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:

The following table summarizes the primary segments of the loan portfolio at June 30, 2023 and December 31, 2022:

(in thousands)

March 31, 2023

June 30, 2023

Individually evaluated for impairment

3 unchanged sentences

Collectively evaluated for impairment

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:

The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and non-accrual loans at June 30, 2023 and December 31, 2022:

(in thousands)

March 31, 2023

June 30, 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 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.

Non-accrual loans that have been subject to partial charge-offs totaled $ 0.1 million at June 30, 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 $ 1.8 million at June 30, 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.

As a percentage of the loan portfolio, accruing

loans past due 30 days or more was 0.18 % at June 30, 2023 compared to 0.17 % at March 31, 2023 and 0.16 % at December 31, 2022.

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

2022-02, which eliminated the recognition and measurement of TDRs.

Due to the removal of the TDR designation, the Corporation 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;

A loan that is considered a non-accrual or 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.

There were no loan modifications made to borrowers facing financial difficulties in the three- or six-month period ending June 30, 2023.

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

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

(i) commercial real estate, (ii) acquisition and development, (iii) commercial and industrial, (iv) residential mortgage, and (v) consumer.

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

The segmentation in the 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.

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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.

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 Corporation’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.

7 unchanged sentences

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:

The following table summarizes the primary segments of the ACL at June 30, 2023 and allowance for loan loss (“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)

March 31, 2023

June 30, 2023

Individually evaluated

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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

The following table presents the amortized cost basis of collateral-dependent individually evaluated loans as of June 30, 2023.

June 30, 2023

(dollars in thousands)

Non-Accrual Loans with No Allowance

Commercial real estate

Acquisition and development

Commercial and industrial

Residential mortgage

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

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

The following tables present the activity in the ACL and ALL for the six- and three- month periods ended June 30, 2023 and 2022:

Three months ended (in thousands)

1 unchanged sentence

Impact of adopting ASC 326

Credit Loss Expense

Loan Charge-offs

Recoveries collected

ACL balance at March 31, 2023

Credit Loss Expense

ACL balance at June 30, 2023

ALL balance at January 1, 2022

1 unchanged sentence

Recoveries collected

ALL balance at March 31, 2022

The Company’s methodology for estimating the ACL includes:

Credit Loss Expense

ALL balance at June 30, 2022

Three months ended (in thousands)

ACL balance at April 1, 2023

Loan Charge-offs

Recoveries collected

Credit Loss Expense

ACL balance at June 30, 2023

ALL balance at April 1, 2022

Credit Loss Expense

ALL balance at June 30, 2022

The Corporation’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.

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

Specific Analysis.

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

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

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

Quantitative Analysis.

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

The Corporation elected to use DCF.

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

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

Management also enhances the calculation through the use of Moody’s economic forecast data in its calculation.

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

1 unchanged sentence

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.

Credit Quality Indicators:

The Corporation’s portfolio grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all.

The Corporation’s internal credit risk grading system is based on debt service coverage, collateral values and other subjective factors.

Mortgage and consumer loans are defaulted to pass grade until a loan migrates to past due status.

The Corporation has a loan review policy and annual scope report that details the level of loan review for loans in a given year.

The annual loan review provides the Credit Risk Committee with an independent analysis of the following:

(i) credit quality of the loan portfolio, (ii) compliance with loan policy, (iii) adequacy of documentation in credit files and (iv) validity of risk ratings.

The Corporation’s internally assigned grades are as follows:

Pass - The Corporation uses six grades of pass, including its watch rating.

Generally, a pass rating indicates that the loan is currently performing and is of high quality.

Special Mention - Assets with potential weaknesses that warrant management’s close attention and if left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date.

Substandard - Assets that are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any.

Assets so classified have a well-defined weakness, or weaknesses that jeopardize the liquidation of

Such assets are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful - Assets with all weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable.

Loss - Assets considered of such little value that its continuance on the books is not warranted.

This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical to defer writing off this basically worthless asset even though partial recovery may be affected in the future.

The ability of borrowers to repay commercial loans is dependent upon the success of their business and general economic conditions.

Due to the greater potential for loss within our commercial portfolio, we monitor the commercial loan portfolio through an internal risk rating system.

Loan risk ratings are assigned based upon the creditworthiness of the borrower and are reviewed on an ongoing basis according to our internal policies.

Loans rated special mention or substandard have potential or well-defined weaknesses not generally found in high quality, performing loans, and require attention from management to limit loss.

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

2 unchanged sentences

Total Portfolio Loans

March 31, 2023

June 30, 2023

Commercial real estate:

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Special Mention

Total residental mortgage - term

Total residential mortgage - term

Current period gross charge-offs

1 unchanged sentence

Special Mention

Total residental mortgage - home equity

Total residential mortgage - home equity

Current period gross charge-offs

36 unchanged sentences

Special Mention

Total residental mortgage - term

Total residential mortgage - term

Current period gross charge-offs

1 unchanged sentence

Special Mention

Total residental mortgage - home equity

Total residential mortgage - home equity

Current period gross charge-offs

12 unchanged sentences

Total Portfolio Loans

March 31, 2023

June 30, 2023

Commercial real estate:

18 unchanged sentences

Nonperforming

Total residental mortgage - term

Total residential mortgage - term

Residential mortgage - home equity

Nonperforming

Total residental mortgage - home equity

Total residential mortgage - home equity

Nonperforming

27 unchanged sentences

Nonperforming

Total residental mortgage - term

Total residential mortgage - term

Residential mortgage - home equity

Nonperforming

Total residental mortgage - home equity

Total residential mortgage - home equity

Nonperforming

3 unchanged sentences

Total Portfolio Loans

Note 6 - Other Real Estate Owned, net

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

(in thousands)

Acquisition and development

Residential mortgage

Total OREO, net

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

(in thousands)

Balance beginning of period

Fair value adjustment

Sales of OREO

Balance at end of period

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

(in thousands)

Gains on sale of real estate, net

Fair value adjustment, net

Expenses, net

Rental and other income

Total OREO expenses, net

Note 6 – 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 March 31, 2023, the U.S.

As of June 30, 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.

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

The TIF bonds and collateralized debt obligation (“CDO”) portfolio, which consists of pooled trust preferred securities issued by banks, thrifts, and insurance companies, are classified as Level 3 within the valuation hierarchy.

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

The CDO fair values are determined by a third party using a discounted cash flow model.

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

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

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

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

1 unchanged sentence

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

For assets measured at fair value on a recurring and non-recurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2023 and December 31, 2022 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 June 30, 2023 and December 31, 2022 were as follows:

Fair Value Measurements

at March 31, 2023 Using

at June 30, 2023 Using

Active Markets

12 unchanged sentences

Equity Investment

Other real estate owned

Fair Value Measurements

17 unchanged sentences

Other real estate owned

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

At June 30, 2023, individually evaluated loans had a net carrying amount of $ 2.2 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 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:

There were no transfers of assets between any of the fair value hierarchy for the six month periods ended June 30, 2023 or 2022.

For Level 3 assets and liabilities measured at fair value on a recurring and non-recurring basis as of June 30, 2023 and December 31, 2022, the significant unobservable inputs used in the fair value measurements were as follows:

(in thousands)

3 unchanged sentences

Discount Margin

Range of low to mid 500 and low to high 700

Range of high 500 to low to mid 600

Non-recurring:

5 unchanged sentences

Revenue Multiples

Other Real Estate Owned

Market Comparable Properties

Marketability Discount

(in thousands)

13 unchanged sentences

Revenue Multiples

Other Real Estate Owned

Market Comparable Properties

Marketability Discount

(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 three month period ended March 31, 2023 and 2022:

Fair Value Measurements

6 unchanged sentences

Included in other comprehensive loss

Ending balance March 31, 2023

Ending balance June 30, 2023

Fair Value Measurements

6 unchanged sentences

Included in other comprehensive loss

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.

Ending balance June 30, 2022

Fair Value Measurements

Using Significant Unobservable Inputs

(in thousands)

Investment Securities

Available for Sale

Beginning balance April 1, 2023

Total gains realized/unrealized:

Included in other comprehensive income

Ending balance June 30, 2023

Fair Value Measurements

Using Significant Unobservable Inputs

(in thousands)

Investment Securities

Available for Sale

Beginning balance April 1, 2022

Total losses realized/unrealized:

Included in other comprehensive income

Ending balance June 30, 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 six or three month periods ended June 30, 2023 or 2022.

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

1 unchanged sentence

Therefore, they cannot be determined with precision.

Changes in the assumptions could significantly impact the derived estimates of fair value.

Changes in the assumptions could significantly impact the derived estimates

of fair value.

Disclosure of non-financial assets such as buildings, as well as certain financial instruments such as leases is not required.

2 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:

March 31, 2023

June 30, 2023

Fair Value Measurements

28 unchanged sentences

Restricted bank stock

Loan held for sale

Loans held for sale

Financial derivative

8 unchanged sentences

Note 7 – Accumulated Other Comprehensive Loss

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

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 periods ended March 31, 2023 and June 30, 2023:

(in thousands)

1 unchanged sentence

Balance - January 1, 2022

Other comprehensive income/(loss) before reclassifications

Other comprehensive (loss)/income before reclassifications

Amounts reclassified from accumulated other comprehensive loss

Balance - December 31, 2022

Other comprehensive (loss)/income before reclassifications

Amounts reclassified from accumulated other comprehensive income

Balance - March 31, 2023

Other comprehensive income/(loss) before reclassifications

Amounts reclassified from accumulated other comprehensive loss

Balance - March 31, 2023

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

Balance - June 30, 2023

The following tables present the components of other comprehensive loss for the six and three month periods ended June 30, 2023 and 2022:

Components of Other Comprehensive Loss

(in thousands)

For the three months ended March 31, 2023

For the six months ended June 30, 2023

Available for sale (AFS) securities with OTTI:

3 unchanged sentences

Available for sale securities – all other:

Unrealized holding gains

Unrealized holding losses

Held to maturity securities:

3 unchanged sentences

Cash flow hedges:

Unrealized holding losses

Unrealized holding gains

Pension Plan:

3 unchanged sentences

Unrealized net actuarial loss

amortization of unrecognized gain

amortization of unrecognized loss

Net SERP liability adjustment

Other comprehensive income

Other comprehensive loss

Components of Other Comprehensive Loss

(in thousands)

For the three months ended March 31, 2022

For the six months ended June 30, 2022

Available for sale (AFS) securities with OTTI:

1 unchanged sentence

accretable yield recognized in income

Net unrealized gains on investments with OTTI

Net unrealized losses on investments with OTTI

Available for sale securities – all other:

6 unchanged sentences

amortization recognized in income

Net unrealized loss on HTM securities

Net unrealized losses on HTM securities

Cash flow hedges:

4 unchanged sentences

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 three month period ended March 31, 2023 and 2022:

Components of Other Comprehensive Loss

(in thousands)

For the three months ended June 30, 2023

Available for sale (AFS) securities with OTTI:

Unrealized holding losses

accretable yield recognized in income

Net unrealized gains on investments with OTTI

Available for sale securities – all other:

Net unrealized losses on all other AFS securities

Held to maturity securities:

Unrealized holding gains

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 June 30, 2022

Available for sale (AFS) securities with OTTI:

Unrealized holding gains

accretable yield recognized in income

Net unrealized losses on investments with OTTI

Available for sale securities – all other:

Unrealized holding losses

gains recognized in income

Net unrealized 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

amortization of prior service costs

Net pension plan liability adjustment

Unrealized net actuarial loss

amortization of unrecognized loss

amortization of prior service costs

Net SERP liability adjustment

Other comprehensive loss

The following table presents the details of amounts reclassified from accumulated other comprehensive loss for the six and three month periods ended June 30, 2023 and 2022:

Amounts Reclassified from

Three Months Ended

Six Months Ended

Accumulated Other Comprehensive Loss

21 unchanged sentences

Total reclassifications for the period

Amounts Reclassified from

Three Months Ended

Accumulated Other Comprehensive Loss

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

Provision for income tax expense

Net pension plan liability adjustment:

Amortization of unrecognized loss

Other expense

Provision for income tax expense

Net SERP liability adjustment:

Amortization of unrecognized loss

Other expense

Provision for income tax expense

Total reclassifications for the period

Note 8 - Equity Compensation Plan Information

5 unchanged sentences

In May 2023, a total of 16,931 fully vested shares of common stock were issued to directors, which had a grant date fair value of $ 13.23 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.

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.

Director stock compensation was $ 138,001 for the six months ended June 30, 2023 and $ 125,588 for the six months ended June 30, 2022.

Director stock compensation expense was $ 62,500 for the quarter ended June 30, 2023 and $ 66,730 for the quarter ended June 30, 2022.

During the six- and three- month periods ended June 30, 2023, employee stock compensation expense was $ 0.2 million and $ 0.1 million, respectively.

Employee stock compensation expense was $ 0 for both the six- and three- month periods ended June 30, 2022.

Restricted Stock Units

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

Corporation’s principal executive officer, its principal financial officer, and certain of its other executive officers.

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

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

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

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

7 unchanged sentences

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

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

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

On March 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.

In the first quarter of 2020, RSUs were granted relating to (i) 9,791 performance-vesting shares (target level) for the performance period ending December 31, 2021 (the “2019 LTIP year”) and (ii) 10,143 performance-vesting shares and 5,070 time-vesting shares (target level) for the performance period ending December 31, 2022 (the “2020 LTIP year”).

Each RSU had a grant date fair market value of $ 12.54 per share of common stock underlying the RSU.

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 subject to RSUs granted for the 2019 LTIP year were issued at maximum performance level.

On March 8, 2023, 15,216 shares subject to RSUs granted for the 2020 LTIP year were issued at maximum performance.

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

1 unchanged sentence

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.

Stock compensation expense was $ 15,896 for the six months ended June 30, 2023, and $ 42,024 for the six months ended June 30, 2022.

Stock compensation expense was $ 0 and $ 15,896 for the second quarters of 2023 and 2022, respectively.

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

All compensation expense related to the 2020 LTIP plans was 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.

2 unchanged sentences

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

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 .

On May 5, 2023, 1,230 shares of the remaining 2,463 time vesting shares were issued to the participants.

Stock compensation expense was $ 33,142 for the six-month periods ended of 2023 and 2022.

Stock compensation expense was $ 16,571 for both of the three month periods ended June 30, 2023 and 2022.

Unrecognized compensation expense as of June 30, 2023 related to unvested units was $ 183,017 .

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.

2 unchanged sentences

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 .

Stock compensation expense was $ 52,290 and $ 26,145 for the six months ended June 30, 2023 and 2022, respectively.

Stock compensation expense was $ 26,145 for both of the three month periods ended June 30, 2023 and 2022.

Unrecognized compensation expense as of June 30, 2023 related to unvested units was $ 183,017 .

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.

1 unchanged sentence

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 .

Stock compensation expense was $ 27,585 for both the six and three month periods ended June 30, 2023.

Unrecognized compensation expense as of June 30, 2023 related to unvested units was $ 303,434 .

Note 9– 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 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.

As of June 30, 2023, $ 15.0 million notional amount remains.

The interest rate swap creates an effective fixed interest rate of 4.6450 % on the $ 15.0 million notional amount of the Corporation’s junior subordination debt until the interest rate swap’s maturity in March 2026.

The fair value of the interest rate swap contracts was $ 1.1 million at June 30, 2023 and December 31, 2022.

For the six months ended June 30, 2023, the Corporation recorded an increase in the value of the derivatives of $ 16 thousand and the related deferred tax of $ 4 thousand in net accumulated other comprehensive loss to reflect the effective portion of cash flow hedges.

For the three months ended June 30, 2023, the Corporation recorded an increase 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 three months ended March 31, 2023.

There was no hedge ineffectiveness recorded for the six or three month periods ended June 30, 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 March 31, 2023.

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.

The table below discloses the impact of derivative financial instruments on the Corporation’s Consolidated Financial Statements for the six and three month periods ended June 30, 2023 and 2022.

Derivative in Cash Flow Hedging Relationships

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Interest rate contracts:

Six months ended:

June 30, 2023

June 30, 2022

Three months ended:

March 31, 2023

March 31, 2022

June 30, 2023

June 30, 2022

(a) Reported as interest expense

1 unchanged sentence

Note 10 – Regulatory Capital Requirements

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

The following table presents our capital ratios as of June 30, 2023 and December 31, 2022.

Total Capital (to risk-weighted assets)

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Tier 1 Capital (to average assets)

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.

As of June 30, 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 our capital ratios immediately upon implementation.

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

1 unchanged sentence

Note 11 – Deposits

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

The following table summarizes deposits as of June 30, 2023 and December 31, 2022.

(dollars in thousands)

March 31, 2023

June 30, 2023

December 31, 2022

5 unchanged sentences

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

June 30, 2023

December 31, 2022

2 unchanged sentences

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

The following table summarizes the percentage of deposit balances from retail customers compared to business customers as June 30, 2023 and December 31, 2022.

June 30, 2023

December 31, 2022

2 unchanged sentences

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 12 – Borrowed Funds

1 unchanged sentence

(Dollars in thousands)

March 31, 2023

June 30, 2023

December 31, 2022

Short-term Correspondent Bank Advance:

Securities sold under agreements to repurchase:

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Approximate weighted average rate during the period

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.

FHLB advances, bearing fixed interest at rates ranging from 4.53 % to 4.69 % at June 30, 2023

Junior subordinated debt, bearing variable interest rate of 8.26 % at June 30, 2023 and 7.49 % at December 31, 2022

Total borrowings outstanding

At June 30, 2023, the repurchase agreements were secured by $ 66.4 million in investment securities issued by government related agencies.

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

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 13 – Segment Reporting

Currently, the Company conducts business in two operating segments:

Currently, the Corporation conducts business in two operating segments:

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

6 unchanged sentences

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.

Non-cash charges other than depreciation of fixed assets were immaterial for the six and three months ended June 30, 2023 and 2022.

Trust and Investment Services :

2 unchanged sentences

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:

Non-cash charges associated with amortization of intangibles were approximately $ 104,000 for both of the six month periods ended June 30, 2023 and 2022 and $ 52,000 for both of the three month periods ended June 30, 2023 and 2022.

Information for the operating segments for the six and three month periods ended June 30, 2023 are presented in the following tables:

Six Months Ended

June 30, 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

Six months ended

June 30, 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

Three Months Ended

March 31, 2023

June 30, 2023

(in thousands)

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Three Months Ended

March 31, 2022

June 30, 2022

(in thousands)

8 unchanged sentences

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.

Total non-fiduciary assets of the trust and investment services segment were $ 0.8 million (including $ 0.7 million in intangible assets) as of June 30, 2023 and $ 0.9 million (including $ 0.8 million in intangible assets) as of December 31, 2022.

Note 14 – Goodwill

ASC Topic 350, Intangibles- Goodwill and Other Intangibles provides guidance with respect to goodwill.

Under this guidance, goodwill is not amortized but shall be tested at least annually for impairment at a level of accounting referred to as a reporting unit.

The Corporation is considered the sole reporting unit.

Goodwill of a reporting unit shall be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

Impairment of goodwill is the condition that exists when the carrying amount of a reporting unit that includes goodwill exceeds the fair value.

A goodwill impairment loss is recognized for the amount that the carrying amount of a reporting unit, including goodwill, exceeds fair value, limited to the total amount of goodwill allocated to that reporting unit.

An entity may assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill.

If after assessing the totality of events or circumstances qualitatively, an entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the quantitative goodwill impairment test is unnecessary.

Management notes that the heightened liquidity concerns that caused the failure of three banks in the United States in 2023 has had global impacts on some macroeconomic conditions and has created an unprecedented economic environment in which the Corporation and many other financial institutions are operating.

The uncertainty has resulted in a significant decrease in the Corporation’s stock price, as well as the banking industry in general.

Based on the totality of the circumstances and the impact of the economic conditions on the stock price, the events more likely than not reduce the fair value of a reporting unit below its carrying amount, including goodwill.

An internal analysis of the fair value of the Corporation as of June 30, 2023, was performed.

The results of the of the internal analysis determined fair value exceeded carrying value and, therefore, management has concluded there is no impairment at June 30, 2023.

Management will continue to monitor the goodwill throughout the remainder of 2023.

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