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Item 8. Financial Statements and Supplementary Data

2024-03-15 compared with 2023-03-24 · 698 added, 514 removed, 1204 unchanged (50% of the section changed)

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Notes to Consolidated Financial Statements for the years ended December 31, 2023 and 2022

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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Opinion on the Financial Statements

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

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

We have audited the accompanying consolidated statements of financial condition of First United Corporation (the "Company") as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.

Change in Accounting Principle

As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2023 due to the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Codification No.

326, Financial Instruments - Credit Losses (ASC 326).

The Company adopted the new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles.

The adoption of the new credit loss standard and its subsequent application is also related to the critical audit matter communicated below.

Basis for Opinion

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

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

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

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

Allowance for Loan Losses – Qualitative Factors

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

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

rate based on historical losses and qualitative factors.

Qualitative factors are used to adjust historical loss

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

trends in delinquency rates and non-accrual loans;

trends in volumes and terms of loans;

effects of changes

in lending policies;

experience, ability, and depth of lending staff;

value of underlying collateral;

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concentrations of credit.

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

calculation is subjective.

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

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

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

included, among others:

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

● Evaluation of management judgments involved in the assessment of the qualitative factors, including the reasonableness and appropriateness of the magnitude of the adjustments for the factors, and the resulting allocation to the allowance.

● Testing the mathematical accuracy of the allowance calculation, including the calculation of the qualitative allowance, which included the accuracy of the allocation of the qualitative factors.

Allowance for Credit Losses on Loans – Reasonable and Supportable Forecasts and Assumptions

In accordance with Accounting Standards Update (the “ASU”) 2016-13, Financial Instruments —Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments , the Company adopted Accounting Standards Codification (“ASC”) 326 as of January 1, 2023 as described in Notes 1 and 5 of the consolidated financial statements using the modified retrospective method.

See also explanatory paragraph above.

The ASU requires the Company's loan portfolio, measured at amortized cost, to be presented at the net amount expected to be collected.

Estimates of expected credit losses for loans are based on evaluation of the size of the portfolio, current risk characteristics, past events, current conditions, reasonable and supportable forecasts of future economic conditions and prepayment experience.

The Company disclosed the impact of adoption of this standard on January 1, 2023 with an increase of $2.0 million to the allowance for credit losses on loans.

The Company recorded a $2.2 million decrease to retained earnings for the cumulative effect adjustment upon adoption.

Provision expense for the year ending December 31, 2023 was $1.6 million and the allowance for credit losses as of December 31, 2023 was $17.5 million.

The Company’s methodology for estimating the allowance for credit losses on loans includes quantitative and qualitative components of the calculation.

The quantitative analysis includes using a discounted cash flow (DCF) model for determining the allowance for credit losses.

Management leverages economic projections from a third party source for its forecasts over the forecast period.

Economic forecast models include but are not limited to unemployment, the Consumer Price Index, the Housing Affordability Index, and Gross State Product (“loss drivers”).

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, which vary over time.

Forecast and reversion periods as well as the selection and application of economic forecast models are considered assumptions applied by management .

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

Management developed a qualitative framework in which maximum loss rates are established considering economic forecasts that serve as the basis for determining the reasonableness of the quantitative model’s output and necessary adjustments.

We determined that auditing the forecasts and assumptions, including the development of quantitative forecast models using the loss drivers, was a critical audit matter as it involved significant judgment by management, which led especially a high degree of auditor judgment and subjectivity and increased audit effort, including the involvement of specialists to obtain audit evidence related to the forecasts.

The primary procedures performed to address this critical audit matter included the following:

● Tested the effectiveness of the Company’s controls that addressed the following:

o Development of the forecast models that are used to determine the quantitative component and used in determining the basis for qualitative adjustments.

o Relevance and reliability of reasonable and supportable forecast data and the reasonableness of significant model assumptions input into the model.

● Use of specialists to test development of the forecast models that are used to determine the quantitative component and used in determining the basis for qualitative adjustments.

● Evaluated the reasonableness of reasonable and supportable economic forecasts and the significant model assumptions, including the relevance and reliability of data used in the model.

/s/ Crowe LLP

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March 15, 2024

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First United Corporation and Subsidiaries

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Investment securities – available-for-sale (at fair value)

Investment securities – held to maturity (fair value of $ 203,080 at December 31, 2022 and $ 65,369 at December 31, 2021)

Investment securities – held to maturity, net of allowance for credit losses of $ 45 and $ 0 , respectively (fair value of $ 184,415 at December 31, 2023 and $ 203,080 at December 31, 2022)

Restricted investment in bank stock, at cost

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Unearned fees

Allowance for loan losses

Allowance for credit losses

Premises and equipment, net

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Right of use assets

Trust receivable

Pension Asset

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SERP deferred compensation

Accrued interest payable and other liabilities

Allowance for credit losses on unfunded commitments

Accrued interest payable

Other liabilities

Dividends payable

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Total Liabilities and Shareholders’ Equity

See notes to consolidated financial statements

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See notes to consolidated financial statement

First United Corporation and Subsidiaries

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Net interest income

Credit for loan losses

Net interest income after provision for loan losses

Credit loss expense

Credit loss expense/(credit)- loans

Credit loss expense- debt securities held to maturity

Credit loss (credit)/expense- unfunded commitments

Total credit loss expense/(credit)

Net interest income after provision for credit losses

Other operating income

Net (losses)/gains on investments, available for sale

Net gains on investment, held to maturity

Net gains on sales of residential mortgage loans

Net (losses)/gains on disposal of fixed assets

Net (losses)/gains

Service charges on deposit accounts

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Brokerage commissions

Insurance reimbursement

Total other income

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Contract labor

Total OREO expense/(income), net

Total OREO (income)/expense, net

Investor relations

Settlement expense

FHLB prepayment expense

Contributions

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See notes to consolidated financial statements

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First United Corporation and Subsidiaries

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Available for sale securities:

Unrealized holding (losses)/gains on investments with OTTI

Unrealized holding losses on investments with credit related impairment

Reclassification adjustment for gains realized in income

Other comprehensive (losses)/income on investments with OTTI

Unrealized holding losses on all other AFS investments

Other comprehensive losses on investments with credit related impairment

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

Reclassification adjustment for (losses)/gains realized in income

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

Held to maturity securities:

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Reclassification adjustment for amortization realized in income

Other comprehensive (losses)/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

Other comprehensive (loss)/gain on cash flow hedges

Pension plan liability:

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SERP liability:

Unrealized holding losses/(gains) on SERP liability

Reclassification adjustment for amortization of unrecognized loss realized in income

Other comprehensive gains/( losses) on SERP liability

Other comprehensive income before income tax

Income tax expense related to other comprehensive income

Other comprehensive (loss)/income, net of tax

Unrealized holding (gains)/losses on SERP liability

Reclassification adjustment for amortization of unrecognized income/(loss) realized in income

Other comprehensive (losses)/gains on SERP liability

Other comprehensive income/(loss) before income tax

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

Other comprehensive income/(loss), net of tax

Comprehensive Income

See notes to consolidated financial statements

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First United Corporation and Subsidiaries

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Balance at January 1, 2022

Other comprehensive income, net of tax

Other comprehensive loss, net of tax

Common stock issued - 45,473 shares

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Stock based compensation

Stock repurchase - 400,000 shares

Balance at December 31, 2022

Other comprehensive loss, net of tax

Adoption of ASC 326- Financial Instruments- Credit Losses

Other comprehensive income, net of tax

Common stock issued- 55,558 shares

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Stock based compensation

Stock repurchase- 82,098 shares

Balance at December 31, 2023

See notes to consolidated financial statements

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First United Corporation and Subsidiaries

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

Credit for loan losses

Provision/(credit) for credit losses

Stock based compensation

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Gains on sales of loans held for sale

Gains on disposal of fixed assets

Net amortization of investment securities discounts and premiums- AFS

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

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

Losses/(gains) on disposal of fixed assets, net

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

Net accretion of investment securities discounts and premiums- HTM

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

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

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

Net gains on investment securities – held to maturity

Amortization of deferred loan fees

Deferred tax expense

Deferred tax (benefit)/expense

Earnings on bank owned life insurance

Amortization of operating lease right of use asset

Operating lease liability

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

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

Amortization of operating lease right of use assets

Amortization of operating lease liabilities

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

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

Net cash provided by operating activities

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Proceeds from disposal of fixed assets

Net decrease in FHLB stock

Net (increase)/decrease in loans

Purchases of loans

Purchase of wealth portfolio

Net (increase)/decrease in FHLB stock

Net increase in loans

Acquisition of mortgage company

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Financing activities

Net increase in deposits

Net (decrease)/increase in deposits

Proceeds from issuance of common stock

Cash dividends paid on common stock

Net increase in short-term borrowings

Net (decrease)/increase in short-term borrowings

Stock repurchase

Payments on long-term borrowings

Net cash provided by/(used in) financing activities

Proceeds from long-term borrowings

Net cash provided by financing activities

Decrease in cash and cash equivalents

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Cash and cash equivalents at end of period

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Supplemental information

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See notes to consolidated financial statements

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First United Corporation and Subsidiaries

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

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

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

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

The Bank has two consumer finance company subsidiaries - OakFirst Loan Center, Inc., a West Virginia corporation, and OakFirst Loan Center, LLC, a Maryland limited liability company - and two subsidiaries that it uses to hold real estate acquired through foreclosure or by deed in lieu of foreclosure - First OREO Trust, a Maryland statutory trust, and FUBT OREO I, LLC, a Maryland limited liability company.

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

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

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

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

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

Material estimates that are particularly susceptible to change include:

(1) the allowance for loan losses and (2) fair values of available for sale debt securities based on estimates from independent valuation services or from brokers.

Principles of Consolidation

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

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Significant Concentrations of Credit Risk

Most of the Corporation’s relationships are with customers located in Western Maryland and Northeastern West Virginia.

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

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

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

At December 31, 2023, approximately 5 %, or $ 77.1 million, of total loans were secured by real estate acquisition, construction and development projects, with $ 77.0 million performing according to their contractual terms and

$ 0.1 million considered to be individually evaluated loans based on management’s concerns about the borrowers’ ability to comply with present repayment terms.

The $ 0.1 million in individually evaluated loans were all classified as non-accrual as of December 31, 2023.

Additionally, loans collateralized by commercial rental properties represented 21 % of the total loan portfolio as of December 31, 2023.

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Gains and losses on the sale of securities are recorded using the specific identification method.

Management systematically evaluates securities for other than temporary impairment on a quarterly basis.

Based upon application of accounting guidance for subsequent measurement in ASC Topic 320 (ASC Section 320-10-35) issued by the Financial Accounting Standards Board (“FASB”), management assesses whether (i) the Corporation has the intent to sell a security being evaluated and (ii) it is more likely than not that the Corporation will be required to sell the security prior to its anticipated recovery.

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

The first is the loss attributable to declining credit quality.

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

The second component consists of all other losses, which are recognized in other comprehensive loss.

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

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

The Corporation adopted Accounting Standards Codification (“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 available-for-sale (“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 off are 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 Corporation utilizes ASC 326 to evaluate its AFS and 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 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 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.

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 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.

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 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.

Restricted Investment in Bank Stock

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

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

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

The determination of whether a decline affects the ultimate recoverability is influenced by criteria such as (i) the significance of the decline in net assets of the issuing bank as compared to the capital stock amount for that bank and the length of time this situation has persisted, (ii) commitments by the issuing bank to make payments required by law or regulation and the level of such payments in relation to the operating performance of that bank, and (iii) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the issuing bank.

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

The Corporation recognizes dividends on an accrual basis.

The Corporation owns non-marketable equity securities in a combination of the Federal Home Loan Bank (“FHLB”) of Atlanta, Atlantic Community Bankers Bank and Community Banker’s Bank.

These securities are carried at cost, classified as restricted securities, and periodically evaluated for impairment based on ultimate recovery of par value.

The Corporation recognizes dividend income on a cash basis.

For the years ended December 31, 2023 and December 31, 2022, dividends of $ 198,457 and $ 36,558 , respectively, were recorded in other operating income.

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

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

There were $ 0.4 million in loans held for sale at December 31, 2023.

No loans were held for sale at December 31, 2022.

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

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

Only the portion of a specific allocation of the allowance for loan losses is associated with a pending event that could trigger loss in the short term is classified in the Doubtful category.

It is possible for a loan to be classified as Substandard in the internal risk rating system, but not considered impaired under GAAP, due to the broader reach of “well-defined weaknesses” in the application of the Substandard definition.

Only the portion of a specific allocation of the allowance for credit losses is associated with a pending event that could trigger loss in the short term is classified in the Doubtful category.

It is possible for a loan to be classified as Substandard in the internal risk rating system, but not be

individually evaluated under GAAP, due to the broader reach of “well-defined weaknesses” in the application of the Substandard definition.

Interest and Fees on Loans

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

Generally, fees on loans

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

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

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

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For all loan segments, the accrual of interest is discontinued when principal or interest is delinquent for 90 days or more unless the loan is well-secured and in the process of collection.

All non-accrual loans are considered to be impaired.

Loans that are on a current payment status or past due less than 90 days may be classified as nonaccrual if repayment in full of principal and/or interest is unlikely.

Interest payments received on non-accrual loans are applied as a reduction of the loan principal balance.

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Generally, consumer installment loans are not placed on non-accrual status, but are charged off after they are 120 days contractually past due.

Loans other than consumer loans are charged-off based on an evaluation of the facts and circumstances of each individual loan.

Allowance for Loan Losses

An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio.

The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.

The Corporation’s methodology for determining the ALL is based on the requirements of ASC Section 310-10-35, Receivables-Overall-Subsequent Measurement , for loans individually evaluated for impairment and ASC Subtopic 450-20, Contingencies - Loss Contingencies , for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance.

The total of the two components represents the Bank’s ALL.

Management evaluates individual loans in all of the commercial segments for possible impairment if the loan is greater than $500,000 or is part of a relationship that is greater than $750,000 and (i) is either in non-accrual status or (ii) is risk-rated Substandard and is greater than 60 days past due.

Loans are considered to be impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.

Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.

Loans other than consumer installment loans are charged-off based on an evaluation of the facts and circumstances of each individual loan.

Allowance for Credit Losses

An allowance for credit loss (“ACL”) is mainained to absorb losses from the Corporation’s financial assets in accordance with ASC 326:

Financial Instruments- Credit Losses .

Allowance for Credit Losses Policy

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.

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.

Held-to-Maturity Securities

Management measures expected credit losses on HTM debt securities on a collective basis by major security type.

Management has elected not to measure an ACL for accrued interest on securities.

The estimate of expected credit losses considers historical credit loss information tha tis adjusted for current conditions and reasonable and supportable forecasts.

Management classifies the held-to-maturity portfolio into the following major security types:

securities issued by U.S.

government issues and agencies (including U.S.

treasuries, agency bonds, and U.S.

guaranteed residential mortgage-backed securities, commercial mortgage-backed securities, and collateralized mortgage obligations), rated municipal securities, and unrated municipal securities.

Securities that are issued or explicitly or implicitely guaranteed by the U.S.

government are hghly rated by major rating agencies and have a long history of no credit losses.

Rated municipal securities are evaluated based on credit rating by major rating agencies and financial performance.

Non-rated securities are evaluated internally based on financial performance and expected future cash flows.

Available-for-Sale Securities

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 to its amortized cost basis.

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

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

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

Any impairment that has not been recorded through the ACL is recognized in other comprehensive income.

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.

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

An ACL is maintained as a valuation account that is deducted from the Corporation’s loan porfolio’s amortized cost basis to present the net amount expected to be collected on the loans.

Loan are charged off against the ACL when management believes the uncollectibility of a loan balance is confirmed.

Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

Historical credit loss experience provides the basis or the estimation of expected credit losses.

Adjustments to historical loss information are made for differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental condition, such as changes in unemployment rates, property values, or other relevant factors.

risk-rated Substandard and is greater than 60 days past due.

Loans are considered to be individually evaluated when, based on current information and events, they no longer share the same risk characteristics of other loans within our portfolio.

Factors considered by management in evaluating loans include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.

Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

The Bank does not separately evaluate individual consumer and residential mortgage loans for impairment, unless such loans are part of larger relationship that is impaired;

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

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

The Bank does not separately evaluate individual consumer and residential mortgage loans, unless such loans are part of larger relationship that is individually evaluated;

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

Once the determination has been made that a loan is individually evaluated, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using one of three methods:

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

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

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

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

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

A specific allocation of the ALL is recorded if there is any deficiency in collateral value determined by comparing the estimated fair value to the recorded investment of the loan.

A specific allocation of the ACL is recorded if there is any deficiency in collateral value determined by comparing the estimated fair value to the recorded investment of the loan.

When updated appraisals are received and reviewed, adjustments are made to the specific allocation as needed.

An unallocated component is maintained to cover uncertainties that could affect Management’s estimate of probable incurred loss.

The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

This estimate, if changed only several basis points, could vary by several hundred thousand dollars.

Therefore, management believes some level of unallocated allowance should be maintained to account for this imprecision.

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 Corporation maintains an ALL on unfunded commercial lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements.

The allowance is determined utilizing a methodology that is similar to that used to determine the ALL, modified to take into account the probability of a draw down on the commitment.

This allowance is reported as a liability on the balance sheet within accrued interest payable and other liabilities.

The balance in the liability account was $ 133,399 at December 31, 2022 and $ 117,685 at December 31, 2021.

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

otherwise, the modified 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 modified loan.

For a discussion with respect to reserve calculations regarding individually evaluated loans, refer to the “Nonrecurring Loans” section in Note 5, Fair Value Measurements.

There were no loan modifications to borrowers facing financial difficulties for the year ending December 31, 2023.

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.

Loan Commitments and Allowance for Credit Loss on Unfunded Commitments

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

The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for unfunded commitments commitments is represented by the contractual amount of those instruments.

Such financial instruments are recorded when they are funded.

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

The RUC on unfunded commitments 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 Modifications

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 modified 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.

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.

See Note 5 for more detail related to the accounting of modified loans.

Premises and Equipment

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

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Bank-Owned Life Insurance (“BOLI”)

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Other Real Estate Owned (“OREO”)

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less the cost to sell at the date of foreclosure, with any losses charged to the ALL, establishing a new cost basis.

Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell.

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Cash and cash equivalents are defined as cash and due from banks and interest-bearing deposits in banks in the Consolidated Statements of Cash Flows.

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

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

Trust Assets and Income

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Business Segments

The Corporation operates in one segment, community banking, as defined by ASC Topic 280, Segment Reporting .

The Corporation in its entirety is managed and evaluated on an ongoing basis by First United Corporation’s Board of Directors and executive management, with no division or subsidiary receiving separate analysis regarding performance or resource allocation.

The Corporation operates in two segments, as defined by ASC Topic 280, Segment Reporting :

community banking and trust and investment services.

The Corporation, both in its entirety and by its business segments, is managed and evaluated on an ongoing basis by First United Corporation’s Board of Directors and executive management.

Refer to Note 22 for further discussion.

Stock Repurchases

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

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

In 2023, the Corporation repurchased 82,098 shares of common stock at a weighted average price of $ 16.79 per share.

The Corporation did no t repurchase shares of common stock during 2022.

Recent Accounting Pronouncements

Recently issued but not yet effective Accounting Pronouncements

In June 2016, the 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.

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

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

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

In March 2020, the FASB issued ASU No.

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 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.

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

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 ASU, 2016-13 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, ASU 2016-13 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 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.

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, 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 ASU 2016-13.

January 1, 2023

(in thousands)

As Reported Under ASU 2016-13

Impact of ASU 2016-13 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 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 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, FASB issued ASU No.

2022-02, Financial Instruments – Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures .

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

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

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

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

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

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

ASU 2022-02, which eliminates the troubled debt restructuring (“TDR”) accounting model for creditors that have adopted ASU 2016-13.

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.

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.

Recently issued but not yet effective Accounting Pronouncements

In March 2020, FASB issued ASU No.

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

Facilitation of Reference Rate Reform on Financial Reporting.” The amendments in ASU 2020-04 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 ASU 2020-04 are effective for all entities between March 12, 2020 and December 31, 2022.

In December 2022, FASB issued ASU No.

“Reference Rate Reform (Topic 848):

Deferral of the Sunset Date of Topic 848.” The amendments in ASU 2020-06 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.

The Corporation has identified all known LIBOR exposures, created a plan to address the exposures, and continues to communicate with all stakeholders to transition to alternative reference rates.

As of December 31, 2023, the Corporation has no financial instruments tied to LIBOR and does not anticipate that the transition related to ASU 2020-04 will have a significant impact on our financial statements.

In November 2023, FASB issued ASU No.

2023-07, “Segment Reporting (Topic 280);

Improvement to Reportable Segment Disclosures.” ASU 2023-07 expands segment disclosure requirements for public entities to require disclosure of significant segment expense and other segment items on an annual and interim basis and to provide in interim periods all disclosures about a reportable segment’s profit or loss and assets that are currently required annually.

ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within the fiscal years beginning after December 15, 2024.

Early adoption is permitted.

ASU 2023-07 is not expected to have a significant impact on our financial statements.

In December 2023, FASB issued ASU No.

2023-09, “Income Taxes (Topic 740):

Improvements to Income Tax Disclosures.” ASU 2023-09 requires public business entities to disclose in their rate reconciliation table additional categories of information about Federal, state, and foreign income taxes and to provide more details about the reconciling items in some categories if items meet a quantitative threshold.

ASU 2023-09 also requires all entities to disclose income taxes paid, net of refunds, disaggregated by Federal, state, and foreign taxes for annual periods and to disaggregate the information by jurisdiction based on a quantitative threshold, among other things.

ASU 2023-09 is effective for fiscal years beginning after December 15, 2024.

ASU 2023-09 is not expected to have a significant impact on our financial statements.

Earnings Per Common Share

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Restricted stock units

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

(in thousands)

Net gains/(losses):

Available-for-sale securities:

Realized gains from sales and calls

Realized losses

Held-to-Maturity:

Realized gains on calls

Realized losses

Gains on sale of loans held for sale

Gain on disposal of fixed assets

Regulatory Capital Requirements

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

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The following table presents First United Bank & Trust’s capital ratios for years ended December 31, 2023 and 2022:

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

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

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

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

Investment Securities

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(in thousands)

Allowance for Credit Losses

Estimated Fair Value

December 31, 2023

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(in thousands)

Estimated Fair Value

Allowance for Credit Losses

December 31, 2023

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(in thousands)

Estimated Fair Value

December 31, 2022

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Obligations of states and political subdivisions

Corporate Bonds

Collateralized debt obligations

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(in thousands)

Estimated Fair Value

December 31, 2022

Held to Maturity:

government agencies

Residential mortgage-backed agencies

Commercial mortgage-backed agencies

Collateralized mortgage obligations

Obligations of states and political subdivisions

Total held to maturity

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

Proceeds from sales and calls of available-for-sale securities and the realized gains and losses for the years ended December 31, 2023 and 2022 are as follows:

(in thousands)

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Total held to maturity

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Less than 12 months

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Obligations of states and political subdivisions

Corporate Bonds

Collateralized debt obligations

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Held to Maturity:

government agencies

Residential mortgage-backed agencies

Commercial mortgage-backed agencies

Collateralized mortgage obligations

Obligations of states and political subdivisions

Total held to maturity

Management systematically evaluates securities for impairment on a quarterly basis.

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

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

The first is the loss attributable to declining credit quality.

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

The second component consists of all other losses.

The other losses are recognized in other comprehensive income.

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

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

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

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

(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 December 31

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As of December 31, 2023, the Corporation recorded ACL of approximately $ 45,000 related to one bond in the HTM security portfolio.

There was no ACL related to its AFS or HTM security portfolio at December 31, 2022.

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

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Held to Maturity:

Due in one year or less

Due after one year through five years

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Total held to maturity

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

Loans and Related Allowance for Loan Losses

At December 31, 2023 and 2022, AFS investment securities with a fair value of $ 50.5 million and $ 49.7 million, respectively, and HTM investment securities with a book value of $ 141.8 million and $ 165.9 million were pledged as permitted or required to secure public deposits, for securities sold under agreements to repurchase as required or permitted by law and as collateral for borrowing capacity.

Loans and Related Allowance for Credit Losses

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

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Balance at December 31

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

There were no loans classified as Doubtful within the internal risk rating system as of December 31, 2022 and 2021:

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

(in thousands)

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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.

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

(in thousands)

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

Loans secured by 1-4 family residential real estate properties in the process of foreclosure totaled $ 1.8 million at December 31, 2023.

There were no loans in the process of foreclosure at December 31, 2022.

Effective January 1, 2023, the Corporation adopted the accounting guidance in ASU 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 non-accrual or modified loan may be subject to the individually evaluated loan analysis if the commitment is $ 0.1 million or greater;

For a discussion with respect to reserve calculations regarding individually evaluated loans, refer to the “Nonrecurring Loans” section in Note 5, Fair Value Measurements.

There were no loan modifications made to borrowers facing financial difficulties in the year ending December 31, 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.

Commercial Real Estate- loans are secured by commercial purpose real estate, including both owner occupied properties and properties obtained for investment 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 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.

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 presents the amortized cost basis of collateral-dependent individually evaluated loans as of December 31, 2023:

December 31, 2023

(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

Effective January 1, 2023, the Corporation adopted the accounting guidance in ASU 2022-02, which eliminates the recognition and measurement of a TDR.

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

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

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

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

As of December 31, 2023, there were no modified loans that were classified as individually evaluated loans.

The following tables present the activity in the ACL and ALL for the years ended December 31, 2023 and 2022:

(in thousands)

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

Impact of adopting ASC 326

Loan charge-offs

Recoveries collected

Credit loss (credit)/expense

ACL balance at December 31, 2023

ALL balance at January 1, 2022

Loan loss expense/(credit)

ALL balance at December 31, 2022

The Corporation’s methodology for estimating the ACL includes:

Segmentation.

The Corporation’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 analyzed reside in the Quantitative Analysis.

Quantitative Analysis.

The Corporation elected to use discounted cash flows.

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.

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.

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.

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 the debt.

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 tables present loan balances by year of origination and internally assigned risk ratings for our portfolio segments as of dates presented:

(in thousands)

December 31, 2023

1 unchanged sentence

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 residential mortgage - term

Current period gross charge-offs

Residential mortgage - home equity

Non-accrual loans that have been subject to partial charge-offs totaled $ 0.1 million at December 31, 2022 and $ 0.5 million at December 31, 2021.

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

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

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

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

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

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

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

The total of the two components represents the Bank’s ALL.

(in thousands)

December 31, 2022

Individually evaluated for impairment

Collectively evaluated for impairment

December 31, 2021

Individually evaluated for impairment

Collectively evaluated 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, at December 31, 2022 and December 31, 2021, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary:

Impaired Loans

with Specific Allowance

Impaired Loans

with No Specific

Total Impaired Loans

Special Mention

Total residential 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)

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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 residential mortgage - term

Current period gross charge-offs

Residential mortgage - home equity

Total impaired loans

Special Mention

Total residential 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)

December 31, 2023

1 unchanged sentence

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 residential mortgage - term

Residential mortgage - home equity

Total impaired loans

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.

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

The un-criticized (“pass”) pools for commercial and residential real estate are further segmented based upon the geographic location of the underlying collateral.

There are seven geographic regions utilized – six that represent the Bank’s lending footprint and a seventh for all out-of-market credits.

Different economic environments and resultant credit risks exist in each region that are acknowledged in the assignment of qualitative factors.

Loans in the criticized pools, which possess certain qualities or characteristics that may lead to collection and loss issues, are closely monitored by management and subject to additional qualitative factors.

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:

(i) national and local economic trends and conditions;

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

(iii) trends in volumes and terms of loans;

(iv) effects of changes in lending policies;

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

(vi) value of underlying collateral;

and (vii) 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 in order 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.

Activity in the ALL is presented for the years ended December 31, 2022 and December 31, 2021:

(in thousands)

ALL balance at January 1, 2022

Provision (credit)

ALL balance at December 31, 2022

ALL balance at January 1, 2021

Provision (credit)

ALL balance at December 31, 2021

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

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

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

The following table presents the average recorded investment in impaired loans and related interest income recognized for the years ended December 31, 2022 and 2021:

Nonperforming

Total residential mortgage - home equity

Nonperforming

Total consumer

Total Portfolio Loans

Nonperforming

Total Portfolio Loans

(in thousands)

Interest income

recognized on

an accrual basis

Interest income

recognized on

Interest income

recognized on

an accrual basis

Interest income

recognized on

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 residential mortgage - term

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 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 $ 3.0 million and 12 loans totaling $ 3.3 million that were classified as TDRs at December 31, 2022 and December 31, 2021, respectively.

The following table presents the volume and recorded

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

Temporary Rate

Extension of Maturity

Modification of Payment

and Other Terms

(Dollars in thousands)

For the year ended December 31, 2022

Commercial real estate

Non owner-occupied

Acquisition and development

All other A&D

Residential mortgage

Residential mortgage – term

For the year ended December 31, 2021

Commercial real estate

Non owner-occupied

Acquisition and development

All other A&D

Residential mortgage

Residential mortgage – term

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

Also, there were no additional funds committed to be advanced in connection with TDRs at December 31, 2022 or 2021.

Nonperforming

Total residential mortgage - home equity

Nonperforming

Total consumer

Total Portfolio Loans

Nonperforming

Total Portfolio Loans

Other Real Estate Owned

6 unchanged sentences

Balance January 1

Fair value write-down

Fair value write-downs, net

Sales of OREO

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Rental and other income

Total OREO expenses/(income), net

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Total OREO (income)/expense, net

Premises and Equipment

26 unchanged sentences

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

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

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

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Total operating lease expense was $ 0.6 million and $ 0.5 million for the years ended December 31, 2023 and December 31, 2022, respectively.

Short-term lease expense was approximately $ 20 thousand for the year ended December 31, 2023 and 2022.

In the fourth quarter of 2023, the Bank announced the closure of four of its branches with an effective closing date of February 29, 2024.

In conjunction with the announced branch closures, the Bank recognized accelerated lease expense of approximately $ 0.1 million in 2023.

Future minimum payments for operating leases with initial or remaining terms of one year or more at December 31, 2023 were as follows:

3 unchanged sentences

Present value of net future minimum lease payments

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

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

(in thousands)

December 31, 2023

December 31, 2022

Non-Interest-bearing deposits:

Interest-bearing deposits:

Savings deposits

Time deposits- retail

Time deposits- brokered

Total Deposits

Time deposits that meet or exceed the FDIC insurance limit of $250,000 at December 31, 2023 and 2022 were $ 48.8 million and $ 37.5 million, respectively.

At December 31, 2023 and 2022, $ 0.4 million and $ 0.3 million, respectively, of deposit overdrafts were re-classified as loans.

1 unchanged sentence

(in thousands)

Time deposits- brokered

Time deposits- retail

In the ordinary course of business, executive officers and directors of the Corporation, including their families and companies in which certain directors are principal owners, were deposit customers of the Bank.

2 unchanged sentences

The following is a summary of short-term borrowings at December 31, 2023 and 2022 with original maturities of less than one year:

(Dollars in thousands)

(in thousands)

Securities sold under agreements to repurchase:

5 unchanged sentences

Repurchase agreements were secured by $ 61.6 million in investment securities at December 31, 2023 and $ 74.6 million at December 31, 2022.

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The following is a summary of long-term borrowings at December 31, 2023 and 2022 with original maturities exceeding one year:

(in thousands)

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

Junior subordinated debt

Total long-term debt

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

These Trusts used the proceeds of these offerings to purchase an equal amount of TPS Debentures, as follows:

$ 20.6 million —floating rate payable quarterly based on three-month LIBOR plus 275 basis points ( 7.49 % at December 31, 2022), maturing in 2034 , became redeemable five years after issuance at First United Corporation’s option.

$ 10.3 million --floating rate payable quarterly based on three-month LIBOR plus 275 basis points ( 7.49 % at December 31, 2022) maturing in 2034 , became redeemable five years after issuance at First United Corporation’s option.

$ 20.6 million —floating rate payable quarterly based on three-month Secured Overnight Financing Rate (“SOFR”) plus 275 basis points ( 8.39 % at December 31, 2023), maturing in 2034 , became redeemable five years after issuance at First United Corporation’s option.

$ 10.3 million --floating rate payable quarterly based on three-month SOFR plus 275 basis points ( 8.39 % at December 31, 2023) maturing in 2034 , became redeemable five years after issuance at First United Corporation’s option.

The TPS Debentures issued to each of the Trusts represent the sole assets of that Trust, and payments of the TPS Debentures by First United Corporation are the only sources of cash flow for the Trust.

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Should this occur, the Corporation may not pay dividends or distributions on, or repurchase, redeem or acquire any shares of its capital stock.

The following is a summary of long-term borrowings at December 31, 2022 and 2021 with original maturities exceeding one year:

(In thousands)

Junior subordinated debt

Total long-term debt

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

The contractual maturities of the FHLB advances outstanding at December 31, 2023 are March 15, 2024 and September 13, 2024.

The contractual maturities of the junior subordinated debt outstanding at December 31, 2023 is 2034.

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

6 unchanged sentences

Home equity loans

At December 31, 2022, $ 195.3 million was available for additional borrowings.

The Bank also has various unsecured lines of credit totaling $ 140.0 million with various financial institutions and a $ 9.6 million secured line with the Federal Reserve to meet daily liquidity requirements.

Total available borrowing capacity

borrowings and letters of credit outstanding

The Bank also has various unsecured lines of credit totaling $ 140.0 million with various financial institutions and a $ 12.2 million secured line with the Federal Reserve to meet daily liquidity requirements.Additionally, the Bank had $ 69.5 million in available in a secured line of credit with the FRB through the BTFP.

At December 31, 2023 and 2022, there were no borrowings under these credit facilities.

Repurchase Agreements - The Bank has retail repurchase agreements with customers within its local market areas.

Repurchase agreements generally have maturities of one to four days from the transaction date.

These borrowings are collateralized with securities that we own and are held in safekeeping at independent correspondent banks.

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

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Goodwill and Other Intangible Assets

14 unchanged sentences

Total amortizing intangible assets

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Accumulated Other Comprehensive Loss (“AOCL”)

1 unchanged sentence

(in thousands)

with credit related impairment

Accumulated OCL, net:

4 unchanged sentences

Balance - December 31, 2022

Other comprehensive income/(loss) before reclassifications

Other comprehensive (loss)/income before reclassifications

Amounts reclassified from accumulated

2 unchanged sentences

The following tables present the components of other comprehensive (loss)/income for the years ended December 31, 2023 and 2022:

Components of Other Comprehensive Loss

Components of Other Comprehensive Income

(in thousands)

1 unchanged sentence

For the year ended December 31, 2023

Available for sale (AFS) securities with OTTI:

Available for sale (AFS) securities with credit-related impairment

Unrealized holding losses

accretable yield recognized in income

Net unrealized losses on investments with OTTI

Net unrealized losses on investments with credit-related impairment

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

Unrealized holding gains

losses recognized in income

Net unrealized gains 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

Net unrealized gains on HTM securities

Cash flow hedges:

Unrealized holding gains

Net unrealized gains on cash flow hedges

Unrealized holding losses

Net unrealized losses on cash flow hedges

Pension Plan:

2 unchanged sentences

Net pension plan liability adjustment

Unrealized net actuarial gain

Unrealized net actuarial loss

amortization of unrecognized loss

Net SERP liability adjustment

Other comprehensive loss

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Components of Other Comprehensive Income

Other comprehensive income

Components of Other Comprehensive Loss

(in thousands)

1 unchanged sentence

For the year ended December 31, 2022

Available for sale (AFS) securities with OTTI:

Unrealized holding gains

Available for sale (AFS) securities with credit related impairment:

Unrealized holding losses

accretable yield recognized in income

Net unrealized gains on investments with OTTI

Net unrealized losses on investments with credit related impairment

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

1 unchanged sentence

Held to maturity securities:

Unrealized holding losses on securities transferred to held to maturity

gains recognized in income

amortization recognized in income

Net unrealized gains on HTM securities

Net unrealized losses on HTM securities

Cash flow hedges:

5 unchanged sentences

Net pension plan liability adjustment

Unrealized net actuarial loss

Unrealized net actuarial gain

amortization of unrecognized loss

Net SERP liability adjustment

Other comprehensive income

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Other comprehensive loss

The following tables present the details of accumulated other comprehensive loss components for the years ended December 31, 2023 and 2022:

Details of Accumulated Other Comprehensive Loss Components

Details of Accumulated Other Comprehensive Income Components

Amount Reclassified from Accumulated Other Comprehensive Loss

2 unchanged sentences

Where Net Income is Presented

Net unrealized losses on investment securities with OTTI:

Net unrealized losses on investment securities with credit related impairment:

Accretable Yield

1 unchanged sentence

Provision for income tax expense

Net unrealized gains on available for sale

Net unrealized losses on available for sale

investment securities - all other:

Gains on sales

Loss on sales

Provision for income tax expense

2 unchanged sentences

Interest income on taxable investment securities

Gains recognized

Net gain/(losses)

Provision for income tax expense

8 unchanged sentences

Total reclassifications for the period

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Details of Accumulated Other Comprehensive Loss Components

3 unchanged sentences

Where Net Income is Presented

Net unrealized gains on investment securities with OTTI:

Net unrealized losses on investment securities with credit related impairment:

Accretable Yield

1 unchanged sentence

Provision for income tax expense

Net unrealized losses on available for sale

Net unrealized gains on available for sale

investment securities - all other:

4 unchanged sentences

Interest income on taxable investment securities

Gains recognized

Provision for income tax expense

Net pension plan liability adjustment:

Other expense

Amortization of unrecognized loss

Other expense

Provision for income tax expense

Net SERP liability adjustment:

Other expense

Amortization of unrecognized loss

Other expense

Provision for income tax expense

Total reclassifications for the period

2 unchanged sentences

Current Tax expense:

Deferred tax expense:

Deferred tax (benefit)/expense:

Income tax expense for the year

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The reconciliation between the statutory federal income tax rate and effective income tax rate for the years ended December 31, 2023 and 2022 is as follows:

7 unchanged sentences

Deferred tax assets:

Allowance for loan losses

Allowance for credit losses

Deferred fees

5 unchanged sentences

Other than temporary impairment on investment securities

Derivative contract

Other real estate owned

12 unchanged sentences

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

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

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Conversely, if the Corporation were to make a

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

At December 31, 2023, the Corporation had Maryland net operating losses (“NOLs”) and other MD carryforwards of $ 39.1 million for which a deferred tax asset of $ 2.8 million has been recorded.

1 unchanged sentence

The valuation allowance was $ 2.8 million at December 31, 2023 and $ 2.9 million at December 31, 2022.

The Company and its subsidiaries file income tax returns in the U.S.

The Corporation and its subsidiaries file income tax returns in the U.S.

federal jurisdiction and various states jurisdictions.

The 2018-2020 tax years remain open under the standard statute of limitations.

Also, with few exceptions, the Company is no longer subject to state income tax examinations for tax years before 2019.

Also, with few exceptions, the Corporation is no longer subject to state income tax examinations for tax years before 2020.

Any interest and penalties on income tax assessments or income tax refunds are recognized in the Consolidated Statements of Income as a components of interest expense (income) and other operating expense.

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Furthermore, there were no net interest and penalties related to unrecognized tax benefits for the periods presented.

Equity Compensation Plan

Equity Compensation Plans

At the 2018 Annual Meeting of Shareholders, First United Corporation’s shareholders approved the First United Corporation 2018 Equity Compensation Plan (the “Equity Plan”) which authorizes the issuance of up to 325,000 shares of common stock to employees, directors, and qualifying consultants pursuant to stock options, stock appreciation rights, stock awards, dividend equivalents, and other stock-based awards.

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

In 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 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.

In October 2023, a total of 852 fully vested shares of common stock were issued to a new director, which had a grant date fair value of $ 16.26 per share.

Director stock compensation expense was $ 255,937 for the year ended December 31, 2023 and $ 266,920 for the year ended December 31, 2022.

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

Employee stock compensation was $ 33,279 and $ 79,464 for the years ended December 31, 2023 and 2022, respectively.

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 restricted stock units (“RSUs”) to the Corporation’s principal executive officer, its principal financial officer, and certain of its other executive officers.

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

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

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

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

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target award opportunity.

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

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

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.

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.

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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"

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

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

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

For the performance period ending December 31, 2025, the RSUs performance goals are based on earnings per share for the year ended December 31, 2025 and growth in tangible book value per share during the performance period.

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.

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

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

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

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 year ended December 31, 2023, and $ 73,816 for the year ended December 31, 2022.

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.

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.

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

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

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

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

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

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

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

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

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.

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

Net stock compensation (credit)/expense was ($ 51,555 ) and $ 66,285 for the years ended December 2023 and 2022.

Unrecognized compensation expense as of December 31, 2023 related to unvested units was $ 7,365 .

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

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

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

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

Stock compensation expense was $ 104,580 and $ 78,436

for the years ended December 31, 2023 and 2022, respectively.

Unrecognized compensation expense as of December 31, 2023 related to unvested units was $ 130,726 .

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.

Stock compensation expense was $ 82,755 for the year ended Decmber 31, 2023.

Unrecognized compensation expense as of December 31, 2023 related to unvested units was $ 248,264 .

Employee Benefit Plans

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

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

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

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

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

his or her Separation from Service (except in the case of death or Disability), except that only item (b) will apply in the event of a Separation from Service following a Change of Control and subsequent Triggering Event.

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

The Corporation recorded $ 50,628 of related compensation expense for 2022 and 2021 related to these contributions.

The Corporation recorded $ 50,628 of related compensation expense for 2022 related to these contributions.

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

The Corporation recorded $ 51,844 of related compensation expense for both 2023 and 2022 related to these contributions.

In January 2023, the Board of Directors approved discretionary contributions to three participants totaling $ 108,184 .

The Corporation recorded $ 54,092 of related compensation expense for 2023.

Each discretionary contribution has a two year vesting period.

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

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Change in discount rate and mortality assumptions

Actuarial (gains)/losses

Actuarial losses/(gains)

Benefits paid

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Amortization of recognized loss

Amortization of prior service cost

Net pension (income)/expense in employee benefits

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

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

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Fair Value Hierarchy

(Dollars in thousands)

(in thousands)

Cash and cash equivalents

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The Large cap equities includes 194,124 shares of First United Corporation common stock at December 31, 2023 and 2022

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December 31, 2022

Fair Value Hierarchy

(Dollars in thousands)

(in thousands)

Cash and cash equivalents

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(in thousands)

Net actuarial loss (gains)

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Net actuarial loss

401(k) Profit Sharing Plan

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Standby letters of credit

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

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The Corporation measures fair values based on the fair value hierarchy established in ASC Paragraph 820-10-35-37.

The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or

liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

The three levels of inputs that may be used to measure fair value under the hierarchy are as follows:

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

Their fair values were determined based

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

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

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

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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.

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

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

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

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

Equity investments- Equity investments included in the table below are considered are recorded with a write-down to fair value recorded in other operating expenses.

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

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

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

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

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

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

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

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Non-recurring:

Impaired loans

Individually evaluated loans

Equity investments

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Non-recurring:

Impaired loans

Individually evaluated loans

Equity investment

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There were no transfers of assets between any of the levels of the fair value hierarchy for the years ended December 31, 2023 or December 31, 2022.

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

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Discount Rate

Range of low to mid 300 and low to high 400

Range of low to mid 500 and low to mid 600

Non-recurring:

Impaired Loans

Market Comparable Properties

Marketability Discount

10.0 % to 15.0 %

Equity Investments

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Marketability Discount

5.0 % to 15.0 %

(weighted avg 5.9 %)

(in thousands)

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Discount Rate

Libor+ 3.25 %

Range of low to mid 300 and low to high 400

Non-recurring:

Impaired Loans

Individually Evaluated Loans

Market Comparable Properties

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10.0 % to 15.0 %

(weighted avg 13.2 %)

Equity Investment

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

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The following tables show a reconciliation of the beginning and ending balances for fair valued assets measured using Level 3 significant unobservable inputs for the years ended December 31, 2023 and 2022:

Measurements Using

Unobservable Inputs

Fair Value Measurement Using Unobservable Inputs (Level 3)

(in thousands)

Investment Securities

Available for Sale

Investment Securities Available for Sale

Beginning balance January 1, 2023

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Ending balance December 31, 2023

Measurements Using

Unobservable Inputs

Fair Value Measurement Using Unobservable Inputs (Level 3)

(in thousands)

Investment Securities

Available for Sale

Investment Securities Available for Sale

Beginning balance January 1, 2022

Total gains/(losses) realized/unrealized:

Included in other comprehensive loss

Included in other comprehensive income

Ending balance December 31, 2022

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

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

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Accrued interest payable

Off balance sheet financial instruments

December 31, 2022

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Restricted bank stock

Financial derivative

Accrued interest receivable

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Accrued interest payable

Off balance sheet financial instruments

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Derivative Financial Instruments

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As of December 31, 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 $ 0.8 million and $ 1.1 million at December 31, 2023 and December 31, 2022, respectively.

For the year ended December 31, 2022, the Corporation recorded an increase in the value of the derivatives of $ 1.5 million and the related deferred tax of $ 0.4 million in net accumulated other comprehensive loss to reflect the effective portion of cash flow hedges.

For the year ended December 31, 2023, the Corporation recorded a decrease in the value of the derivatives of $ 0.3 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.

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

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(in thousands)

Amount of gain (loss) recognized in OCI on derivative (effective portion)

Amount of (loss)/gain recognized in OCI on derivative (effective portion)

Amount of gain or (loss) reclassified from accumulated OCI into income (effective portion) (1)

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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

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

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.

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Total Noninterest Income

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Segment Reporting

Currently, the Corporation 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 years ended December 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 $ 208,000 for the years ending December 31, 2023 and 2022.

Information for the operating segments for the years ended December 31, 2023 and 2022 are presented in the following tables:

December 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

December 31, 2022

(in thousands)

Interest income

Interest expense

Loan loss credit

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 $ 0.7 million (including $ 0.6 million in intangible assets) at December 31, 2023 and $ 0.9 million (including $ 0.8 million in intangible assets) at December 31, 2022.

All other assets (including goodwill of $ 11.0 million as of December 31 2023 and 2022 and other intangible assets of $ 0.5 million and $ 0.6 million as of December 31, 2023 and 2022, respectively) were held by the community banking segment.

Parent Company Only Financial Information

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Unrealized losses on AFS Securities, net of tax

Unrealized gains on cash flow hedges, net of tax

Other comprehensive income/(loss), net of tax

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

Other comprehensive (loss)/income, net of tax

Comprehensive income

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Condensed Statements of Cash Flows

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Increase in other assets

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

Increase in accrued interest payable and other liabilities

Stock compensation

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Cash and cash equivalents at end of year

Accumulated Other Comprehensive Loss

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

Tax (Expense)

For the year ended December 31, 2022

Available for Sale Securities:

Unrealized holding losses

Cash flow hedges:

Unrealized holding gains

Other comprehensive income

For the year ended December 31, 2021

Available for Sale Securities:

Unrealized holding losses

Cash flow hedges:

Unrealized holding gains

Other comprehensive loss

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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data