10-K 1 func-20231231x10k.htm 10-K
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2023

or

  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____to _____

Commission file number 0-14237

First United Corporation

(Exact name of registrant as specified in its charter)

Maryland

    

52-1380770

(State or other jurisdiction of incorporation or organization)

(I. R. S. Employer Identification No.)

19 South Second Street, Oakland, Maryland

21550-0009

(Address of principal executive offices)

(Zip Code)

(800) 470-4356

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbols

Name of each exchange on which registered

Common Stock

FUNC

Nasdaq Stock Market

Securities registered pursuant to Section 12(g) of the Act:  None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes    No 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes    No 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes    No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “accelerated filer”, “large accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act). :

Large accelerated filer

    

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes    No 

The aggregate market value of the registrant’s outstanding voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $85,737,171.

The number of shares of the registrant’s common stock outstanding as of February 29, 2024: 6,643,161.

Documents Incorporated by Reference

Portions of the registrant’s definitive proxy statement for the 2024 Annual Meeting of Shareholders to be filed with the SEC pursuant to Regulation 14A are incorporated by reference into Part III of this Annual Report on Form 10-K.

First United Corporation

Table of Contents

FORWARD LOOKING STATEMENTS

3

PART I

ITEM 1.

Business

4

ITEM 1A.

Risk Factors

16

ITEM 1B.

Unresolved Staff Comments

31

ITEM 1C

Cybersecurity

31

ITEM 2.

Properties

33

ITEM 3.

Legal Proceedings

33

ITEM 4.

Mine Safety Disclosures

33

PART II

ITEM 5.

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

34

ITEM 6.

Reserved

34

ITEM 7.

Management’s Discussion and Analysis of Financial Condition & Results of Operations

35

ITEM 7A.

Quantitative and Qualitative Disclosures About Market Risk

61

ITEM 8.

Financial Statements and Supplementary Data

62

ITEM 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

126

ITEM 9A.

Controls and Procedures

126

ITEM 9B.

Other Information

128

ITEM 9C.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

128

PART III

ITEM 10.

Directors, Executive Officers and Corporate Governance

128

ITEM 11.

Executive Compensation

128

ITEM 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

128

ITEM 13.

Certain Relationships and Related Transactions, and Director Independence

129

ITEM 14.

Principal Accountant Fees and Services

129

PART IV

ITEM 15.

Exhibits and Financial Statement Schedules

130

ITEM 16.

Form 10-K Summary

132

SIGNATURES

133

2

As used in this annual report, the terms “the Corporation”, “we”, “us”, and “our” mean First United Corporation and unless the context clearly suggests otherwise, its consolidated subsidiaries.

FORWARD LOOKING STATEMENTS

This annual report contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Such statements include projections, predictions, expectations or statements as to beliefs or future events or results or refer to other matters that are not historical facts. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from those contemplated by the statements. The forward-looking statements contained in this annual report are based on various factors and were derived using numerous assumptions. In some cases, you can identify these forward-looking statements by words like “may”, “will”, “should”, “expect”, “plan”, “anticipate”, “intend”, “believe”, “estimate”, “predict”, “potential”, or “continue” or the negative of those words and other comparable words. You should be aware that those statements reflect only our predictions. If known or unknown risks or uncertainties should materialize, or if underlying assumptions should prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. You should bear this in mind when reading this annual report and not place undue reliance on these forward-looking statements. Factors that might cause such differences include, but are not limited to:

market, economic, operational, liquidity, credit, and interest rate risks associated with our business;
changes in market rates and prices may adversely impact the value of securities, loans, deposits and other financial instruments and the interest rate sensitivity of our balance sheet;
our liquidity requirements could be adversely affected by changes in our assets and liabilities;
the effect of legislative or regulatory developments, including changes in laws concerning taxes, banking, securities, insurance and other aspects of the financial services industry;
competitive factors among financial services organizations, including product and pricing pressures and our ability to attract, develop and retain qualified banking professionals;
the effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board (the “FASB”), the Securities and Exchange Commission (the “SEC”), and other regulatory agencies;
the effect of fiscal and governmental policies of the United States federal government; and
the effect of any epidemic.

You should also consider carefully the risk factors discussed in Item 1A of Part I of this annual report, which address additional factors that could cause our actual results to differ from those set forth in the forward-looking statements and could materially and adversely affect our business, operating results and financial condition. The risks discussed in this annual report are factors that, individually or in the aggregate, could cause our actual results to differ materially from expected and historical results. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider such disclosures to be a complete discussion of all potential risks or uncertainties.

The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

3

PART I

ITEM 1. BUSINESS

General

First United Corporation is a Maryland corporation chartered in 1985 and a bank holding company registered with the Board of Governors of the Federal Reserve System (the “FRB”) under the Bank Holding Company Act of 1956, as amended, that elected financial holding company status in 2021.  The Corporation’s primary business is serving as the parent company of First United Bank & Trust, a Maryland trust company (the “Bank”), First United Statutory Trust I (“Trust I”) and First United Statutory Trust II (“Trust II” and together with Trust I, the “Trusts”), both Connecticut statutory business trusts. The Trusts were formed for the purpose of selling trust preferred securities that qualified as Tier 1 capital. The Bank has two consumer finance company subsidiaries - OakFirst Loan Center, Inc., a West Virginia corporation, and OakFirst Loan Center, LLC, a Maryland limited liability company - and two subsidiaries that it uses to hold real estate acquired through foreclosure or by deed in lieu of foreclosure - First OREO Trust, a Maryland statutory trust, and FUBT OREO I, LLC, a Maryland limited liability company. In addition, the Bank owns 99.9% of the limited partnership interests in Liberty Mews Limited Partnership, a Maryland limited partnership formed for the purpose of acquiring, developing and operating low-income housing units in Garrett County, Maryland, and a 99.9% non-voting membership interest in MCC FUBT Fund, LLC, an Ohio limited liability company formed for the purpose of acquiring, developing and operating low-income housing units in Allegany County, Maryland.

At December 31, 2023, we had total assets of $1.9 billion, net loans of $1.4 billion and deposits of $1.6 billion. Shareholders’ equity at December 31, 2023 was $161.9 million.

The Corporation maintains an Internet website at www.mybank.com on which it makes available, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the foregoing as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the SEC.

Banking Products and Services

The Bank operates 26 banking offices, one customer service center and 33 Automated Teller Machines (“ATMs”) in Allegany County, Frederick County, Garrett County, and Washington County in Maryland, and in Mineral County, Berkeley County, Monongalia County and Harrison County in West Virginia. The Bank is an independent community bank providing a complete range of retail and commercial banking services to businesses and individuals in its market areas. Services offered are essentially the same as those offered by the regional institutions that compete with the Bank and include checking, savings, money market deposit accounts, and certificates of deposit, business loans, personal loans, mortgage loans, lines of credit, and consumer-oriented retirement accounts including individual retirement accounts (“IRAs”) and employee benefit accounts. In addition, the Bank provides full brokerage services through a networking arrangement with Cetera Investment Services, LLC., a full-service broker-dealer. The Bank also provides safe deposit and night depository facilities, insurance products and trust services. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”).

Lending Activities

Our lending activities are conducted through the Bank. Since 2010, the Bank has not originated any new loans through the OakFirst Loan Centers and their sole activity is servicing existing loans.

The Bank’s commercial loans are primarily secured by real estate, commercial equipment, vehicles or other assets of the borrower. Repayment is often dependent on the successful business operations of the borrower and may be affected by adverse conditions in the local economy or real estate market. The financial condition and cash flow of commercial borrowers is therefore carefully analyzed during the loan approval process, and continues to be monitored throughout the duration of the loan by obtaining business financial statements, personal financial statements and income tax returns. The

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frequency of this ongoing analysis depends upon the size and complexity of the credit and collateral that secures the loan. It is also the Bank’s general policy to obtain personal guarantees from the principals of the commercial loan borrowers.

Commercial real estate (“CRE”) loans are primarily those secured by land for residential and commercial development, agricultural purpose properties, service industry buildings such as restaurants and motels, retail buildings and general purpose business space. The Bank attempts to mitigate the risks associated with these loans through low loan to value ratio standards, thorough financial analyses, and management’s knowledge of the local economy in which the Bank lends.

The risk of loss associated with CRE construction lending is controlled through conservative underwriting procedures such as loan to value ratios of 80% or less, obtaining additional collateral when prudent, analysis of cash flows, and closely monitoring construction projects to control disbursement of funds on loans.

The Bank’s residential mortgage portfolio is distributed between variable and fixed rate loans. Some loans are booked at fixed rates to meet the Bank’s requirements under the federal Community Reinvestment Act (the “CRA”) or to complement our asset liability mix. Other fixed rate residential mortgage loans are originated in a brokering capacity on behalf of other financial institutions, for which the Bank receives a fee. As with any consumer loan, repayment is dependent on the borrower’s continuing financial stability, which can be adversely impacted by factors such as job loss, divorce, illness, or personal bankruptcy. Residential mortgage loans exceeding an internal loan-to-value ratio require private mortgage insurance. Title insurance protecting the Bank’s lien priority, as well as fire and casualty insurance, is also required.  During 2022, residential mortgage loans at higher rates were booked as in-house portfolio loans.  During the latter half of 2023, the Bank made the strategic decision to shift the lending of residential mortgage loans to the secondary market.

Home equity lines of credit, included within the residential mortgage portfolio, are secured by the borrower’s home and can be drawn on at the discretion of the borrower. These lines of credit are at variable interest rates.

The Bank also provides residential real estate construction loans to builders and individuals for single family dwellings. Residential construction loans are usually granted based upon “as completed” appraisals and are secured by the property under construction. Site inspections are performed to determine pre-specified stages of completion before loan proceeds are disbursed. These loans typically have maturities of six to twelve months and may have a fixed or variable rate. Permanent financing for individuals offered by the Bank includes fixed and variable rate loans with five, seven or ten-year adjustable rate mortgages.

A variety of other consumer loans are also offered to customers, including indirect and direct auto loans, student loans, and other secured and unsecured lines of credit and term loans.

An allowance for credit losses (“ACL”) is maintained to provide for probable losses from our lending activities. A complete discussion of the factors considered in determination of the ACL is included in Item 7 of Part II of this report.

Deposit Activities

The Bank offers a full array of deposit products including checking, savings and money market accounts, regular and IRA certificates of deposit, Christmas Savings accounts, College Savings accounts, and Health Savings accounts. The Bank also offers the Certificate of Deposit Account Registry Service®, or CDARS®, program to municipalities, businesses, and consumers through which the Bank provides access to multi-million-dollar certificates of deposit and the IntraFi Cash Service®, or ICS®, program to municipalities, businesses, and consumers through which the Bank provides access to multi-million-dollar savings and demand deposits. Both programs are FDIC-insured. In addition, we offer our commercial customers packages which include Treasury Management, Cash Sweep and various checking opportunities.

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Information about our income from and assets related to our banking business may be found in the Consolidated Statements of Financial Condition and the Consolidated Statements of Income and the related notes thereto included in Item 8 of Part II of this annual report.

Wealth Management

The Bank’s Trust Department offers a full range of trust services, including personal trust, investment agency accounts, charitable trusts, retirement accounts including IRA roll-overs, 401(k) accounts and defined benefit plans, estate administration and estate planning.

At December 31, 2023 and 2022, the total market value of assets under the supervision of the Bank’s Trust Department was approximately $1.5 billion and $1.0 billion, respectively. Trust Department revenues for these years may be found in the Consolidated Statements of Income under the heading “Other operating income”, which is contained in Item 8 of Part II of this annual report.

COMPETITION

The banking business, in all of its phases, is highly competitive. Within our market areas, we compete with commercial banks, (including local banks and branches or affiliates of other larger banks), savings and loan associations and credit unions for loans and deposits, with consumer finance companies for loans, and with other financial institutions for various types of products and services, including trust services. There is also competition for commercial and retail banking business from banks and financial institutions located outside our market areas and on the internet.

The primary factors in competing for deposits are interest rates, personalized services, the quality and range of financial services, convenience of office locations and office hours. The primary factors in competing for loans are interest rates, loan origination fees, the quality and range of lending services and personalized services.

To compete with other financial services providers, we rely principally upon local promotional activities, personal relationships established by officers, directors and employees with customers, and specialized services tailored to meet customers’ needs. In those instances in which we are unable to accommodate customers’ needs, we attempt to arrange for those services to be provided by other financial services providers with which we have a relationship.

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The following tables set forth deposit data for the Maryland and West Virginia Counties in which the Bank maintains offices as of June 30, 2023, the most recent date for which comparative information is available.

Offices

Deposits

Market

    

(in Market)

    

(in thousands)

    

Share

Allegany County, Maryland:

Manufacturers & Traders Trust Company

5

$

251,493

31.82%

First United Bank & Trust

3

220,832

27.94%

Truist Bank

3

210,264

26.60%

Dollar Bank, Federal Savings Bank

2

75,600

9.56%

Somerset Trust Company

2

32,295

4.08%

Source: FDIC Deposit Market Share Report

Frederick County, Maryland:

PNC Bank NA

13

$

1,736,987

26.42%

Truist Bank

10

1,179,142

17.93%

Bank Of America NA

4

796,096

12.11%

Manufacturers & Traders Trust Company

6

520,131

7.91%

Sandy Spring Bank

3

462,455

7.03%

Woodsboro Bank

5

382,066

5.81%

Capital One, NA

2

373,274

5.68%

Middletown Valley Bank

4

346,755

5.27%

ACNB Bank

4

321,095

4.88%

First United Bank & Trust

4

205,475

3.13%

Wells Fargo Bank NA

1

163,221

2.48%

Fulton Bank National Association

1

39,282

0.60%

WesBanco Bank, Inc.

1

38,762

0.59%

Presidential Bank, FSB

1

6,755

0.10%

Woodforest National Bank

1

3,292

0.06%

Source: FDIC Deposit Market Share Report

Garrett County, Maryland:

First United Bank & Trust

5

$

617,916

68.06%

Manufacturers & Traders Trust Company

2

118,849

13.09%

Clear Mountain Bank

1

73,259

8.07%

Truist Bank

1

67,228

7.40%

Somerset Trust Company

1

23,815

2.62%

Miners & Merchants Bank

1

6,876

0.76%

Source: FDIC Deposit Market Share Report

Washington County, Maryland:

Truist Bank

5

$

710,137

21.70%

Fulton Bank National Association

6

622,767

19.03%

Manufacturers & Traders Trust Company

9

589,355

18.01%

Middletown Valley Bank

3

475,267

14.52%

PNC Bank NA

3

344,013

10.51%

First United Bank & Trust

4

151,841

4.64%

CNB Bank, Inc.

3

139,552

4.26%

United Bank

2

127,026

3.88%

Orrstown Bank

1

49,463

1.51%

Bank of Charles Town

1

33,444

1.02%

Ameriserv Financial Bank

1

17,218

0.53%

Jefferson Security Bank

1

6,442

0.20%

Farmers and Merchants Trust Company of Chambersburg

1

6,153

0.19%

Source: FDIC Deposit Market Share Report

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Berkeley County, West Virginia:

United Bank

4

$

494,548

26.97%

Truist Bank

    

3

    

380,686

    

20.76%

City National Bank of West Virginia

4

235,097

12.82%

Summit Community Bank, Inc.

3

181,210

9.88%

First United Bank & Trust

3

151,393

8.26%

Jefferson Security Bank

2

143,803

7.84%

CNB Bank, Inc.

3

130,447

7.11%

Bank of Charles Town

2

111,907

6.10%

Woodforest National Bank

1

4,374

0.26%

Source: FDIC Deposit Market Share Report

Harrison County, West Virginia:

Truist Bank

3

$

563,939

26.60%

MVB Bank, Inc.

2

345,424

16.29%

The Huntington National Bank

3

315,065

14.86%

WesBanco Bank, Inc.

5

305,449

14.41%

JP Morgan Chase Bank, NA

1

253,060

11.94%

Harrison County Bank

4

140,313

6.62%

City National Bank of West Virginia

2

52,885

2.49%

Clear Mountain Bank

1

30,707

1.45%

BC Bank, Inc.

1

27,055

1.28%

West Union Bank

1

24,796

1.17%

Summit Community Bank

1

21,568

1.02%

Peoples Bank

1

17,090

0.81%

Freedom Bank, Inc

1

16,681

0.79%

First United Bank & Trust

1

6,235

0.27%

Source: FDIC Deposit Market Share Report

Mineral County, West Virginia:

First United Bank & Trust

2

$

118,018

36.64%

Manufacturers & Traders Trust Company

2

78,816

24.47%

Truist Bank

1

67,279

20.89%

Grant County Bank

1

39,482

12.26%

FNB Bank, Inc.

1

18,470

5.74%

Source: FDIC Deposit Market Share Report

Monongalia County, West Virginia:

MVB Bank, Inc.

2

$

1,269,013

29.70%

United Bank

6

1,038,394

24.30%

The Huntington National Bank

6

635,131

14.87%

Clear Mountain Bank

3

352,898

8.26%

Truist Bank

3

330,870

7.74%

WesBanco Bank, Inc.

3

195,767

4.58%

PNC Bank NA

2

191,859

4.49%

First United Bank & Trust

4

122,948

2.88%

Citizens Bank of Morgantown, Inc.

1

41,348

0.97%

Summit Community Bank, Inc.

1

39,412

0.92%

First Exchange Bank

2

35,999

0.84%

JP Morgan Chase Bank, NA

1

15,898

0.37%

City National Bank of West Virginia

1

2,979

0.08%

Source: FDIC Deposit Market Share Report

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For further information about competition in our market areas, see the Risk Factor entitled “We operate in a competitive environment, and our inability to effectively compete could adversely and materially impact our financial condition and results of operations” in Item 1A of Part I of this annual report.

SUPERVISION AND REGULATION

The following is a summary of the material regulations and policies applicable to the Corporation and its subsidiaries and is not intended to be a comprehensive discussion.  Changes in applicable laws and regulations may have a material effect on our business.

General

The Corporation is registered with the Federal Reserve as a financial holding company under the BHC Act and, as such, is subject to the supervision, examination and reporting requirements of the BHC Act and the regulations of the Federal Reserve.  As a publicly-traded company whose common stock, par value $0.01 per share (the “Common Stock”), is registered under Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and listed on The NASDAQ Global Select Market, the Corporation is also subject to regulation and supervision by the SEC and The NASDAQ Stock Market, LLC (“NASDAQ”).

The Bank is a Maryland trust company subject to the banking laws of Maryland and to regulation by the Maryland Department of Labor’s Office of Financial Regulation (the “Maryland OFR”), who is required by statute to make at least one examination in each calendar year (or at 18-month intervals if the Maryland OFR determines that an examination is unnecessary in a particular calendar year).  The Bank also has offices in West Virginia, and the operations of these offices are subject to various West Virginia laws.  As a member of the FDIC, the Bank is also subject to certain provisions of federal laws and regulations regarding deposit insurance and activities of insured state-chartered banks, including those that require examination by the FDIC.  In addition to the foregoing, there are a myriad of other federal and state laws and regulations that affect, or govern the business of banking, including consumer lending, deposit-taking, and trust operations.

All non-bank subsidiaries of the Corporation are subject to examination by the FRB, and, as affiliates of the Bank, are subject to examination by the FDIC and the Maryland OFR. In addition, OakFirst Loan Center, Inc. is subject to licensing and regulation by the West Virginia Division of Banking, and OakFirst Loan Center, LLC is subject to licensing and regulation by the Maryland OFR.  

Regulation of Bank Holding Companies

The Corporation and its affiliates are subject to the provisions of Section 23A and Section 23B of the Federal Reserve Act.  Section 23A limits the amount of loans or extensions of credit to, and investments in, the Corporation and its non-bank affiliates by the Bank.  Section 23B requires that transactions between the Bank and the Corporation and its non-bank affiliates be on terms and under circumstances that are substantially the same as with non-affiliates.

Under FRB policy, the Corporation is expected to act as a source of strength to the Bank, and the FRB may charge the Corporation with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank when required.  This support may be required at times when the bank holding company may not have the resources to provide the support.  Under the prompt corrective action provisions, if a controlled bank is undercapitalized, then the regulators could require the bank holding company to guarantee the bank’s capital restoration plan.  In addition, if the FRB believes that a bank holding company’s activities, assets or affiliates represent a significant risk to the financial safety, soundness or stability of a controlled bank, then the FRB could require the bank holding company to terminate the activities, liquidate the assets or divest the affiliates. The regulators may require these and other actions in support of controlled banks even if such actions are not in the best interests of the bank holding company or its stockholders.  Because the Corporation is a bank holding company, it is viewed as a source of financial and managerial strength for any controlled depository institutions, like the Bank.

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In addition, under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”), depository institutions insured by the FDIC can be held liable for any losses incurred by, or reasonably anticipated to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default.  Accordingly, in the event that any insured subsidiary of the Corporation causes a loss to the FDIC, other insured subsidiaries of the Corporation could be required to compensate the FDIC by reimbursing it for the estimated amount of such loss.  Such cross guaranty liabilities generally are superior in priority to obligations of a financial institution to its shareholders and obligations to other affiliates.

Regulation of Financial Holding Companies

In 2021, the Corporation elected to become a financial holding company, which allows it to engage in certain activities, and own shares or control of certain entities, that are in addition to those permissible for an entity that is a bank holding company only.  The provisions of the BHC Act relating to financial holding companies and the regulations promulgated thereunder require the Bank to remain “well capitalized” and “well managed”.  The capital requirement is discussed below under the heading, “Prompt Corrective Action”.  The Bank will be considered to be well managed so long as it achieves a CAMEL composite rating of at least “2” as a result of its most recent examination and at least a “satisfactory” management rating (if such rating is given).  If the Bank were to fail to meet either of these requirements, then the Corporation would be required to enter into an agreement with the FRB that would address the remediation of the condition that led to the failure.  During the term of that agreement, which is typically 180 days but can be extended at the discretion of the FRB, the Corporation would be prohibited from commencing any additional activity or acquiring control or shares of any company that would otherwise be permissible for a financial holding company under Section 4(k) of the BHC Act.  If the Corporation were to fail to correct that condition by the expiration of the agreement’s term, then the FRB could order the Corporation to divest its ownership of the Bank or, alternatively, terminate all financial holding company activities.  For so long as the Corporation remains a financial holding company, the Bank must also maintain a Satisfactory or better rating under the Community Reinvestment Act (the “CRA”).  During any period that the Bank fails to satisfy this requirement, the Corporation is prohibited from commencing any additional activity or acquiring control or shares of any company that would otherwise be permissible for a financial holding company under Section 4(k) of the BHC Act.  The Bank currently satisfies all of the foregoing conditions.

Federal Banking Regulation

Federal banking regulators, such as the FRB and the FDIC, may prohibit the institutions over which they have supervisory authority from engaging in activities or investments that the agencies believe are unsafe or unsound banking practices.  Federal banking regulators have extensive enforcement authority over the institutions they regulate to prohibit or correct activities that violate law, regulation or a regulatory agreement or which are deemed to be unsafe or unsound practices.  Enforcement actions may include the appointment of a conservator or receiver, the issuance of a cease and desist order, the termination of deposit insurance, the imposition of civil money penalties on the institution, its directors, officers, employees and institution-affiliated parties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the removal of or additions to restrictions on directors, officers, employees and institution-affiliated parties, and the enforcement of any such mechanisms through restraining orders or other court actions.

The Bank is subject to certain restrictions on extensions of credit to executive officers, directors, and principal shareholders or any related interest of such persons, which generally require that such credit extensions be made on substantially the same terms as those available to persons who are not related to the Bank and not involve more than the normal risk of repayment.  Other laws tie the maximum amount that may be loaned to any one customer and its related interests to capital levels.

As part of the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), each federal banking regulator adopted non-capital safety and soundness standards for institutions under its authority.  These standards include internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation, fees and benefits.  An institution that fails to meet those standards may be

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required by the agency to develop a plan acceptable to meet the standards.  Failure to submit or implement such a plan may subject the institution to regulatory sanctions.  We believe that the Bank meets substantially all standards that have been adopted.  FDICIA also imposes capital standards on insured depository institutions.

The CRA requires the FDIC, in connection with its examination of financial institutions within its jurisdiction, to evaluate the record of those financial institutions in meeting the credit needs of their communities, including low and moderate income neighborhoods, consistent with principles of safe and sound banking practices.  These factors are also considered by all regulatory agencies in evaluating mergers, acquisitions and applications to open a branch or facility.  As of the date of its most recent examination report, the Bank had a CRA rating of “Satisfactory”.

The Bank is also subject to a variety of other laws and regulations with respect to the operation of its business, including, but not limited to, the TILA/RESPA Integrated Disclosure rule (“TRID”), Truth in Lending Act, the Real Estate Settlement Procedures Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the Electronic Funds Transfer Act, the Fair Housing Act, the Home Mortgage Disclosure Act, the Fair Debt Collection Practices Act, the Fair Credit Reporting Act, Expedited Funds Availability (Regulation CC), Reserve Requirements (Regulation D), Privacy of Consumer Information (Regulation P), Margin Stock Loans (Regulation U), the Right To Financial Privacy Act, the Flood Disaster Protection Act, the Homeowners Protection Act, the Servicemembers Civil Relief Act, the Telephone Consumer Protection Act, the CAN-SPAM Act, the Children’s Online Privacy Protection Act, Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) and Office of Foreign Assets Control (“OFAC”).

Capital Requirements

We require capital to fund loans, satisfy our obligations under the Bank’s letters of credit, meet the deposit withdrawal demands of the Bank’s customers, and satisfy our other monetary obligations.  To the extent that deposits are not adequate to fund our capital requirements, we can rely on the funding sources identified below under the heading “Liquidity Management”.  As of December 31, 2023, the Bank had $140.0 million available through unsecured lines of credit with correspondent banks, $12.2 million available through a secured line of credit with the Federal Reserve Discount Window, $69.5 million available through the FFB’s Bank Term Funding Program (“BTFP”), and approximately $145.4 million available through the Federal Home Loan Bank of Atlanta (“FHLB”).  Management is not aware of any demands, commitments, events or uncertainties that are likely to materially affect our ability to meet our future capital requirements.  

In addition to operational requirements, the Bank and the Corporation are subject to risk-based capital regulations, which were adopted and are monitored by federal banking regulators.  These regulations are used to evaluate capital adequacy and require an analysis of an institution’s asset risk profile and off-balance sheet exposures, such as unused loan commitments and stand-by letters of credit.   

Regulators may require higher capital ratios when warranted by the particular circumstances or risk profile of a given banking organization.  In the current regulatory environment, banking organizations must stay well-capitalized in order to receive favorable regulatory treatment on acquisition and other expansion activities and favorable risk-based deposit insurance assessments.  Our capital policy establishes guidelines meeting these regulatory requirements and takes into consideration current or anticipated risks as well as potential future growth opportunities.

In July 2019, the federal banking agencies adopted a final rule that simplifies compliance with certain aspects of the capital rules.  A majority of the simplifications apply solely to banking organizations that are not subject to the advanced approaches capital rule.  The rule simplified the application of regulatory capital treatment for mortgage servicing assets, certain deferred tax assets arising from temporary differences, investments in the capital of unconsolidated financial institutions, and capital issued by a consolidated subsidiary of a banking organization and held by third parties (minority interest).  In addition, the rule revised the treatment of certain acquisition, development, or construction exposures.  

As of December 31, 2023, we were in compliance with the applicable requirements.

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Additional information about our capital ratios is contained in “Consolidated Balance Sheet Review” section of Item 7 of Part II of this annual report under the heading “Capital Resources”.  

Prompt Corrective Action

The Federal Deposit Insurance Act (“FDI Act”) requires, among other things, the federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. The FDI Act includes the following five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation. The relevant capital measures are the total capital ratio, the Tier 1 capital ratio and the leverage ratio.

A bank will be (i) “well capitalized” if the institution has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure, (ii) “adequately capitalized” if the institution has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 4.0% or greater, and a leverage ratio of 4.0% or greater and is not “well capitalized”, (iii) “undercapitalized” if the institution has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio of less than 4.0% or a leverage ratio of less than 4.0%, (iv) “significantly undercapitalized” if the institution has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 3.0% or a leverage ratio of less than 3.0%, and (v) “critically undercapitalized” if the institution’s tangible equity is equal to or less than 2.0% of average quarterly tangible assets. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.

Following the 2010 enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), the federal banking regulators implemented the Basel III regulatory framework on bank capital adequacy, stress testing, and market liquidity risk (the “Basel III Capital Rules”).  The Basel III Capital Rules revised the prompt corrective action requirements by (i) introducing the Common Equity Tier 1 (“CET1”) ratio requirement at each level (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category (other than critically undercapitalized), with the minimum Tier 1 capital ratio for well-capitalized status being 8%; and (iii) eliminating the provision that permitted a bank with a composite supervisory rating of 1 but a leverage ratio of at least 3% to be deemed adequately capitalized.  

The FDI Act generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be “undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit a capital restoration plan. The agencies may not accept such a plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. In addition, for a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with such capital restoration plan. The bank holding company must also provide appropriate assurances of performance. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to 5.0% of the depository institution’s total assets at the time it became undercapitalized and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.”  Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator.

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The appropriate federal banking agency may, under certain circumstances, reclassify a well-capitalized insured depository institution as adequately capitalized. The FDI Act provides that an institution may be reclassified if the appropriate federal banking agency determines (after notice and opportunity for hearing) that the institution is in an unsafe or unsound condition or deems the institution to be engaging in an unsafe or unsound practice.

The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the supervisory provisions as if the institution were in the next lower category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory information other than the capital levels of the institution.

As of December 31, 2023, the Bank was “well capitalized” based on the aforementioned ratios.

Liquidity Requirements

Historically, the regulation and monitoring of bank liquidity has been addressed as a supervisory matter, without required formulaic measures. The Basel III Capital Rules require banks to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, going forward would be required by regulation. One test, referred to as the liquidity coverage ratio, is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario. The other test, referred to as the net stable funding ratio, is designed to promote more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon. These requirements will incent banking entities to increase their holdings of securities issued by the U.S. Department of the Treasury (the “Treasury”) and other sovereign debt as a component of assets and increase the use of long-term debt as a funding source.  

Deposit Insurance

The Bank is a member of the FDIC and pays an insurance premium to the FDIC based upon its assessable deposits on a quarterly basis.  Deposits are insured up to applicable limits by the FDIC and such insurance is backed by the full faith and credit of the United States Government.

The deposit insurance limit set by law is currently $250,000.  The coverage limit is per depositor, per insured depository institution for each account ownership category.  

The Federal Deposit Insurance Reform Act of 2005, which created the DIF, gave the FDIC greater latitude in setting the assessment rates for insured depository institutions which could be used to impose minimum assessments.  The FDIC has the flexibility to adopt actual rates that are higher or lower than the total base assessment rates adopted without notice and comment, if certain conditions are met.  

In October 2022, the FDIC adopted a final rule to increase the initial base deposit insurance assessment rate schedules uniformly by two basis points beginning in the first quarterly assessment period of 2023.   The increased assessment was expected to improve the likelihood that the DIF reserve ratio would reach the statutory minimum of 1.35% by the statutory deadline prescribed under the FDIC’s amended restoration plan.

The FDIC is authorized to conduct examinations of and require reporting by FDIC-insured institutions.  It is also authorized to terminate a depository bank’s deposit insurance upon a finding by the FDIC that the bank’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has violated any applicable rule, regulation, order or condition enacted or imposed by the bank’s regulatory agency.  The termination of deposit insurance for our bank subsidiary would have a material adverse effect on our earnings, operations and financial condition.

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Bank Secrecy Act/Anti-Money Laundering

The Bank Secrecy Act (“BSA”), which is intended to require financial institutions to develop policies, procedures, and practices to prevent and deter money laundering, mandates that every national bank have a written, board-approved program that is reasonably designed to assure and monitor compliance with the BSA.

The program must, at a minimum: (i) provide for a system of internal controls to assure ongoing compliance; (ii) provide for independent testing for compliance; (iii) designate an individual responsible for coordinating and monitoring day-to-day compliance; and (iv) provide training for appropriate personnel.  In addition, state-chartered banks are required to adopt a customer identification program as part of its BSA compliance program.  State-chartered banks are also required to file Suspicious Activity Reports when they detect certain known or suspected violations of federal law or suspicious transactions related to a money laundering activity or a violation of the BSA.

In addition to complying with the BSA, the Bank is subject to the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA Patriot Act”). The USA Patriot Act is designed to deny terrorists and criminals the ability to obtain access to the United States’ financial system and has significant implications for depository institutions, brokers, dealers, and other businesses involved in the transfer of money.   The USA Patriot Act mandates that financial service companies implement additional policies and procedures and take heightened measures designed to address any or all of the following matters: customer identification programs, money laundering, terrorist financing, identifying and reporting suspicious activities and currency transactions, currency crimes, and cooperation between financial institutions and law enforcement authorities.

Dodd-Frank Act

The Dodd-Frank Act was enacted in July 2010 and significantly restructured the financial regulatory regime in the United States. Although the Dodd-Frank Act’s provisions that have received the most public attention generally have been those applying to or more likely to affect larger institutions such as banks and bank holding companies with total consolidated assets of $50 billion or more, it contains numerous other provisions that affect all financial institutions, including the Bank.  The Dodd-Frank Act established the Consumer Financial Protection Bureau (the “CFPB”), discussed below, and contains a wide variety of provisions affecting the regulation of depository institutions, including fair lending, fair debt collection practices, mortgage loan origination and servicing obligations, bankruptcy, military service member protections, use of credit reports, privacy matters, and disclosure of credit terms and correction of billing errors.  Local, state and national regulatory and enforcement agencies continue efforts to address perceived problems within the mortgage lending and credit card industries through broad or targeted legislative or regulatory initiatives aimed at lenders’ operations in consumer lending markets.  There continues to be a significant amount of legislative and regulatory activity, nationally, locally and at the state level, designed to limit certain lending practices while mandating certain servicing procedures.  Federal bankruptcy and state debtor relief and collection laws, as well as the Servicemembers Civil Relief Act affect the ability of banks, including the Bank, to collect outstanding balances.    

Moreover, the Dodd-Frank Act permits states to adopt stricter consumer protection laws and states’ attorneys general may enforce consumer protection rules issued by the CFPB.  U.S. financial regulatory agencies have increasingly used a general consumer protection statute to address unethical or otherwise bad business practices that may not necessarily fall directly under the purview of a specific banking or consumer finance law.  Prior to the Dodd-Frank Act, there was little formal guidance to provide insight to the parameters for compliance with the “unfair or deceptive acts or practices” (“UDAP”) law.  However, the UDAP provisions have been expanded under the Dodd-Frank Act to apply to “unfair, deceptive or abusive acts or practices”, which has been delegated to the CFPB for supervision.

The Dodd-Frank Act has increased, and will likely continue to increase, our regulatory compliance burdens and costs and may restrict the financial products and services that we offer to our customers in the future.  

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Mortgage Lending and Servicing

The Bank’s mortgage lending and servicing activities are subject to various laws and regulations that are enforced by the federal banking regulators and the CFPB, such as the Truth in Lending Act, the Real Estate Settlement Procedures Act, and various rules adopted thereunder, including those relating to consumer disclosures, appraisal requirements, mortgage originator compensation, prohibitions on mandatory arbitration provisions under certain circumstances, and the obligation to credit payments and provide payoff statements within certain time periods and provide certain notices prior to interest rate and payment adjustments.

The Bank is required to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms.  Qualified mortgages that are not “higher-priced” are afforded a safe harbor presumption of compliance with the ability to repay rules, while qualified mortgages that are “higher-priced” garner a rebuttable presumption of compliance with the ability to repay rules.  In general, a “qualified mortgage” is a mortgage loan without negative amortization, interest-only payments, balloon payments, or a term exceeding 30 years, where the lender determines that the borrower has the ability to repay, and where the borrower’s points and fees do not exceed 3% of the total loan amount.  “Higher-priced” mortgages must have escrow accounts for taxes and insurance and similar recurring expenses.

Consumer Lending – Military Lending Act

The Military Lending Act (the “MLA”), which was initially implemented in 2007, was amended and its coverage significantly expanded in 2015.  The Department of Defense (the “DOD”) issued a final rule under the MLA that took effect on October 15, 2015, but financial institutions were not required to take action until October 3, 2016.  The types of credit covered under the MLA were expanded to include virtually all consumer loan and credit card products (except for loans secured by residential real property and certain purchase-money motor vehicle/personal property secured transactions).  Lenders must now provide specific written and oral disclosures concerning the protections of the MLA to active duty members of the military and dependents of active duty members of the military (“covered borrowers”).  The rule imposes a 36% “Military Annual Percentage Rate” cap that includes costs associated with credit insurance premiums, fees for ancillary products, finance charges associated with the transactions, and application and participation charges.  In addition, loan terms cannot include (i) a mandatory arbitration provision, (ii) a waiver of consumer protection laws, (iii) mandatory allotments from military benefits, or (iv) a prepayment penalty.  The revised rule also prohibits “roll-over” or refinances of the same loan unless the new loan provides more favorable terms for the covered borrower.  Lenders may verify covered borrower status using a DOD database or information provided by credit bureaus.  We believe that we are in compliance with the revised rule.  

Federal Securities Laws and NASDAQ Rules

The Common Stock is registered with the SEC under Section 12(b) of the Exchange and shares of the Common Stock are listed on the NASDAQ Global Select Market.  The Corporation is subject to information reporting requirements, proxy solicitation requirements, insider trading restrictions and other requirements of the Exchange Act, including the requirements imposed under the federal Sarbanes-Oxley Act of 2002, and rules adopted by NASDAQ.  Among other things, loans to and other transactions with insiders are subject to restrictions and heightened disclosure, directors and certain committees of the Board must satisfy certain independence requirements, the Corporation must comply with certain enhanced corporate governance requirements, and various issuances of securities by the Corporation require shareholder approval.

Governmental Monetary and Credit Policies and Economic Controls

The earnings and growth of the banking industry and ultimately of the Bank are affected by the monetary and credit policies of governmental authorities, including the FRB.  An important function of the FRB is to regulate the national supply of bank credit in order to control recessionary and inflationary pressures. Among the instruments of monetary policy used by the FRB to implement these objectives are open market operations in U.S. Government securities, changes

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in the federal funds rate, changes in the discount rate of member bank borrowings, and changes in reserve requirements against member bank deposits.  These means are used in varying combinations to influence overall growth of bank loans, investments and deposits and may also affect interest rates charged on loans or paid on deposits.  The monetary policies of the FRB authorities have had a significant effect on the operating results of commercial banks in the past and are expected to continue to have such an effect in the future.  In view of changing conditions in the national economy and in the money markets, as well as the effect of actions by monetary and fiscal authorities, including the FRB, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or their effect on our businesses and earnings.

EMPLOYEES

At December 31, 2023, we employed 338 individuals, of whom 304 were full-time employees.

ITEM 1A. RISK FACTORS

The significant risks and uncertainties related to us, our business and our securities of which we are aware are discussed below.  Investors and shareholders should carefully consider these risks and uncertainties before making investment decisions with respect to the Corporation’s securities.  Any of these factors could materially and adversely affect our business, financial condition, operating results and prospects and could negatively impact the market price of the Corporation’s securities.  If any of these risks materialize, the holders of the Corporation’s securities could lose all or part of their investments in the Corporation.  Additional risks and uncertainties that we do not yet know of, or that we currently think are immaterial, may also impair our business operations.  Investors and shareholders should also consider the other information contained in this annual report, including our financial statements and the related notes, before making investment decisions with respect to the Corporation’s securities.

Risks Relating to First United Corporation and its Affiliates

First United Corporation’s future success depends on the successful growth of its subsidiaries.

The Corporation’s primary business activity for the foreseeable future will be to act as the holding company of the Bank and its other direct and indirect subsidiaries.  Therefore, the Corporation’s future profitability will depend on the success and growth of these subsidiaries.

The Bank’s funding sources may prove insufficient to replace deposits and support our future growth.

The Bank relies on customer deposits, advances from the FHLB, lines of credit at other financial institutions and brokered funds to fund our operations.  Although the Bank has historically been able to replace maturing deposits and advances if desired, no assurance can be given that the Bank would be able to replace such funds in the future if our financial condition or the financial condition of the FHLB or market conditions were to change.  Our financial flexibility could be severely constrained and/or our cost of funds could increase if we are unable to maintain our access to funding or if financing necessary to accommodate future growth is not available at favorable interest rates.  If we are required to rely more heavily on more expensive funding sources to support future growth, then our revenues may not increase proportionately to cover our costs.  In that case, our profitability would be adversely affected.

We may need to raise capital in the future, and such capital may not be available when needed or at all.

We may need to raise capital in the future to provide it with sufficient capital resources and liquidity to meet our commitments and business needs including complying with new regulatory capital rules, particularly if our asset quality or earnings were to deteriorate significantly.  Our ability to raise capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of our control, and our financial condition.  Economic conditions and the loss of confidence in financial institutions may limit access to certain customary sources of capital, and increase our cost of raising capital.  No assurance can be given that such capital will be available on acceptable terms or

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at all.  Any occurrence that may limit our access to the capital markets, such as a decline in the confidence of depositors, investors or counterparties participating in the capital markets may adversely affect our capital costs and our ability to raise capital and, in turn, our liquidity. Moreover, if we need to raise capital in the future, we may have to do so when many other financial institutions are also seeking to raise capital and would have to compete with those institutions for investors.  An inability to raise additional capital on acceptable terms as and when needed could have a materially adverse effect on our business, financial condition and results of operations.

Our inability to generate liquidity in a timely manner may adversely impact our ability to satisfy obligations associated with our financing, our operations and other components of our business.

Timely access to liquidity is essential to our business, and being able to meet obligations as they come due and pay deposits when they are withdrawn is critical to ongoing operations.  If we are unable to meet our payment obligations on a daily basis, we may be subject to being placed into receivership, regardless of our capital levels.  Our primary sources of liquidity consist of cash and cash balances due from correspondent banks, excess reserves at the Federal Reserve, loan repayments, federal funds sold and other short-term investments, maturities and monetization of investment securities, cash provided by operating activities and new core deposits into the Bank.  Our ability to obtain or liquidate these primary sources of liquidity may be impacted by adverse economic conditions resulting from dynamic, complex, and other foreseen and unforeseen inter-related factors and events in the economic environment.  If we were to rely on sales proceeds from the sale of investment securities within our portfolio in order to satisfy our obligations, we may be adversely impacted by our ability to transact and settle such sales.  Sales of investment securities in an unrealized loss position would negatively affect our earnings and regulatory capital.  In addition, in order to monetize our held-to-maturity (“HTM”) securities, we expect to rely on pledging those securities for secured funding, and our liquidity may be impaired if we are unable to timely pledge those or any other securities due to lack of available funding, operational impediments or otherwise.  Our industry is susceptible to the negative impact of limited access to short-term and/or long-term sources of funds, which could result in a liquidity shortfall and/or impact our liquidity coverage ratio and could have an adverse effect on our operations, financial condition and earnings.  

Our inability to access sources of financing at terms that are favorable to us may result in an adverse effect on our business, financial condition, and results of operations.

Our liquidity could be adversely affected by any inability to access the debt or equity capital markets, liquidity or volatility in those capital markets, the decrease in value of eligible collateral or increased collateral requirements (including as a result of credit concerns for short-term borrowings), changes to our relationships with our funding providers based on real or perceived changes in our risk profile, prolonged federal government shutdowns or changes in regulations.  Additionally, our liquidity may be negatively impacted by the unwillingness or inability of the Federal Reserve to act as a lender of last resort.

Our ability  to raise additional financing depends on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry, market conditions and governmental activities and on our financial condition and performance.   Accordingly, we may be unable to raise additional financing if needed or on acceptable terms.

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The value of real estate collateral may fluctuate significantly resulting in an under-collateralized loan portfolio.

The market value of real estate, particularly real estate held for investment, can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located.  If the value of the real estate serving as collateral for the Corporation’s loan portfolio were to decline materially, a significant part of the Corporation’s loan portfolio could become under-collateralized.  If the loans that are collateralized by real estate become troubled during a time when market conditions are declining or have declined, then, in the event of foreclosure, we may not be able to realize the amount of collateral that we anticipated at the time of originating the loan.  This could have a material adverse effect on the Corporation’s provision for credit losses and the Corporation’s operating results and financial condition.

The Corporation is subject to lending risk, and the impacts of interest rate changes could adversely impact the Corporation.

There are inherent risks associated with the Corporation’s lending activities.  These risks include, among other things, the impact of changes in interest rates and changes in the economic conditions in the markets where the Corporation operates.  Increases in interest rates and/or weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans.  

A substantial portion of the Corporation’s loan portfolio is comprised of residential and commercial real estate loans.  The Corporation’s concentration of real estate loans may subject the Corporation to additional risk, as fluctuations in market value of collateral and difficulty monitoring income-producing property serving as a source of repayment and collateral.  Any of these or other risks relating to real estate loans could adversely affect the collection by the Corporation of the outstanding loan balances.

Interest rates and other economic conditions will impact our results of operations.

Our net income depends primarily upon our net interest income. Net interest income is the difference between interest income earned on loans, investments and other interest-earning assets and the interest expense incurred on deposits and borrowed funds. The level of net interest income is primarily a function of the average balance of our interest-earning assets, the average balance of our interest-bearing liabilities, and the spread between the yield on such assets and the cost of such liabilities. These factors are influenced by both the pricing and mix of our interest-earning assets and our interest-bearing liabilities which, in turn, are impacted by such external factors as the local economy, competition for loans and deposits, the monetary policy of the Federal Open Market Committee of the FRB, and market interest rates.

Different types of assets and liabilities may react differently, and at different times, to changes in market interest rates. We expect that we will periodically experience gaps in the interest rate sensitivities of our assets and liabilities. That means either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. When interest-bearing liabilities mature or re-price more quickly than interest-earning assets, an increase in market rates of interest could reduce our net interest income. Likewise, when interest-earning assets mature or re-price more quickly than interest-bearing liabilities, falling interest rates could reduce our net interest income. We are unable to predict changes in market interest rates, which are affected by many factors beyond our control, including inflation, deflation, recession, unemployment, money supply, domestic and international events and changes in the United States and other financial markets.

We also attempt to manage risk from changes in market interest rates, in part, by controlling the mix of interest rate sensitive assets and interest rate sensitive liabilities. However, interest rate risk management techniques are not exact. A rapid increase or decrease in interest rates could adversely affect our results of operations and financial performance.

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The majority of our business is concentrated in Maryland and West Virginia, much of which involves real estate lending, so a decline in the real estate and credit markets could materially and adversely impact our financial condition and results of operations.  

Most of the Bank’s loans are made to borrowers located in Western Maryland and Northeastern West Virginia, and many of these loans, including construction and land development loans, are secured by real estate.  Accordingly, a decline in local economic conditions would likely have an adverse impact on our financial condition and results of operations, and the impact on us would likely be greater than the impact felt by larger financial institutions whose loan portfolios are geographically diverse.  We cannot guarantee that any risk management practices we implement to address our geographic and loan concentrations will be effective to prevent losses relating to our loan portfolio.  

The Bank’s concentrations of commercial real estate loans could subject it to increased regulatory scrutiny and directives, which could force us to preserve or raise capital and/or limit future commercial lending activities.

The federal banking regulators believe that institutions that have particularly high concentrations of CRE loans within their lending portfolios face a heightened risk of financial difficulties in the event of adverse changes in the economy and CRE markets.  Accordingly, through published guidance, these regulators have directed institutions whose concentrations exceed certain percentages of capital to implement heightened risk management practices appropriate to their concentration risk.  The guidance provides that banking regulators may require such institutions to reduce their concentrations and/or maintain higher capital ratios than institutions with lower concentrations in CRE.  At December 31, 2023, our CRE concentrations were below the heightened risk management thresholds set forth in this guidance.  

The Bank may experience loan losses in excess of its allowance for credit losses, which would reduce our earnings.

The risk of credit losses on loans varies with, among other things, general economic conditions, the type of loans being made, the creditworthiness of the borrowers over the term of the loans and, in the case of collateralized loans, the value and marketability of the collateral for the loans.  Management of the Bank maintains an ACL based upon, among other things, historical experience, an evaluation of economic conditions and regular reviews of delinquencies and loan portfolio quality. Based upon such factors, management makes various assumptions and judgments about the ultimate collectability of the loan portfolio and provides the ACL based upon a percentage of the outstanding balances and for specific loans when their ultimate collectability is considered questionable.  If management’s assumptions and judgments prove to be incorrect and the ACL is inadequate to absorb future losses, or if the bank regulatory authorities require us to increase the ACL as a part of its examination process, our earnings and capital could be significantly and adversely affected.  Although management continually monitors our loan portfolio and makes determinations with respect to the ACL, future adjustments may be necessary if economic conditions differ substantially from the assumptions used or adverse developments arise with respect to our non-performing or performing loans.  Material additions to the ACL could result in a material decrease in our net income and capital; and could have a material adverse effect on our financial condition.

We depend on the accuracy and completeness of information about customers and counterparties, and inaccurate, incomplete or misleading information provided to us by these persons could cause us to suffer losses.

In deciding whether to extend credit or enter into other transactions, we rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports and other financial information. We also rely on representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports or other financial information could have a material adverse impact on our business, financial condition and results of operations.

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Our accounting estimates and risk management processes rely on analytical and forecasting models, the inadequacy of which could have a material adverse effect on our financial condition and/or results of operations.

The processes we use to estimate our ACL and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on our financial condition and results of operations, depends upon the use of analytical and forecasting models. These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation, including flaws caused by failures in controls, data management, human error or from the reliance on technology. If the models we use for interest rate risk and asset-liability management are inadequate, we may incur increased or unexpected losses upon changes in market interest rates or other market measures. If the models we use for estimating our expected credit losses are inadequate, the ACL may not be sufficient to support future charge-offs. If the models we use to measure the fair value of financial instruments are inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what we could realize upon sale or settlement of such financial instruments. Any such failure in our analytical or forecasting models could have a material adverse effect on our business, financial condition and results of operations.

The Bank’s lending activities subject the Bank to the risk of environmental liabilities.

A significant portion of the Bank’s loan portfolio is secured by real property.  During the ordinary course of business, the Bank may foreclose on and take title to properties securing certain loans.  In doing so, there is a risk that hazardous or toxic substances could be found on these properties.  If hazardous or toxic substances are found, the Bank may be liable for remediation costs, as well as for personal injury and property damage.  Environmental laws may require the Bank to incur substantial expenses and may materially reduce the affected property’s value or limit the Bank’s ability to use or sell the affected property.  In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase the Bank’s exposure to environmental liability.  Although the Bank has policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards.  The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations.

Our investment securities are subject to market risk and credit risk that may have an adverse impact on our financial condition and results of operation.

At December 31, 2023, investment securities in our investment portfolio having a cost basis of $117.9 million and a market value of $97.2 million were classified as available-for-sale pursuant to FASB Accounting Standards Codification (“ASC”) Topic 320, Investments – Debt and Equity Securities, relating to accounting for investments.  Topic 320 requires that unrealized gains and losses in the estimated value of the available-for-sale portfolio be “marked to market” and reflected as a separate item in shareholders’ equity (net of tax) as accumulated other comprehensive loss.  There can be no assurance that future market performance of our investment portfolio will enable us to realize income from sales of securities.  Shareholders’ equity will continue to reflect the unrealized gains and losses (net of tax) of these investments.  Moreover, there can be no assurance that the market value of our investment portfolio will not decline, causing a corresponding decline in shareholders’ equity.

Several factors could affect the market value of our investment portfolio.  These include, but are not limited to, changes in interest rates or expectations of changes, the degree of volatility in the securities markets, inflation rates or expectations of inflation and the slope of the interest rate yield curve (the yield curve refers to the differences between shorter-term and longer-term interest rates; a positively sloped yield curve means shorter-term rates are lower than longer-term rates).  Also, the passage of time will affect the market values of our investment securities, in that the closer they are to maturing, the closer the market price should be to par value.  These and other factors may impact specific categories of the portfolio differently, and management cannot predict the effect these factors may have on any specific category.

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Our investment securities portfolio as a whole is exposed to credit risk associated with rating agency downgrades and defaults of the issuers of those securities.  We measure expected credit losses on our investment portfolio through our CECL estimate.  Increases to the provision for credit losses would have a negative impact on our results of operations and regulatory capital ratios.  Additionally, an insufficient CECL provision may result in additional losses that would have an adverse impact on our results of operations.  The investment portfolio’s performance, including the existence of unrealized and unrecognized losses in the portfolio, also may create reputational risk for us, particularly in conjunction with the conditions of the banking industry generally, that could result in deposit outflows or reduced access to funding, or negatively impact our ability to attract and retain prospective customers.

Impairment of goodwill and other intangible assets or deferred tax assets could require charges to earnings, which could result in a negative impact on our results of operations.

Under current accounting standards, goodwill and other intangible assets are subject to impairment tests on at least an annual basis or more frequently if an event occurs or circumstances change that reduce the fair value of a reporting unit below its carrying amount.  A decline in the price of the shares of Common Stock or occurrence of a triggering event following any of our quarterly earnings releases and prior to the filing of the periodic report for that period could, under certain circumstances, cause us to perform a goodwill impairment test and result in an impairment charge being recorded for that period which was not reflected in such earnings release.  In the event that we conclude that all or a portion of our goodwill and other intangible assets may be impaired, a non-cash charge for the amount of such impairment would be recorded to earnings.  Such a charge would have no impact on tangible capital.  At December 31, 2023, we had recorded goodwill and other intangible assets of $12.1 million, representing approximately 7.5% of shareholders’ equity.  

At December 31, 2023, our net deferred tax assets were valued at $11.1 million.  Included in that total is $2.8 million of state net operating loss carryforwards (“NOLs”) associated with separate company tax filings of the Corporation, which we do not expect to use and, thus, we have established a $2.8 million valuation allowance.  A deferred tax asset is reduced by a valuation allowance if, based on the weight of the evidence available, both negative and positive, including the recent trend of quarterly earnings, the Corporation determines that it is more likely than not that some portion or all of the total deferred tax asset will not be realized.  Moreover, our ability to utilize our net operating loss carryforwards to offset future taxable income may be significantly limited if we experience an “ownership change,” as determined under Section 382 of the Internal Revenue Code of 1986, as amended (“the Code”). If an ownership change were to occur, the limitations imposed by Section 382 of the Code could result in a portion of our net operating loss carryforwards expiring unused, thereby impairing their value. Section 382’s provisions are complex, and we cannot predict any circumstances surrounding the future ownership of the Common Stock.  Accordingly, we cannot provide any assurance that we will not experience an ownership change in the future.  

The impact of each of these impairment matters could have a material adverse effect on our business, results of operations, and financial condition.

Adverse developments affecting the financial services industry, such as actual events or concerns involving liquidity, defaults, or non-performance by financial institutions or transactional counterparties, could adversely affect our financial condition and results of operations.

Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships, and we routinely execute transactions with counterparties in the financial industry.   Actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past and may in the future lead to market-wide liquidity problems.

Increases in bond interest rates have led to a significant decline in the fair value of investment securities.  Although the Treasury, the FDIC and the FRB have announced the BTFP  to provide up to $25 billion of loans to financial institutions secured by certain of such government-backed agency securities held by financial institutions to mititgate the risk of

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potential losses on the sale of such instruments, widespread demands for customer withdrawals or other liquidity needs of financial institutions for immediate liquidity might exceed the capacity of such program.  The FRB announced in January 2024 that the BTFP will stop originating new loans on March 11, 2024, as scheduled.  The FRB also modified the terms of the program so that interest rate on reserve balances in effect on the day the loan is made.  In January 2024, prior to these announcements by the FRB, the Corporation borrowed $40.0 million through the BTFP at an interest rate of 4.87% and a maturity date in January 2025.

In addition to the risk that occurrence of such events could adversely impact our ability to engage in routine funding transactions, they could also lead to losses or defaults by us or by other institutions, either of which could have a material adverse effect on our business, results of operations and financial condition.

Increases in FDIC insurance premiums may have a material adverse effect on our results of operations.

In general, we are unable to control the amount of premiums that are required to be paid for FDIC insurance.  In October 2022, the FDIC finalized a rule to increase the assessment rate by two basis points beginning in the first quarter of 2023.  The increase in the assessment rate for banks is intended to increase the Deposit Insurance Fund (“DIF)” reserve ratio to 1.35%.  In early March 2023, the FDIC was appointed receiver for two banks, in each case due primarily to liquidity concerns at those institutions.  Promptly following these events, the federal banking regulators announced that the FDIC will use funds from the DIF to ensure that all depositors of the two failed institutions are made whole, at no cost to taxpayers.  We anticipate that the FDIC will impose special assessments on all banks to replenish the DIF.  As a result of these and/or other financial institution failures, we may be required to pay significantly higher premiums than the levels currently imposed, as well as additional special assessments or taxes, which could adversely affect earnings.  Any future increases or required repayments in FDIC insurance premiums may materially adversely affect our results of operations.

We operate in a competitive environment, and our inability to effectively compete could adversely and materially impact our financial condition and results of operations.

We operate in a competitive environment, competing for loans, deposits, and customers with commercial banks, savings associations and other financial entities.  Competition for deposits comes primarily from other commercial banks, savings associations, credit unions, money market and mutual funds and other investment alternatives.  Competition for loans comes primarily from other commercial banks, savings associations, mortgage banking firms, credit unions and other financial intermediaries.  Competition for other products, such as securities products, comes from other banks, securities and brokerage companies, and other non-bank financial service providers in our market area.  Many of these competitors are much larger in terms of total assets and capitalization, have greater access to capital markets, and/or offer a broader range of financial services than those that we offer.  In addition, banks with a larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are thereby able to serve the needs of larger customers.

In addition, changes to the banking laws over the last several years have facilitated interstate branching, merger and expanded activities by banks and holding companies.  For example, the federal Gramm-Leach-Bliley Act (the “GLB Act”) revised the BHC Act and repealed the affiliation provisions of the Glass-Steagall Act of 1933, which, taken together, limited the securities and other non-banking activities of any company that controls an FDIC insured financial institution.  As a result, the ability of financial institutions to branch across state lines and the ability of these institutions to engage in previously-prohibited activities are now accepted elements of competition in the banking industry.  These changes may bring us into competition with more and a wider array of institutions, which may reduce our ability to attract or retain customers.  Management cannot predict the extent to which we will face such additional competition or the degree to which such competition will impact our financial conditions or results of operations.

The banking industry is heavily regulated; significant regulatory changes could adversely affect our operations.

Our operations will be impacted by current and future legislation and by the policies established from time to time by various federal and state regulatory authorities.  The Corporation is subject to supervision by the FRB.  The Bank

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is subject to supervision and periodic examination by the Maryland OFR of Financial Regulation, the West Virginia Division of Banking, and the FDIC.  Banking regulations, designed primarily for the safety of depositors, may limit a financial institution’s growth and the return to its investors by restricting such activities as the payment of dividends, mergers with or acquisitions by other institutions, investments, loans and interest rates, interest rates paid on deposits, expansion of branch offices, and the offering of securities or trust services.  The Corporation and the Bank are also subject to capitalization guidelines established by federal law and could be subject to enforcement actions to the extent that either is found by regulatory examiners to be undercapitalized. It is not possible to predict what changes, if any, will be made to existing federal and state legislation and regulations or the effect that such changes may have on our future business and earnings prospects.  Management also cannot predict the nature or the extent of the effect on our business and earnings of future fiscal or monetary policies, economic controls, or new federal or state legislation.  Further, the cost of compliance with regulatory requirements may adversely affect our ability to operate profitably.

The Consumer Financial Protection Bureau may continue to reshape the consumer financial laws through rulemaking and enforcement of the prohibitions against unfair, deceptive and abusive business practices.  Compliance with any such change may impact our business operations.

The Consumer Financial Protection Bureau (“CFPB”) has broad rulemaking authority to administer and carry out the provisions of the Dodd-Frank Act with respect to financial institutions that offer covered financial products and services to consumers.  The CFPB has also been directed to adopt rules identifying practices or acts that are unfair, deceptive or abusive in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service.  The concept of what may be considered to be an “abusive” practice is fluid and can change based on politically-appointed leadership at the CFPB.  We have been required to dedicate significant personnel resources to address the compliance burdens imposed by the CFBP’s adoption of various rules, and the adoption of additional rules in the future would likely require us to dedicate even more resources.  

Compliance with ever-evolving federal and state laws relating to the handling of information about individuals involves significant expenditure and resources, and any failure by us or our vendors to comply may result in significant liability, negative publicity, and/or an erosion of trust, which could materially adversely affect our business, results of operations, and financial condition.

We are subject to a number of U.S. federal, state, local and foreign laws and regulations relating to consumer privacy and data protection. Under privacy protection provisions of the GLBA and its implementing regulations and guidance, we are limited in our ability to disclose certain non-public information about consumers to nonaffiliated third parties. The GLBA regulates, among other things, the use of certain information about individuals (“non-public personal information”) in the context of the provision of financial services, including by banks and other financial institutions. The GLBA includes both a “Privacy Rule”,  which imposes obligations on financial institutions relating to the use or disclosure of non-public personal information, and a “Safeguards Rule”, which imposes obligations on financial institutions and, indirectly, their service providers to implement and maintain physical, administrative and technological measures to protect the security of non-public personal financial information. Any failure to comply with the GLBA could result in substantial financial penalties and significant reputational harm.  Multiple states have recently enacted, or are expected to enact, stringent privacy laws, not all of which exempt financial institutions categorically. Many other states are currently reviewing or proposing the need for greater regulation of the collection, sharing, use and other processing of information related to individuals for marketing purposes or otherwise, and there remains increased interest at the federal level as well. Further, to comply with the varying state laws around data breaches, we must maintain adequate security measures, which require significant investments in resources and ongoing attention.  

Additionally, laws, regulations, and standards covering marketing, advertising, and other activities conducted by telephone, email, mobile devices, and the internet are or may become applicable to our business, such as the Telephone Consumer Protection Act, the CAN-SPAM Act, and similar state consumer protection and communication privacy laws.  We occasionally make telephone calls and/or send SMS text messages to customers. The actual or perceived improper calling of customer phones and/or sending of text messages may subject us to potential risks, including liabilities or claims relating to consumer protection laws such as the Telephone Consumer Protection Act. Numerous class-action suits under

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federal and state laws have been filed in recent years against companies who conduct telemarketing and/or SMS texting programs, with many resulting in multi-million-dollar settlements to the plaintiffs. Any future such litigation against us could be costly and time-consuming to defend. In particular, the Telephone Consumer Protection Act imposes significant restrictions on the ability to make telephone calls or send text messages to mobile telephone numbers without the prior consent of the person being contacted. Federal or state regulatory authorities or private litigants may claim that the notices and disclosures we provide, form of consents we obtain or our outreach practices are not adequate or violate applicable law. This may in the future result in civil claims against us. Claims that we have violated the Telephone Consumer Protection Act could be costly to litigate, whether or not they have merit, and could expose us to substantial statutory damages or costly settlements.

We also send marketing messages via email and are subject to the CAN-SPAM Act. The CAN-SPAM Act imposes certain obligations regarding the content of emails and providing opt-outs (with the corresponding requirement to honor such opt-outs promptly). While we strive to ensure that all of our marketing communications comply with the requirements set forth in the CAN-SPAM Act, any violations could result in the FTC seeking civil penalties against us.

Moreover, we are considered a “user” of consumer reports provided by consumer reporting agencies under the FCRA, as amended by the Fair and Accurate Credit Transactions Act.  FCRA regulates and protects consumer information collected by consumer reporting agencies and imposes specific obligations on “users” of consumer reports. Such obligations may include restricting the sharing of information contained in a consumer report, notifying consumers when such reports are used to make an adverse decision, and, in the context of completing employee background checks, providing a notice containing certain disclosures to the consumer and obtaining their consent.

Bank regulators and other regulations, including the Basel III Capital Rules, may require higher capital levels, impacting our ability to pay dividends or repurchase our stock.

The capital standards to which we are subject, including the standards created by the Basel III Capital Rules, may materially limit our ability to use our capital resources and/or could require us to raise additional capital by issuing additional shares of Common Stock or other equity securities.  In addition, we could experience increases in deposits and assets as a result of other depository institutions’ difficulties or failures, which would increase the capital that we are required to maintain to support such growth.  The issuance of additional equity securities to fund our capital needs could dilute existing stockholders.

A material weakness in our disclosure or internal controls could have an adverse effect on us.

The Corporation is required by the Sarbanes-Oxley Act of 2002 to establish and maintain disclosure controls and procedures and internal control over financial reporting.  These control systems are intended to provide reasonable assurance that material information relating to the Corporation is made known to our management and reported as required by the Exchange Act, to provide reasonable assurance regarding the reliability and preparation of our financial statements, and to provide reasonable assurance that fraud and other unauthorized uses of our assets are detected and prevented. We may not be able to maintain controls and procedures that are effective at the reasonable assurance level.  If that were to happen, our ability to provide timely and accurate information about the Corporation, including financial information, to investors could be compromised and our results of operations could be harmed. Moreover, if the Corporation or its independent registered public accounting firm were to identify a material weakness in any of those control systems, our reputation could be harmed and investors could lose confidence in us, which could cause the market price of the Corporation’s stock to decline and/or limit the trading market for the shares of the Common Stock.

We may not be able to keep pace with developments in technology.

We use various technologies in conducting our businesses, including telecommunication, data processing, computers, automation, internet-based banking, and debit cards.  The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. Our future success depends, in part, on our ability to address the needs of our customers by using technology to provide products and services

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that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology driven products and services or be successful in marketing these products and services to our customers. In addition, our implementation of certain new technologies, such as those related to artificial intelligence, automation and algorithms, in our business processes may have unintended consequences due to their limitations or our failure to use them effectively. In addition, cloud technologies are also critical to the operation of our systems, and our reliance on cloud technologies is growing. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse effect on our business, financial condition and results of operations.

Our operational or communications systems or infrastructure may fail or may be the subject of a breach or cyber-attack that, if successful, could adversely affect our business or disrupt business continuity.

Our business depends heavily on the use of computer systems, the Internet and other means of electronic communication and recordkeeping to process, record, and monitor client transactions and to communicate with clients and other institutions on a continuous basis.  As client, industry, public, and regulatory expectations regarding operational and information security have increased, our operational systems and infrastructure continue to be safeguarded and monitored for potential failures, disruptions, and breakdowns, whether as a result of events beyond our control or otherwise.

Our business, financial, accounting, data processing, or other operating systems and facilities may stop operating properly or become disabled or damaged as a result of a number of factors, including events that are wholly or partially beyond our control. For example, there could be sudden increases in client transaction volume; electrical or telecommunications outages; natural disasters such as earthquakes, tornadoes, floods, and hurricanes; disease pandemics; events arising from local or larger scale political or social matters, including terrorist acts; occurrences of employee error, fraud, theft, or malfeasance; disruptions caused by technology implementation, including hardware deployment and software updates; and, as described below, cyber-attacks.

Although we have business continuity plans and other safeguards in place, our operations and communications may be adversely affected by significant and widespread disruption to our systems and infrastructure that support our businesses, clients, and teammates. While we continue to evolve and modify our business continuity plans, there can be no assurance in an escalating threat environment that they will be effective in avoiding disruption and business impacts. Our insurance may not be adequate to compensate us for all resulting losses, and the cost to obtain adequate coverage may increase for us or the industry.

Security risks for financial institutions such as ours have dramatically increased in recent years in part because of the proliferation of new technologies, the use of the internet and telecommunications technologies to conduct financial transactions, and the increased sophistication, resources, and activities of hackers, terrorists, activists, industrial spies, insider bad actors, organized crime, and other external parties, including nation state actors. In addition, to access our products and services, clients may use devices and/or software that are beyond our control environment, which may provide additional avenues for attackers to gain access to confidential information. Although we have information security procedures and controls in place, our technologies, systems, networks, and clients' devices and software may become the target of cyber-attacks, information security breaches, business email compromise, or information theft that could result in the unauthorized release, gathering, monitoring, misuse, loss, change, or destruction of our or our clients' or teammates' confidential, proprietary, or other information (including personal identifying information of individuals), or otherwise disrupt our or our clients' or our third parties' business operations. U.S. financial institutions and financial service companies have reported breaches in the security of their websites or other systems, including attempts to shut down access to their networks and/or systems in an attempt to extract compensation from them to regain control. Financial institutions, including the Bank, have experienced distributed denial-of-service attacks, a sophisticated and targeted attack intended to disable or degrade internet service or to sabotage systems.

We and others in our industry are regularly the subject of attempts by attackers to gain unauthorized access to our networks, systems, and data, or to obtain, change, or destroy confidential data (including personal identifying information of individuals) through a variety of means, including computer viruses, malware, business email compromise, and

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phishing. These attacks may result in unauthorized individuals obtaining access to our confidential information or that of our clients or teammates, or otherwise accessing, compromising, damaging, or disrupting our systems or infrastructure.

We are continuously developing and enhancing our controls, processes, and practices designed to protect our systems, computers, software, data, and networks from attack, damage, or unauthorized access. This continued development and enhancement will require us to expend additional resources, including resources to investigate and remediate any information security vulnerabilities that may be detected. Despite our ongoing investments in security resources, talent, and business practices, we are unable to assure that any security measures will be effective.

If our systems and infrastructure were to be breached, compromised, damaged, or disrupted, or if we were to experience a loss of our confidential information or that of our clients or teammates, we could be subject to serious negative consequences, including disruption of our operations, damage to our reputation, a loss of trust in us on the part of our clients, vendors or other counterparties, client or teammate attrition, reimbursement or other costs, increased compliance costs, significant litigation exposure and legal liability, or regulatory fines, penalties or intervention. Any of these could materially and adversely affect our results of operations, our financial condition, and/or our share price.

A disruption, breach, or failure in the operational systems or infrastructure of our third party vendors or other service providers, including as a result of cyber-attacks, could adversely affect our business.

Third parties perform significant operational services on our behalf. These third parties with whom we do business or that facilitate our business activities, including exchanges, clearing houses, central clearing counterparties, financial intermediaries, or vendors that provide services or security solutions for our operations, could also be sources of operational and information security risk to us, including from breakdowns or failures of their own systems or capacity constraints. In particular, operating our business requires us to provide access to client, teammate, and other sensitive Company information to our contractors, consultants, and other third parties and authorized entities. Controls and oversight mechanisms are in place that are designed to limit access to this information and protect it from unauthorized disclosure, theft, and disruption. However, control systems and policies pertaining to system access are subject to errors in design, oversight failure, software failure, human error, intentional subversion, or other compromise resulting in theft, error, loss, or inappropriate use of information or systems to commit fraud, cause embarrassment to us or our executives or to gain competitive advantage. In addition, regulators expect financial institutions to be responsible for all aspects of their performance, including aspects which they delegate to third parties. If a disruption, breach, or failure in the system or infrastructure of any third party with whom we do business occurred, then our business may be materially and adversely affected in a manner similar to if our own systems or infrastructure had been compromised. As has been the case in other major system events in the U.S., our systems and infrastructure may also be attacked, compromised, or damaged as a result of, or as the intended target of, any disruption, breach, or failure in the systems or infrastructure of any third party with whom we do business.

We may be subject to claims and the costs of defensive actions, and such claims and costs could materially and adversely impact our financial condition and results of operations.

Our customers may sue us for losses due to alleged breaches of fiduciary duties, errors and omissions of employees, officers and agents, incomplete documentation, our failure to comply with applicable laws and regulations, or many other reasons.  Also, our employees may knowingly or unknowingly violate laws and regulations.  Management may not be aware of any violations until after their occurrence.  This lack of knowledge may not insulate us from liability.  Claims and legal actions will result in legal expenses and could subject us to liabilities that may reduce our profitability and hurt our financial condition

The loss of key personnel could disrupt our operations and result in reduced earnings.

Our growth and profitability will depend upon our ability to attract and retain skilled managerial, marketing and technical personnel.  Competition for qualified personnel in the financial services industry is intense, and there can be no assurance that we will be successful in attracting and retaining such personnel.  Our current executive officers provide

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valuable services based on their many years of experience and in-depth knowledge of the banking industry and the market areas we serve.  Due to the intense competition for financial professionals, these key personnel would be difficult to replace and an unexpected loss of their services could result in a disruption to the continuity of operations and a possible reduction in earnings.  

We are a community banking organization and our ability to maintain our reputation is critical to the success of our business.

We are a community banking organization, and our reputation is one of the most valuable components of our business. A key component of our business strategy is to rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our current market and contiguous areas. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. If our reputation is negatively affected by the actions of our employees, by our inability to conduct our operations in a manner that is appealing to current or prospective customers, or otherwise, our business and, therefore, our operating results may be materially adversely affected.

We could be adversely affected by risks associated with future acquisitions and expansions.

Although our core growth strategy is focused around organic growth, we may from time to time consider acquisition and expansion opportunities involving a bank or other entity operating in the financial services industry.  We cannot predict if or when we will engage in such a strategic transaction, or the nature or terms of any such transaction.  To the extent that we grow through an acquisition, we cannot assure investors that we will be able to adequately and profitably manage that growth or that an acquired business will be integrated into our existing businesses as efficiently or as timely as we may anticipate.  Acquiring another business would generally involve risks commonly associated with acquisitions, including:

increased capital needs;
increased and new regulatory and compliance requirements;
implementation or remediation of controls, procedures and policies with respect to the acquired business;
diversion of management time and focus from operation of our then-existing business to acquisition-integration challenges;
coordination of product, sales, marketing and program and systems management functions;
transition of the acquired business’s users and customers onto our systems;
retention of employees from the acquired business;
integration of employees from the acquired business into our organization;
integration of the acquired business’s accounting, information management, human resources and other administrative systems and operations with ours;
potential liability for activities of the acquired business prior to the acquisition, including violations of law, commercial disputes and tax and other known and unknown liabilities;
potential increased litigation or other claims in connection with the acquired business, including claims brought by regulators, terminated employees, customers, former stockholders, vendors, or other third parties; and
potential goodwill impairment.

Our failure to execute our acquisition strategy could adversely affect our business, results of operations, financial condition and future prospects risks of unknown or contingent liabilities.  

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New lines of business, products or services may subject us to additional risks.

From time to time, we implement new lines of business or offer new products and services within existing lines of business.  There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services we invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service.  Furthermore, any new line of business, new product or service and/or new technology could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business, new products or services and/or new technologies could have a material adverse effect on our business, financial condition and results of operations.

Increasing scrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to our environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks.

Many companies are facing increasing scrutiny from customers, regulators, investors, and other stakeholders related to their environmental, social and governance (“ESG”) practices and disclosure. Investor advocacy groups, investment funds and influential investors are also increasingly focused on these practices, especially as they relate to the environment, health and safety, diversity, labor conditions and human rights. Increased ESG-related compliance costs could result in increases to our overall operational costs. Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards could negatively impact our reputation, ability to do business with certain partners, and our stock price. New government regulations could also result in new or more stringent forms of ESG oversight and expanding mandatory and voluntary reporting, diligence, and disclosure.

Climate change could have a material adverse impact on us and our customers.

Our business, as well as the operations and activities of our customers, could be negatively impacted by climate change. Climate change presents both immediate and long-term risks to us and our customers and these risks are expected to increase over time. Climate changes presents multi-faceted risks, including (i) operational risk from the physical effects of climate events on our facilities and other assets as well as those of our customers; (ii) credit risk from borrowers with significant exposure to climate risk; and (iii) reputational risk from stakeholder concerns about our practices related to climate change, our carbon footprint and our business relationships with customers who operate in carbon-intensive industries. Our business, reputation and ability to attract and retain employees may also be harmed if our response to climate change is perceived to be ineffective or insufficient.

Climate change exposes us to physical risk as its effects may lead to more frequent and more extreme weather events, such as prolonged droughts or flooding, tornados, hurricanes, wildfires and extreme seasonal weather; and longer-term shifts, such as increasing average temperatures, ozone depletion and rising sea levels. Such events and long-term shifts may damage, destroy or otherwise impact the value or productivity of our properties and other assets; reduce the availability of insurance; and/or disrupt our operations and other activities through prolonged outages. Such events and long-term shifts may also have a significant impact on our customers, which could amplify credit risk by diminishing borrowers' repayment capacity or collateral values, and other businesses and counterparties with whom we transact, which could have a broader impact on the economy, supply chains and distribution networks.

Climate change also exposes us to transition risks associated with the transition to a less carbon-dependent economy. Transition risks may result from changes in policies; laws and regulations; technologies; and/or market preferences to address climate change. Such changes could materially, negatively impact our business, results of operations, financial condition and/or our reputation, in addition to having a similar impact on our customers. We have customers who operate in carbon-intensive industries like oil and gas that are exposed to climate risks, such as those risks

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related to the transition to a less carbon-dependent economy, as well as customers who operate in low-carbon industries that may be subject to risks associated with new technologies. Federal and state banking regulators and supervisory authorities, investors and other stakeholders have increasingly viewed financial institutions as important in helping to address the risks related to climate change both directly and with respect to their customers, which may result in financial institutions coming under increased pressure regarding the disclosure and management of their climate risks and related lending and investment activities. Given that climate change could impose systemic risks upon the financial sector, either via disruptions in economic activity resulting from the physical impacts of climate change or changes in policies as the economy transitions to a less carbon-intensive environment, we face regulatory risk of increasing focus on our resilience to climate-related risks, including in the context of stress testing for various climate stress scenarios. Ongoing legislative or regulatory uncertainties and changes regarding climate risk management and practices may result in higher regulatory, compliance, credit and reputational risks and costs.

Risks Relating to First United Corporation’s Securities

The shares of Common Stock are not insured.

The shares of the Common Stock are not deposits and are not insured against loss by the FDIC or any other governmental or private agency.  

The shares of Common Stock are not heavily traded.

Shares of the Common Stock are listed on the NASDAQ Global Select Market but are not heavily traded.  Securities that are not heavily traded can be more volatile than stock trading in an active public market.  Factors such as our financial results, the introduction of new products and services by us or our competitors, changes in the financial estimates by securities analysts, market conditions within the banking industry, the general state of the securities market, general economic condition, and investor speculation as to our future plans and strategies could have a significant impact on the market price and trading volume of the shares of Common Stock.  Likewise, events that are unrelated to the Corporation but that affect the equity markets generally, such as national or international health crises, wars, political instability, the loss of investor or depositor confidence due to the failure of one or more financial institutions, and similar factors, could also have a significant impact on the market price and trading volume of the shares of Common Stock.  Management cannot predict the extent to which an active public market for shares of Common Stock will develop or be sustained in the future.  Accordingly, shareholders may not be able to sell their shares at the volumes, prices, or times that they desire.

Significant sales of shares of Common Stock, or the perception that significant sales may occur in the future, could adversely affect the market price of shares of Common Stock.

 

The sale of a substantial number of shares of the Common Stock could adversely affect the market price of such shares.  The availability of shares for future sale could adversely affect the prevailing market price of shares of Common Stock and could cause the market price of such shares to remain low for a substantial amount of time. In addition, the Corporation may grant equity awards under its equity compensation plans from time to time in effect, including fully-vested shares of Common Stock.  It is possible that if a significant percentage of such available shares were attempted to be sold within a short period of time, the market for the shares would be adversely affected.  Management cannot predict whether the market for shares of Common Stock could absorb a large number of attempted sales in a short period of time, regardless of the price at which they might be offered.  Even if a substantial number of sales do not occur within a short period of time, the mere existence of this “market overhang” could have a negative impact on the market for the common stock and our ability to raise capital in the future.

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The Corporation’s ability to pay dividends on the common stock is subject to the terms of the outstanding TPS Debentures, which prohibit the Corporation from paying dividends during an interest deferral period.  

In March 2004, the Corporation issued approximately $30.9 million, in the aggregate, of junior subordinated debentures (“TPS Debentures”) to the Trusts in connection with the Trusts’ sales to third party investors of $30.0 million, in the aggregate, in mandatorily redeemable preferred capital securities.  The terms of the TPS Debentures require the Corporation to make quarterly payments of interest to the Trusts, as the holders of the TPS Debentures, although the Corporation has the right to defer payments of interest for up to 20 consecutive quarterly periods, and the Corporation has exercised this deferral right in the past.  An election to defer interest payments does not constitute an event of default under the terms of the TPS Debentures.  The terms of the TPS Debentures prohibit the Corporation from declaring or paying any dividends or making other distributions on, or from repurchasing, redeeming or otherwise acquiring, any shares of its capital securities, including the common stock, if the Corporation elects to defer quarterly interest payments under the TPS Debentures.  In addition, a deferral election will require the Trusts to likewise defer the payment of quarterly dividends on their related trust preferred securities.

Applicable banking and Maryland laws impose additional restrictions on the ability of the Corporation and the Bank to pay dividends and make other distributions on their capital securities, and, in any event, the payment of dividends is at the discretion of the boards of directors of the Corporation and the Bank.  

In the past, the Corporation has funded dividends on its capital securities using cash received from the Bank, and this will likely be the case for the foreseeable future.  No assurance can be given that the Bank will be able to pay dividends to the Corporation for these purposes at times and/or in amounts requested by the Corporation.  Both federal and state laws impose restrictions on the ability of the Bank to pay dividends.  Under Maryland law, a state-chartered commercial bank may pay dividends only out of undivided profits or, with the prior approval of the Maryland Commissioner, from surplus in excess of 100% of required capital stock.  If, however, the surplus of a Maryland bank is less than 100% of its required capital stock, cash dividends may not be paid in excess of 90% of net earnings.  In addition to these specific restrictions, bank regulatory agencies have the ability to prohibit proposed dividends by a financial institution which would otherwise be permitted under applicable regulations if the regulatory body determines that such distribution would constitute an unsafe or unsound practice.  Banks that are considered “troubled institution” are prohibited by federal law from paying dividends altogether.  Notwithstanding the foregoing, shareholders must understand that the declaration and payment of dividends and the amounts thereof are at the discretion of the Corporation’s Board of Directors.  Thus, even at times when the Corporation is not prohibited from paying cash dividends on its capital securities, neither the payment of such dividends nor the amounts thereof can be guaranteed.

The Corporation’s Articles of Incorporation and Bylaws and Maryland law may discourage a corporate takeover.

The Corporation’s Amended and Restated Articles of Incorporation (the “Charter”) and its Amended and Restated Bylaws (the “Bylaws”) contain certain provisions designed to enhance the ability of the Corporation’s Board of Directors to deal with attempts to acquire control of the Corporation.  First, the Board of Directors is classified into three classes.  Directors of each class serve for staggered three-year periods, and no director may be removed except for cause, and then only by the affirmative vote of either a majority of the entire Board of Directors or a majority of the outstanding voting stock.  Although the Corporation’s board has amended the Bylaws to eliminate this classified Board structure, the declassification will not be fully phased in until after the 2024 annual meeting of shareholders.  Second, the Board has the authority to classify and reclassify unissued shares of stock of any class or series of stock by setting, fixing, eliminating, or altering in any one or more respects the preferences, rights, voting powers, restrictions and qualifications of, dividends on, and redemption, conversion, exchange, and other rights of, such securities.  The Board could use this authority, along with its authority to authorize the issuance of securities of any class or series, to issue shares having terms favorable to management or to a person or persons affiliated with or otherwise friendly to management.  In addition, the Bylaws require any shareholder who desires to nominate a director to abide by strict notice requirements.

Maryland laws include provisions that could discourage a sale or takeover of the Corporation.  The Maryland Business Combination Act generally prohibits, subject to certain limited exceptions, corporations from being involved in

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any “business combination” (defined as a variety of transactions, including a merger, consolidation, share exchange, asset transfer or issuance or reclassification of equity securities) with any “interested shareholder” for a period of five years following the most recent date on which the interested shareholder became an interested shareholder.  An interested shareholder is defined generally as a person who is the beneficial owner of 10% or more of the voting power of the outstanding voting stock of the corporation after the date on which the corporation had 100 or more beneficial owners of its stock or who is an affiliate or associate of the corporation and was the beneficial owner, directly or indirectly, of 10% percent or more of the voting power of the then outstanding stock of the corporation at any time within the two-year period immediately prior to the date in question and after the date on which the corporation had 100 or more beneficial owners of its stock.  The Maryland Control Share Acquisition Act applies to acquisitions of “control shares”, which, subject to certain exceptions, are shares the acquisition of which entitle the holder, directly or indirectly, to exercise or direct the exercise of the voting power of shares of stock of the corporation in the election of directors within any of the following ranges of voting power:  one-tenth or more, but less than one-third of all voting power; one-third or more, but less than a majority of all voting power or a majority or more of all voting power.  Control shares have limited voting rights.  Maryland banking laws provide that the Maryland Commissioner must approve certain acquisitions of the common stock of the Corporation and/or the Bank, and these laws impose penalties on persons who effect such acquisitions without approval, including a five year voting prohibition.  

Although these provisions do not preclude a sale or takeover, they may have the effect of discouraging, delaying or deferring a sale, tender offer, or takeover attempt that a shareholder might consider in his or her best interest, including those attempts that might result in a premium over the market price for the common stock.  Such provisions will also render the removal of the Board of Directors and of management more difficult and, therefore, may serve to perpetuate current management.  These provisions could potentially adversely affect the market prices of the Corporation’s securities.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 1C. Cybersecurity

Risk Management Strategy

Our risk management program is designed to identify, assess, and mitigate risks across various aspects of the Corporation, including financial, operational, reputational, and legal.  Cybersecurity is a critical component of this program, given the increasing reliance on technology and potential of cyber threats.  Our Cyber Security Initiative (“CSI”) committee led by our Information Security Officer is primarily responsible for this cybersecurity component and is a key member of the risk management organization.  The Information Security Officer reports directly to the Chief Operating Officer and, as discussed below, regularly to the Risk and Compliance Committee of our board of directors.  

Our objective for managing cybersecurity risk is to avoid or minimize the impacts of external threat events or other efforts to penetrate, disrupt or misuse our systems or information.  The structure of our information security program is designed around the Cyber Risk Institute’s cybersecurity profile designed specifically for the financial services industry, regulatory guidance, and other industry standards.  In addition, we leverage certain industry and government associations, third-party benchmarking, audits, and threat intelligence feeds to facilitate and promote program effectiveness.  Our Information Security Officer, along with key members of our risk team, regularly collaborate with peer banks, industry groups, and policymakers to discuss cybersecurity trends and issues and identify best practices.  The information security program is periodically reviewed by such personnel with the goal of addressing changing threats and conditions.

We employe an in-depth, layered, defensive strategy that embraces a “trust by design” philosophy when designing new products, services, and technology.  We leverage people, processes, and technology as part of our efforts to manage and maintain cybersecurity controls.  We also employe a variety of preventative and detective tools designed to monitor, block, and provide alerts regarding suspicious activity, as well as to report on suspected advanced persistent threats.  We

31

have established processes and systems designed to mitigate cyber risk, including regular and on-going education and training for employees, preparedness simulations and tabletop exercises, and recovery and resilience tests.  We engage in regular assessments of our infrastructure, software systems, and network architecture, using internal cybersecurity experts and third-party specialists.  We also maintain a third-party risk management program designed to identify, assess, and manage risks, including cybersecurity risks, associated with external service providers and our supply chain.  We also actively monitor our email gateways for malicious phishing email campaigns and monitor remote connections as a significant portion of our workforce has the option to work remotely.  We leverage internal and external auditors and independent external partners to periodically review our processes, systems, and controls, including with respect to our information security program, to assess their design and operating effectiveness and make recommendations to strengthen our risk management program.

We maintain an Incident Response Plan that provides a documented framework for responding to actual or potential cybersecurity incidents, including timely notification of and escalation to the appropriate Board-approved management committees, as discussed further below, and the Risk and Compliance Committee of our board of directors.  The Incident Response Plan is coordinated through the Management Director of Information Technology and key members of management are embedded into the Plan by its design. The Incident Response Plan facilitates coordination across multiple parts of our organization and is evaluated at least annually.

Notwithstanding our defensive measures and processes, the threat posed by cyber-attacks is severe.  Our internal systems, processes, and controls are designed to mitigate loss from cyber-attacks and, while we have experienced cybersecurity incidents in the past, to date, risks from cybersecurity threats have not materially affected our Company.  For further discussion of risks from cybersecurity threats, see the section captioned “A disruption, breach, or failure in the operational systems or infrastructure of our third party vendors or other service providers, including as a result of cyber-attacks, could adversely affect our business” in Item 1A.  Risk Factors.

Governance

Our Information Security Officer is accountable for managing our enterprise information security processes and procedures and delivering our information security program.  The responsibilities of this department include cybersecurity risk assessment, incident response, vulnerability assessment, threat intelligence, identity access governance, third-party risk management, and business resilience.  The foregoing responsibilities are covered on a day-to-day basis by a first line of defense function, and our second line of defense function, including the CSI Committee, provides guidance, oversight, monitoring, and challenge of the first line’s activities.  The Committee as a whole, consists of information security professionals with varying degrees of education and experience  as well as Information Technology professionals, and audit and fraud professionals.  Individuals within the Committee are generally subject to professional education and certification requirements.  In particular, our Information Security Officer has substantial relevant expertise and formal training in the areas of information security and cybersecurity risk management.

Our board of directors has approved management commitess including the CSI Committee, which focuses on technology impact, and the Management Risk Committee, which focuses on business impact.  These committees provide oversight and governance of the technology program and the information security program.  These committees are chaired by managers within the Corporation and include the Chief Operating Officer, as well as his direct reports and other key departmental managers from throughout the entire company.  These committees generally meet regularly to provide oversight of the risk management strategy, standards, policies, practices, controls, and mitigation to facilitate timely information and monitoring efforts.  The Information Security Officer reports summaries of key issues, including significant cybersecurity and/or privacy incidents, discussed at committee meetings and the actions taken to the Risk and Compliance Committee of our board of directors on a quarterly basis (or more frequently as may be required by the Incident Response Plan).

The Risk and Compliance Committee of our board of directors is responsible for overseeing our information security and technology programs, including management’s actions to identify, assess, mitigate, and remediate or prevent material cybersecurity issues and risks.  Our CSI Committee provides quarterly reports to the Risk and Compliance

32

Committee of our board of directors regarding the information security program and the technology program, key enterprise cybersecurity initiatives, and other matters relating to cybersecurity processes.  The Risk and Compliance Committee of our board of directors reviews and approves our information security and technology budgets and strategies annually.  Additionally, the Risk and Compliance Committee of our board of directors reviews our cyber security risk profile on a regular basis.  The Risk and Compliance Committee our board of directors provides a report of their activities to the full board of directors at board meetings.

ITEM 2. PROPERTIES

The headquarters of the Corporation and the Bank occupies approximately 29,000 square feet at 19 South Second Street, Oakland, Maryland, and a 30,000 square feet operations center located at 12892 Garrett Highway, Oakland Maryland. These premises are owned by the Corporation. The Bank owns 19 of its banking offices and leases seven. Total rent expense on the leased offices and properties was $0.5 million in 2023.  In November 2023, the Corporation announced the closure of four of its leased banking offices.

ITEM 3. LEGAL PROCEEDINGS

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

33

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Shares of the Corporation’s common stock are listed on the NASDAQ Global Select Market under the symbol “FUNC”. As of February 29, 2024, thres issued and outstanding shares of Common Stock were held by 1,315 shareholders of record.

The ability of the Corporation to declare dividends is limited by federal banking laws and Maryland corporation laws. Subject to these and the terms of its other securities, including the TPS Debentures, the payment of dividends on the shares of common stock and the amounts thereof are at the discretion of the Corporation’s board of directors. Cash dividends are typically declared on a quarterly basis. When paid, dividends to shareholders are dependent on the ability of the Corporation’s subsidiaries, especially the Bank, to declare dividends to the Corporation. Like the Corporation, the Bank’s ability to declare and pay dividends is subject to limitations imposed by federal and Maryland banking and Maryland corporation laws. A complete discussion of these and other dividend restrictions is contained in Item 1A of Part I of this annual report under the heading “Risks Relating to First United Corporation’s Securities” and in Note 3 to the Consolidated Financial Statements, both of which are incorporated herein by reference. Accordingly, there can be no assurance that dividends will be declared on the shares of common stock in any future fiscal quarter.

The Corporation’s Board of Directors periodically evaluates the Corporation’s dividend policy, both internally and in consultation with the Federal Reserve.

Issuer Repurchases

Pursuant to the SEC’s Regulation S-K Compliance and Disclosure Interpretation 106.01, the information required by this Item pursuant to Item 201(d) of Regulation S-K relating to securities authorized for issuance under the Corporation’s equity compensation plans is located in Item 12 of Part III of this annual report and is incorporated herein by reference.

Issuer Purchases of Equity Securities

Period

Total Number of Shares (or Units) Purchased (1)

Average Price Paid per Share (or Unit)

Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs

Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs

805,702

(1)

October 2023

40,300

$

16.35

40,300

765,402

November 2023

11,500

17.30

11,500

753,902

December 2023

11,000

18.69

11,000

742,902

Total

62,800

$

16.79

62,800

742,902

(1) All shares were purchased in open-market transactions pursuant to First United Corporation's stock repurchase plan that was initially adopted effective August 18, 2023.  The plan authorized the repurchase of up to 825,000 shares of common stock of First United Corporation.  The plan authorizes the repurchases to be conducted through open market or private transactions at such times and in such amounts per transaction as the Chairman and Chief Executive Officer of First United Corporation determines to be appropriate.

ITEM 6. [Reserved]

34

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and notes thereto for the years ended December 31, 2023 and 2022, which are included in Item 8 of Part II of this annual report.

Overview

First United Corporation is a financial holding company that, through the Bank and its non-bank subsidiaries, provides an array of financial products and services primarily to customers in four Western Maryland counties and four Northeastern West Virginia counties. Its principal operating subsidiary is the Bank, which consists of a community banking network of 26 branch offices located throughout its market areas. Our primary sources of revenue are interest income earned from our loan and investment securities portfolios and fees earned from financial services provided to customers.

For the year ended December 31, 2023, net income was $15.1 million on a GAAP basis, inclusive of a $3.3 million, net of tax, loss on the sale of securities and $0.5 million, net of tax, in increased expenses related to announced branch closures that occurred on February 29, 2024, and $18.8 million on a non-GAAP basis compared to GAAP and non-GAAP basis income of $25.0 million in 2022.  The year-over-year $10.0 million decrease in GAAP net income was driven by an increase in total operating expenses of $7.1 million.  Salaries and employee benefits increased by $3.4 due primarily to increased salary expense of $2.0 million related to new hires, the competitive environment for labor and merit increases effective April 1, 2023, increased health insurance costs of $1.0 million associated with unusually high claims and decreases of $0.4 in deferred loan costs. Occupancy and equipment expense increased by $0.7 million due primarily to accelerated depreciation and lease termination expenses associated with the announced branch closures that occurred on February 29, 2024, data processing expense increased by $0.5 million due to the implementation of new technology, and FDIC assessments increased by $0.4 million.  Other miscellaneous expenses, such as loan service fees, dues and licenses, check fraud expenses, employee benefit plan expense, and miscellaneous expenses increased by $2.0 million and professional fees increased by $0.6 million due to the $0.8 million cash receipt related to reimbursement of litigation expenses that were previously expensed and was credited to expenses in 2022.  Provision for credit losses increased by $2.2 million when compared to prior year due to increased loan growth during 2023 and qualitative factors with the implementation of Accounting Standards Update 2016-13:  Financial Instruments- Credit Losses (“CECL”).  Net losses on available-for-sale (“AFS”) securities increased by $4.2 million when compared to prior year due to the sale of securities in the fourth quarter of 2023.  Net interest income decreased by $0.8 million due to compression of the net interest margin as experienced industry-wide during 2023.  These increases were partially offset by increases in gains on sales of mortgages of $0.3 million, service charges on deposit accounts of $0.2 million, and $0.1 million increase in debit card income.  Income taxes were down by $3.7 million when comparing the two periods due primarily to reductions in pre-tax income.

The provision for credit losses was $1.6 million for the year ended December 31, 2023 and a credit of $0.6 million for the year ended December 31, 2022.  Net charge-offs of $0.9 million were recorded for the year ended December 31, 2023, compared to $0.7 million for 2022. The ratio of the ACL to loans outstanding was 1.24% at December 31, 2023 compared to 1.14% at December 31, 2022.  

Other operating income, including net losses/gains on sales of mortgage loans and sales of investment securities, decreased by approximately $3.6 million when compared to 2022.  This decrease was primarily related to a $4.2 million loss recognized through the sale of  AFS investment securities as part of a strategic balance sheet restructuring in the fourth quarter of 2023. This loss was partially offset by a $0.2 million in increases in service charges on deposit accounts, $0.1 million increase in wealth management income, and $0.3 million increase in gains on sales of residential mortgages.

Other operating expenses increased $7.1 million compared to the year ended December 31, 2022.  Salaries and employee benefits increased by $3.4 due primarily to increased salary expense of $2.0 million related to new hires, the competitive environment for labor and merit increases effective April 1, 2023, increased health insurance costs of $1.0 million associated with unusually high claims and decreases of $0.4 in deferred loan costs. Occupancy and equipment

35

expense increased by $0.7 million due to the expenses related to the branch closures, data processing expense increased by $0.5 million as a result of the implementation of a new sales management system, and FDIC assessments increased by $0.4 million.  Professional fees increased by $0.6 million related to increased audit expenses in correlation to the new CECL implementation and increased legal and professional expenses due to the receipt of an $0.8 million in proceeds credited to expense in 2022 related to reimbursement of legal and professional expenses previously recorded. Other miscellaneous expenses increased by $2.0 million primarily driven by increased check fraud related expenses of $0.5 million, increased employee benefit costs of $1.1 million, increased escrow account fees due to the rising rate environment, miscellaneous loan fees and an increase of $0.2 million in fees associated with the Intrafi Cash Service (“ICS”) product.

Outstanding loans of $1.4 billion at December 31, 2023 reflected growth of $127.2 million in 2023.  Since December 31, 2022, commercial real estate loans increased by $34.9 million, acquisition and development loans increased by $6.5 million and commercial and industrial loans increased by $29.2 million.  Growth in the commercial portfolios was driven by increased activity with existing clients as well as cultivating new business relationships.  Residential mortgage loans increased $55.5 million related to management’s strategic decision to book new mortgage loans at higher rates to our in-house portfolio during the first half  of 2023 and then shifted production to sales in the secondary market during the second half of 2023. The consumer loan portfolio increased slightly by $1.2 million.  

Net interest income, on a non-GAAP, fully-taxable equivalent (“FTE”) basis, decreased by $1.1 million in 2023 compared to 2022.  Interest expense on deposits increased by $16.0 million due to an increase in balances of $102.3 million and an increase in yield of 141 basis points.  Interest expense on long-term borrowings increased $3.5 million related to $80.0 million in Federal Home Loan Bank (“FHLB”) borrowings obtained during the first quarter of 2023 and an increase in interest rates on variable rate trust preferred borrowings.  The increased interest expense resulted in an overall increase of 151 basis points on interest bearing liabilities.   This increase was partially offset by an increase of $18.4 million in interest income.   The yield on earning assets increased 78 basis points to 4.63% in 2023 compared to 3.85% in 2022 in correlation with the rising interest rate environment, new loans booked at higher rates as well as adjustable rate loans repricing.  The net interest margin was 3.26% in 2023 compared to 3.56% in 2022.

Comparing the year ended December 31, 2023 with the year ended December 31, 2022, interest income increased by $18.4 million.  Interest and fees on loans increased by $15.1 million and investment income increased by $0.2 million. Excess cash balances during 2023 were invested at the Fed Funds rate, which also positively affected interest income for the year ended December 31, 2023 when compared to 2022.  Increases in loan interest income stemmed from the growth of core loans at higher rates in 2023.  The rate earned on the loan portfolio increased by 74 basis points when comparing the year ended December 31, 2023 to the year ended December 31, 2022.

Total deposits at December 31, 2023 decreased by $19.8 million when compared to December 31, 2022.  In March 2023, the Corporation obtained $61.1 million in new brokered deposits.  In August 2023, the Corporation obtained $30.0 million of brokered deposits to pre-fund the maturity of a $30.4 million brokered certificate of deposit that matured in September 2023.  In December 2023, $30.6 million in brokered deposits matured and were repaid.  In addition, retail certificates of deposit increased by $45.0 million due primarily to a promotional nine-month certificate of deposit product offered in 2023.  Interest-bearing demand deposits increased by $23.2 million and money market accounts increased by $20.5 million due to a shift in the deposit portfolio mix from non-interest-bearing accounts to interest-bearing accounts including the ICS product to ensure full FDIC insurance.  These increases were offset by decreases in non-interest-bearing deposits of $78.9 million and savings accounts of $59.5 million due to the shift to interest-bearing demand deposit accounts, two relationships having large, planned deposit withdrawals totaling $39.5 million during 2023 to fund business activity, the effects of consumer and commercial spending and the competitive market for deposits.  

Estimates and Critical Accounting Policies

This discussion and analysis of our financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities.

36

(See Note 1 to the Consolidated Financial Statements.)  On an on-going basis, management evaluates estimates and bases those estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Corporation identifies the following critical accounting policies may affect our more significant judgments and estimates used in the preparation of the Consolidated Financial Statements.

Allowance for Credit Losses

The ACL represents an amount which, in management’s judgment, is adequate to absorb expected credit losses over the life of outstanding loans as of the balance sheet date based on the evaluation of 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 by a provision or decreased by a recovery 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 of the ACL is reviewed quarterly by management.

Management believes it uses relevant information available to make determinations about the ACL and it has established the existing allowance in accordance with GAAP.  However, the determination of the ACL requires significant judgment, and estimates of expected credit losses in the loan portfolio can vary from the amounts actually observed.  While management uses available information to recognize expected credit 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 conditions of borrowers.

The ACL”base case” model is derived from various economic forecasts provided by widely recognized sources.  Management evaluates the variability of market conditions by examining the peak and trough of economic cycles.  These peaks and troughs are used to stress the base case model to develop a range of potential outcomes.  Management then determines the appropriate reserve through an evaluation of these various outcomes relative to current economic conditions and known risks in the portfolio.

The ACL is also discussed below in Item 7 under the heading “Allowance for Credit Losses” and in Note 5 to the Consolidated Financial Statements.

Liquidity Sources

As of December 31, 2023, the Corporation had approximately $140.0 million in unsecured lines of credit with its correspondent banks, $12.2 million available through a secured line of credit with the Federal Reserve Discount Window, and approximately $145.4 million of secured borrowings with the FHLB.   The Corporation also had approximately $69.5 million available through the BTFP offered by the Federal Reserve.  Additionally, the Corporation has access to the brokered certificates of deposit market.

Capital

The Corporation’s and the Bank’s capital ratios are strong, and both institutions are considered to be well-capitalized by applicable regulatory measures

37

Adoption of New Accounting Standards and Effects of New Accounting Pronouncements

Note 1 to the Consolidated Financial Statements discusses new accounting pronouncements that, when adopted, could affect our future consolidated financial statements.

CONSOLIDATED STATEMENT OF INCOME REVIEW

Net Interest Income

Net interest income is our largest source of operating revenue. Net interest income is the difference between the interest that we earn on our interest-earning assets and the interest expense we incur on our interest-bearing liabilities. For analytical and discussion purposes, net interest income is adjusted to an FTE basis to facilitate performance comparisons between taxable and tax-exempt assets by increasing tax-exempt income by an amount equal to the federal income taxes that would have been paid if this income were taxable at the statutorily applicable rate. This is a non-GAAP disclosure and it is not materially different than the corresponding GAAP disclosure.

The table below summarizes net interest income for 2023 and 2022.

GAAP

Non-GAAP - FTE

(in thousands)

    

2023

    

2022

    

2023

    

2022

Interest income

$

81,156

$

62,422

$

81,783

$

63,362

Interest expense

24,286

4,789

24,286

4,789

Net interest income

$

56,870

$

57,633

$

57,497

$

58,573

Net interest margin %

3.22%

3.50%

3.26%

3.56%

Net interest income, on a non-GAAP, FTE basis, decreased by $1.1 million (1.8%) during the year ended December 31, 2023 when compared to the year ended December 31, 2022, driven by a $19.5 million (407.1%) increase in interest expense, which was partially offset by an increase in interest income of $18.4 million (29.1%).  The net interest margin, on an FTE basis, decreased to 3.26% for the year ended December 31, 2023 from 3.56% for the year ended December 31, 2022.  

Comparing the year ended December 31, 2023 with the year ended December 31, 2022, interest income increased by $18.4 million. Interest and fees on loans increased by $15.1 million investment income increased by of $0.2 million.  The increase in interest on loans was primarily due to an increase of $116.7 million in average loan balance in 2023 compared to 2022.  The rate earned on the loan portfolio increased by 74 basis points when comparing the year ended December 31, 2023 to the year ended December 31, 2022.  The increase in investment income was due to the 20 basis point increase in yield during 2023, which was partially offset by the $21.1 million reduction in average balances.  Other interest income increased by $3.1 million during 2023 primarily due to a 397 basis point increase in interest income of funds held at the Federal Reserve as well as an increase of $20.9 million in average balances.

The increase in interest expense for 2023 was driven by an an increase in interest expense on deposits of $16.0 million due to an increase in balances of $102.3 million and an increase in yield of 141 basis points.  Interest expense on long-term borrowings increased $3.5 million related to $80.0 million in FHLB borrowings obtained during the first quarter of 2023 and an increase in interest rates on variable rate trust preferred borrowings.  The increased interest expense resulted in an overall increase of 151 basis points on interest bearing liabilities.  

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As shown below, the composition of total interest income between 2023 and 2022 remained relatively stable.

% of Total Interest Income

    

2023

    

2022

Interest and fees on loans

86%

87%

Interest on investment securities

10%

12%

Other

5%

1%

The following table sets forth the average balances, net interest income and expense, and average yields and rates for our interest-earning assets and interest-bearing liabilities for 2023 and 2022:

Distribution of Assets, Liabilities and Shareholders’ Equity

Interest Rates and Interest Differential – Tax Equivalent Basis

For the Years Ended December 31

2023

2022

(in thousands)

    

Average
Balance

    

Interest

    

Average
Yield/
Rate

    

Average
Balance

    

Interest

    

Average
Yield/
Rate

    

Assets

Loans

$

1,340,118

$

69,631

5.20

%

$

1,223,388

$

54,513

4.46

%

Investment Securities:

Taxable

335,888

7,173

2.14

%

348,516

6,252

1.79

%

Non taxable

18,471

1,279

6.92

%

26,952

1,981

7.35

%

Total

354,359

8,452

2.39

%

375,468

8,233

2.19

%

Federal funds sold

65,131

3,409

5.23

%

44,207

555

1.26

%

Interest-bearing deposits with other banks

2,585

93

3.60

%

3,061

24

0.78

%

Other interest earning assets

4,048

198

4.89

%

1,027

37

3.60

%

Total earning assets

1,766,241

81,783

4.63

%

1,647,151

63,362

3.85

%

Allowance for loan losses

(16,561)

(15,568)

Non-earning assets

199,474

170,128

Total Assets

$

1,949,154

$

1,801,711

Liabilities and Shareholders’ Equity

Interest-bearing demand deposits

$

362,070

$

4,814

1.33

%

$

301,183

$

855

0.28

%

Interest-bearing money markets

333,274

8,672

2.60

%

312,978

1,256

0.40

%

Savings deposits

219,516

240

0.11

%

250,624

154

0.06

%

Time deposits - Retail

141,921

2,872

2.02

%

138,865

961

0.69

%

Time deposits - Brokered

49,209

2,600

5.28

%

%

Short-term borrowings

47,968

147

0.31

%

63,182

112

0.18

%

Long-term borrowings

94,271

4,941

5.24

%

30,929

1,451

4.69

%

Total interest-bearing
  liabilities

1,248,229

24,286

1.95

%

1,097,761

4,789

0.44

%

Non-interest-bearing deposits

512,496

533,096

Other liabilities

32,320

33,169

Shareholders’ Equity

156,109

137,685

Total Liabilities and Shareholders’ Equity

$

1,949,154

$

1,801,711

Net interest income and spread

$

57,497

2.68

%

$

58,573

3.41

%

Net interest margin

3.26

%

3.56

%

Notes:

(1)The above table reflects the average rates earned or paid stated on an FTE basis assuming a tax rate of 21% for 2023 and 2022. Non-GAAP interest income on an FTE basis for the years ended December 31, 2023 and 2022 were $626 and $940, respectively.
(2)The average balances of non-accrual loans for the years ended December 31, 2023 and 2022, which were reported in the average loan balances for these years, were $3,171 and $2,120, respectively.
(3)Net interest margin is calculated as net interest income divided by average earning assets.
(4)The average yields on investments are based on amortized cost.

The following table sets forth an analysis of volume and rate changes in interest income and interest expense of our average interest-earning assets and average interest-bearing liabilities for 2023 and 2022. This table distinguishes between the changes related to average outstanding balances (changes in volume created by holding the interest rate

39

constant) and the changes related to average interest rates (changes in interest income or expense attributed to average rates created by holding the outstanding balance constant).

Interest Variance Analysis (1)

2023 Compared to 2022

(in thousands and tax equivalent basis)

    

Volume

    

Rate

    

Net

Interest Income:

Loans

$

5,206

$

9,912

$

15,118

Taxable Investments

(226)

1,147

921

Non-taxable Investments

(623)

(79)

(702)

Federal funds sold

263

2,591

2,854

Interest-bearing deposits

(4)

73

69

Other interest earning assets

109

52

161

Total interest income

4,725

13,696

18,421

Interest Expense:

Interest-bearing demand deposits

170

3,789

3,959

Interest-bearing money markets

81

7,335

7,416

Savings deposits

(19)

105

86

Time deposits - Retail

21

1,890

1,911

Time deposits - Brokered

2,600

2,600

Short-term borrowings

(27)

62

35

Long-term borrowings

2,971

519

3,490

Total interest expense

5,797

13,700

19,497

Net interest income

$

(1,072)

$

(4)

$

(1,076)

Note:

(1)The change in interest income/expense due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

Provision for Credit Losses

The provision for credit losses was $1.6 million for the year ended December 31, 2023 and a credit of $0.6 million for the year ended December 31, 2022.  Net charge-offs of $0.9 million were recorded for the year ended December 31, 2023, compared to net charge-offs of $0.7 million for 2022. The ratio of the ACL to loans outstanding was 1.24% at December 31, 2023 compared to an ALL 1.14% at December 31, 2022.  The ACL reflects a level commensurate with the risk inherent in our loan portfolio.  

For periods prior to the adoption of the CECL standard, we recognized credit losses on loans that were collectively evaluated for impairment based on an incurred loss approach, which limited our measurement of credit losses to credit events that were estimated to have already occurred.  Effective January 1, 2023, we adopted CECL, which replaced the incurred loss impairment model with an expected loss model.   Our CECL methodology introduced a modified discounted cash flow methodology based on expected cash flow changes in the future.  

40

Other Operating Income

The following table shows the major components of other operating income for the past two years, exclusive of net gains, and the percentage changes during these years:

(in thousands)

    

2023

    

2022

    

% Change

Service charges on deposit accounts

$

2,198

$

1,981

10.95%

Other service charges

929

925

0.43%

Trust department income

8,282

8,244

0.46%

Debit card income

4,101

3,958

3.61%

Bank owned life insurance

1,261

1,196

5.43%

Brokerage commissions

1,160

1,049

10.58%

Other income

400

525

(23.81)%

Total other operating income

$

18,331

$

17,878

2.53%

Other operating income, exclusive of gains, increased $0.5 million during the year ended December 31, 2023 when compared to the same period of 2022.  The increase was primarily a result of a increase of $0.2 million in service charges on deposit accounts, an increase of $0.1 million in wealth management income, and a $0.1 million increase in debit card income.

Net losses of $3.9 million were reported for the year ended December 31, 2023 compared to net gains of $0.2 million for the same period in 2022.   The Corporation recognized a $4.2 millon loss in the sale of AFS investment securities as part of the balance sheet restructuring in the fourth quarter of 2023.  This loss was partially offset by an increase of $0.3 million in gains on sale of residential mortgages.

The following table shows the components of net losses for the year ended December 31, 2023 and net gains for the year ended December 31, 2022.

(in thousands)

    

2023

    

2022

Net gains/(losses):

Available-for-sale securities:

Realized gains from sales and calls

$

$

3

Realized losses from sales and calls

(4,214)

Held-to-Maturity:

Realized gains on calls

91

Gains on sale of loans held for sale

381

45

(Loss)/Gain on disposal of fixed assets

(29)

33

Net (losses)/gains

$

(3,862)

$

172

41

Other Operating Expense

The following table compares the major components of other operating expense for 2023 and 2022:

(in thousands)

    

2023

    

2022

    

% Change

Salaries and employee benefits

$

27,503

$

24,130

13.98%

FDIC premiums

992

636

55.97%

Equipment

4,356

4,163

4.64%

Occupancy

3,445

2,906

18.55%

Data processing

3,980

3,444

15.56%

Marketing

762

543

40.33%

Professional services

2,160

1,538

40.44%

Contract labor

643

618

4.05%

Line rentals

466

482

(3.32)%

Total OREO (income)/expenses, net

(89)

590

(115.08)%

Investor relations

345

300

15.00%

Contributions

229

288

(20.49)%

Other expenses

5,451

3,491

56.14%

Total other operating expense

$

50,243

$

43,129

16.49%

Other operating expenses increased $7.1 million for the year ended December 31, 2023 when compared to 2022.  Salaries and employee benefits increased by $3.4 due primarily to increased salary expense of $2.0 million related to new hires, the competitive environment for labor and merit increases effective April 1, 2023, increased health insurance costs of $1.0 million associated with unusually high claims and decreases of $0.4 in deferred loan costs. Occupancy and equipment expense increased by $0.7 million due to the expenses related to the announced branch closures that occurred on February 29, 2024, data processing expense increased by $0.5 million as a result of the implementation of a new sales management system, and FDIC assessments increased by $0.4 million.  Professional fees increased by $0.6 million related to increased audit expenses in correlation to the new CECL implementation and increased legal and professional expenses due to the receipt of an $0.8 million in proceeds credited to expense in 2022 related to previously expensed legal and professional fees. Other miscellaneous expenses increased by $2.0 million primarily driven by increased check fraud related expenses of $0.5 million, increased employee benefit costs of $1.1 million, increased escrow account fees due to the rising rate environment, miscellaneous loan fees and an increase of $0.2 million in fees associated with the ICS product.

Applicable Income Taxes

We recognized a tax expense of $4.4 million in 2023, compared to a tax expense of $8.1 million in 2022. See the discussion under “Income Taxes” in Note 13 to the Consolidated Financial Statements presented elsewhere in this annual report for a detailed analysis of our deferred tax assets and liabilities.  Our effective income tax rates as a percentage of income for the years ended December 31, 2023 and December 31, 2022 were 22.7% and 24.5%, respectively.  The decrease in the tax rate for the 2023 period was primarily related to a new low-income housing tax credit investment in 2022 that began generating tax credits during the fourth quarter of 2022.  This tax credit will continue through 2032.

At December 31, 2023, the Corporation had Maryland Net Operating Losses (“NOLs”) of $39.1 million for which a deferred tax asset of $2.6 million has been recorded. There was also a Maryland state interest expense carryforward of $3.5 million, for which a deferred tax asset of $0.2 million has been recorded.  There has been and continues to be a full valuation allowance on these NOLs and interest expense deferred tax assets, based on management’s belief that it is more likely than not that these NOLs will not be realized prior to the expiration of their carry-forward periods because the Corporation will not generate sufficient taxable income in the future to fully utilize the NOLs. The valuation allowance was $2.8 million and $2.9 million at December 31, 2023 and 2022, respectively.

We have concluded that no valuation allowance is deemed necessary for our remaining federal and state deferred tax assets at December 31, 2023, as it is more likely than not that they will be realized based on the expected reversal of

42

deferred tax liabilities, the generation of future income sufficient to realize the deferred tax assets as they reverse, and the ability to implement tax planning strategies to prevent the expiration of any carry-forward periods.

GAAP and Non-GAAP measures

The following tables sets forth certain selected financial data for the years ended December 31, 2023 and 2022 under generally accepted accounting principles (“GAAP”) (as reported) and non-GAAP.  A non-GAAP financial measure is a numerical measure of historical or future financial performance, financial position or cash flows that excludes or includes amounts that are required to be disclosed in the most directly comparable measure calculated and presented in accordance with GAAP in the United States.  The Corporation’s management believes the presentation of non-GAAP financial measures provide investors with a greater understanding of the Corporation’s operating results in addition to the results measured in accordance with GAAP.  While management uses these non-GAAP measures in its analysis of the Corporation’s performance, this information should not be viewed as a substitute for financial results determined in accordance with GAAP or considered to be more important than financial results determined in accordance with GAAP.

The following non-GAAP financial measures exclude losses on the sale of AFS securities and accelerated depreciation and lease termination expenses related to announced branch closures that occurred on February 29, 2024.

For the year ended

December 31,

    

2023

    

2022

 

Per Share Data

Basic net income per common share - as reported

$

2.25

$

3.77

Basic net income per common share - non-GAAP

2.81

3.77

Diluted net income per common share - as reported

$

2.25

$

3.76

Diluted net income per common share - non-GAAP

2.81

3.76

Significant Ratios:

Return on Average Assets (a) - as reported

0.77

%

1.39

%

Loss on sale of AFS securities, accelerated depreciation and lease termination expenses, net of income tax effect

0.19

Adjusted Return on Average Assets (a) (non-GAAP)

0.96

%

1.39

%

Return on Average Equity (a) - as reported

9.65

%

18.19

%

Loss on sale of AFS securities, accelerated depreciation and lease termination expenses, net of income tax effect

2.40

Adjusted Return on Average Equity (a) (non-GAAP)

12.05

%

18.19

%

43

Year Ended

    

2023

    

2022

(in thousands, except for per share amount)

Net income - as reported

$

15,060

$

25,048

Adjustments:

Loss on sale of securities

4,214

Accelerated depreciation and lease termination expenses

623

Income tax effect of adjustment

(1,097)

Adjusted net income (non-GAAP)

$

18,800

$

25,048

Basic earnings per share - as reported

$

2.25

$

3.77

Adjustments:

Loss on sale of securities

0.63

Accelerated depreciation and lease termination expenses

0.09

Income tax effect of adjustment

(0.16)

Adjusted basic earnings per share (non-GAAP)

$

2.81

$

3.77

Diluted earnings per share - as reported

$

2.81

$

3.76

CONSOLIDATED BALANCE SHEET REVIEW

Overview

Total assets at December 31, 2023 increased by $57.7 million, or 3.1%, when compared to December 31, 2022.  During the year, cash balances decreased by $24.6 million, investment securities decreased by $50.1 million and gross loans increased by $127.2 million.  In the first quarter of 2023, management made the strategic decision to obtain $61.1 million in brokered certificates of deposit and $80.0 million of FHLB borrowings to strengthen on-balance sheet liquidity in light of the disruption in the banking industry.  $30.0 million of the brokered deposits were repaid in September 2023 and during the third quarter, in anticipation of increasing rates, management pre-funded the $30.7 million of brokered deposits set to mature in the fourth quarter of 2023 at the same rate in order to maintain cash balances and control interest expense.   Investment in FHLB stock increased by $4.2 million during the year related to the borrowings obtained in the first quarter.  Other assets, including OREO, deferred taxes, premises and equipment, and accrued interest receivable, increased by $3.5 million.  Total liabilities increased by $47.6 million since December 31, 2022.  Total deposits decreased by $19.8 million during the year.  Interest-bearing demand deposits and money market accounts increased by $23.2 million and $20.5 million, respectively, due to a shift in the deposit portfolio mix from non-interest-bearing deposits to interest-bearing accounts including the ICS product to ensure full FDIC insurance coverage, where balances grew by approximately $104.0 million.  These increases were offset by decreases in non-interest-bearing deposits of $78.9 million and savings accounts of $59.5 million as we saw businesses and consumers utilizing cash due to the rising rate and inflationary environment.  Total certificates of deposit increased by $75.0 million primarily due to an increase of $30.0 million in brokered certificates of deposits and $45.0 million in retail certificates of deposit.  Short-term borrowings decreased by $19.1 million since December 31, 2022 primarily due to one municipal customer moving funds from an overnight investment product to a non-interest bearing deposit product in 2023 as well as regular fluctuations in municipal deposit balances.  Long-term borrowings increased by $80.0 million in 2023 when compared to December 31, 2022 due to the acquisition of $80.0 million in FHLB borrowings in the first quarter of 2023.  

44

As indicated below, the total interest-earning asset mix remained relatively constant at December 31, 2023 as compared to December 31, 2022. The mix for each year is illustrated below.  

Year End Percentage
of Total Assets

    

2023

    

2022

Cash and cash equivalents

3%

4%

Net loans

73%

68%

Investments

16%

20%

The year-end total liability mix has remained relatively consistent during the two-year period as illustrated below.

Year End Percentage
of Total Liabilities

    

2023

    

2022

Total deposits

89%

93%

Total borrowings

9%

6%

Loan Portfolio

The Bank is actively engaged in originating loans to customers primarily in Allegany County, Frederick County, Garrett County, and Washington County in Maryland, and in Berkeley County, Mineral County, Monongalia County, and Harrison County in West Virginia; and the surrounding regions of West Virginia and Pennsylvania. We have policies and procedures designed to mitigate credit risk and to maintain the quality of our loan portfolio. These policies include underwriting standards for new credits as well as continuous monitoring and reporting policies for asset quality and the adequacy of the ACL. These policies, coupled with ongoing training efforts, have provided effective checks and balances for the risk associated with the lending process. Lending authority is based on the type of the loan, and the experience of the lending officer.

Commercial loans are collateralized primarily by real estate and, to a lesser extent, equipment and vehicles. Unsecured commercial loans represent an insignificant portion of total commercial loans. Residential mortgage loans are collateralized by the related property. Generally, a residential mortgage loan exceeding a specified internal loan-to-value ratio requires private mortgage insurance. Installment loans are typically collateralized, with loan-to-value ratios which are established based on the financial condition of the borrower. We also have made unsecured consumer loans to qualified borrowers meeting our underwriting standards. Additional information about our loans and underwriting policies can be found in Item 1 of Part I of this annual report under the heading “Banking Products and Services”.

The following table sets forth the composition of our loan portfolio. Historically, our policy has been to make the majority of our loan commitments in our market areas. We had no foreign loans in our portfolio as of December 31 for any of the years presented.

Summary of Loan Portfolio

The following table presents the composition of our loan portfolio as of December 31 for the past two years:

(In millions)

    

2023

    

2022

Commercial real estate

$

493.7

$

458.8

Acquisition and development

77.1

70.6

Commercial and industrial

274.6

245.4

Residential mortgage

499.9

444.4

Consumer

61.4

60.3

Total Loans

$

1,406.7

$

1,279.5

45

Outstanding loans of $1.4 billion at December 31, 2023 reflected growth of $127.2 million in 2023.  Since December 31, 2022, commercial real estate loans increased by $34.9 million, acquisition and development loans increased by $6.5 million and commercial and industrial loans increased by $29.2 million.  Growth in the commercial portfolios was driven by increased activity with existing clients as well as cultivating new business relationships.  Residential mortgage loans increased $55.5 million related to management’s strategic decision to book new mortgage loans at higher rates to our in-house portfolio during the first half of 2023. The consumer loan portfolio increased slightly by $1.2 million.  

New commercial loan production for the year  ended December 31, 2023 was approximately $197.0 million.  The pipeline of commercial loans as of December 31, 2023 was approximately $22.0 million.  At December 31, 2023, unfunded, committed commercial construction loans totaled approximately $29.6 million. Commercial amortization and payoffs were approximately $434.4 million through December 31, 2023 due primarily to pay-offs of short-term commercial loans as well as normal amortizations of the commercial loan portfolio.

New residential mortgage loan production for year ended December 31, 2023 was approximately $96.6 million, with most of this production comprised of in-house loans.  The pipeline of in-house, portfolio loans as of December 31, 2023 was $7.0 million.  The residential mortgage production level declined in the fourth quarter of 2023 due to the increasing interest rates and seasonality of this line of business.  Unfunded commitments related to residential construction loans totaled $17.6 million on December 31, 2023.  Beginning in the second quarter of 2023, management began shifting more activity towards the secondary market.

46

The following table presents loans in our commercial real estate portfolio by industry type.

(in thousands)

Non-owner-occupied

Owner-occupied

Multi-family

Total

Accommodations and food services

$

76,473

4,943

-

$

81,416

Administration and support, waste management, and remediation services

-

1,464

-

1,464

Agriculture, forestry, fishing and hunting

-

2,246

-

2,246

Arts, entertainment and recreation

77

3,065

-

3,142

Construction

3,452

6,307

-

9,759

Educational services

-

956

-

956

Finance and insurance

-

403

-

403

Health care and social assistance

4,832

12,124

-

16,956

Management of companies and enterprises

-

2,828

-

2,828

Manufacturing

-

6,978

-

6,978

Other services (except public services)

2,291

18,705

319

21,315

Professional, scientific and technical services

-

2,627

-

2,627

Public administration

1,530

1,086

-

2,616

Commercial rental properties

185,064

74,078

-

259,142

Residential rental properties

512

346

27,167

28,025

Student rental properties

-

-

4,861

4,861

Mixed use rental properties

151

191

17,908

18,250

Storage units

17,332

-

-

17,332

Real estate rental and leasing- other

4,709

3,702

422

8,833

Retail trade

12

3,051

-

3,063

Transportation and warehousing

-

518

-

518

Wholesale trade

135

838

-

973

Total

$

296,570

$

146,456

$

50,677

$

493,703

Our loan portfolio does not consist of any loans secured by office buildings located in major metropolitan areas or that are over four stories or any retail properties rented to major big box retail tenants.  

47

The following table sets forth the maturities, based upon contractual dates, for selected loan categories as of December 31, 2023:

Maturities of Loan Portfolio at December 31, 2023

Fixed Rate Loans

(in thousands)

    

Maturing
Within
One Year

    

Maturing After
One Year
But Within
Five Years

    

Maturing
After
Five Years Within Fifteen Years

Maturing After Fifteen Years

    

Total

Commercial real estate

$

58,198

$

277,383

$

41,339

$

$

376,920

Acquisition and development

33,705

15,911

412

776

50,804

Commercial and industrial

15,063

107,990

34,006

157,059

Residential mortgage

7,188

34,186

44,670

92,360

178,404

Consumer

3,021

35,934

19,500

40

58,495

Total Loans

$

117,175

$

471,404

$

139,927

$

93,176

$

821,682

Variable Rate Loans

(in thousands)

Maturing
Within
One Year

    

Maturing After
One Year
But Within
Five Years

    

Maturing
After
Five Years Within Fifteen Years

Maturing After Fifteen Years

    

Total

Commercial real estate

$

11,260

$

21,415

$

76,089

$

8,019

$

116,783

Acquisition and development

3,549

9,366

13,329

12

26,256

Commercial and industrial

63,046

38,720

15,779

117,545

Residential mortgage

3,129

1,233

54,882

262,223

321,467

Consumer

2,868

4

62

2,934

Total Loans

$

83,852

$

70,738

$

160,141

$

270,254

$

584,985

Management 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 required payment is past due. A loan is considered to be past due when a scheduled payment has not been received for 30 days past its contractual due date. 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.  Interest payments received on non-accrual loans are applied as a reduction of the loan principal balance. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

48

The following sets forth the amounts of non-accrual, past-due and modified loans for the past two years:

Risk Elements of Loan Portfolio

At December 31,

(in thousands)

    

2023

    

2022

Non-accrual loans:

Commercial real estate

$

826

$

145

Acquisition and development

113

146

Residential mortgage

2,988

3,204

Consumer

29

Total non-accrual loans

$

3,956

$

3,495

Accruing Loans Past Due 90 days or more:

Residential mortgage

$

459

$

282

Consumer

84

25

Total accruing loans past due 90 days or more

$

543

$

307

Total non-accrual and past due 90 days or more

$

4,499

$

3,802

Modified Loans:

Performing

$

$

2,751

Non-accrual (included above)

277

Total modified loans

$

$

3,028

Other Real Estate Owned

$

4,493

$

4,733

Total Non-performing assets

$

8,992

$

8,535

Individually evaluated loans without a valuation allowance

$

2,963

$

6,153

Individually evaluated loans with a valuation allowance

345

Total individually evaluated loans

$

2,963

$

6,498

Non-accrual loans to total loans (as %)

0.28%

0.27%

Non-performing loans to total loans (as %)

0.32%

0.30%

Non-performing assets to total assets (as %)

0.47%

0.46%

Allowance for credit losses to non-accrual loans (as %)

441.86%

418.77%

Allowance for credit losses to non-performing assets (as %)

194.40%

171.48%

49

The following table sets forth the percent applicable by portfolio for non-accrual loans for the past two years:

Non-Accrual Loans as a % of Applicable Portfolio

    

2023

    

2022

Commercial real estate

0.2%

0.0%

Acquisition and development

0.1%

0.2%

Commercial and industrial

0.0%

0.0%

Residential mortgage

0.6%

0.7%

Consumer

0.0%

0.0%

We would have recognized $0.4 million in interest income for the year ended December 31, 2023 had our non-accrual loans been current and performing in accordance with their terms. During 2023, we recognized, on a cash basis, $0.3 million of interest income on non-accrual loans that paid off.

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; 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 19, Fair Value Measurements.  There were no loan modifications made to borrowers facing financial difficulties in the year ending December 31, 2023.

Allowance for Credit Losses

Effective January 1, 2023, we adopted 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.   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 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.

The ACL represents an amount which, in management’s judgment, is adequate to absorb expected credit losses over the life of outstanding loans as of the balance sheet date based on the evaluation of 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 by a provision or decreased by a recovery 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 highly subjective estimates.  The reasonableness of the ACL is reviewed quarterly by management.  

50

Management believes it uses relevant information available to make determination 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 credit losses in the loan portfolio can vary from the amounts actually observed.  While management uses available information to recognize expected credit 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 ACL “base case” model is derived from various economic forecasts provided by widely recognized sources.  Management evaluates the variability of market conditions by examining the peak and trough of economic cycles.  These peaks and troughs are used to stress the base case model to develop a range of potential outcomes.  Management then determines the appropriate reserve through an evaluation of these various outcomes relative to current economic conditions and known risks in the portfolio.   Management enhances its calculation with the use of Moody’s economic forecast data to provide additional support to substantiate its ACL.

The ACL was $17.5 million at December 31, 2023 compared to an allowance for loan loss (“ALL”) of $14.6 million at December 31, 2022. The provision for credit losses was $1.6 million for the year ended December 31, 2023, compared to a credit to provision of $0.6 million for the year ended December 31, 2022.  The provision expense recorded in 2023 was primarily related to strong loan growth and increases in qualitative risk factors related to the uncertainty of the economy, inflation levels, and rising interest rates, which was partially offset by the reduction of historical loss factors related to the strength of our overall portfolio.  Net charge-offs of $0.9 million were recorded for the year ended December 31, 2023 and $0.7 million for the year ended December 31, 2022.  The ratio of the ACL to loans outstanding was 1.24% at December 30, 2023 and 1.14% at December 31, 2022.  

The ratio of net charge-offs to average loans for the year ended December 31, 2023 was an annualized 0.07%, compared to of 0.06% for the year ended December 31, 2022. The increase in net charge-offs was primarily related to increased charge-offs in our commercial loan portfolio.  Our special assets team continues to effectively collect on charged-off loans, resulting in ongoing overall low charge-off ratios.

Accruing loans past due 30 days or more increased to 0.24%, compared to 0.16% at December 31, 2022. Non-accrual loans totaled $4.0 million at December 31, 2023 compared to $3.5 million at December 31, 2022. The increase in non-accrual balances at December 31, 2023 was primarily related to two commercial real estate loans with a combined  balance of $0.8 million added to non-accrual in 2023.  This was partially offset by reductions in principal balance of existing non-accrual loans.

The ACL at December 31, 2023 is adequate to provide for probable losses inherent in our loan portfolio. Amounts that will be recorded for the provision for loan losses in future periods will depend upon trends in the loan balances, including the composition of the loan portfolio, changes in loan quality and loss experience trends, potential recoveries on previously charged-off loans and changes in other qualitative factors. Management also applies interest rate risk, collateral value and debt service sensitivity analyses to the CRE loan portfolio and obtains new appraisals on specific loans under defined parameters to assist in the determination of the periodic provision for credit losses.

51

The following table presents a summary of the activity in the ACL and ALL by major loan category for the past two years.

Analysis of Activity in the Allowance for Credit/Loan Losses

For the Years Ended December 31,

(in thousands)

    

2023

    

2022

Balance, January 1

$

14,636

$

15,955

Impact of CECL Adoption

2,066

Charge-offs:

Commercial real estate

(87)

Acquisition and development

(20)

Commercial and industrial

(423)

(134)

Residential mortgage

(55)

(46)

Consumer

(874)

(921)

Total charge-offs

(1,439)

(1,121)

Recoveries:

Commercial real estate

7

1

Acquisition and development

11

22

Commercial and industrial

186

93

Residential mortgage

73

184

Consumer

240

145

Total recoveries

517

445

Net credit losses

(922)

(676)

Provision/credit for credit/loan losses

1,700

(643)

Balance at end of period

$

17,480

$

14,636

Allowance for credit/loan losses to total loans (as %)

1.24%

1.14%

Net (Charge-offs)/Recoveries as a % of Average Applicable Portfolio

    

2023

    

2022

Commercial real estate

0.0%

0.0%

Acquisition and development

0.0%

0.0%

Commercial and industrial

(0.1%)

(0.0%)

Residential mortgage

0.0%

0.0%

Consumer

(1.0%)

(1.3%)

52

The following presents management’s allocation of the ACL by major loan category in comparison to that loan category’s percentage of total loans. Changes in the allocation over time reflect changes in the composition of the loan portfolio risk profile and refinements to the methodology of determining the ACL. Specific allocations in any particular category may be reallocated in the future as needed to reflect current conditions. Accordingly, the entire ACL is considered available to absorb losses in any category.

Allocation of the Allowance for Credit/Loan Losses

For the Years Ended December 31,

(in thousands)

    

2023

    

% of
Total
Loans

    

2022

    

% of
Total
Loans

Commercial real estate

$

5,120

29%

$

6,345

43%

Acquisition and development

940

5%

979

7%

Commercial and industrial

3,717

21%

2,845

19%

Residential mortgage

6,774

39%

3,160

22%

Consumer

929

6%

877

6%

Unallocated

0%

430

3%

Total

$

17,480

100%

$

14,636

100%

53

Investment Securities

The following table sets forth the composition of our investment securities portfolio by major category as of the indicated dates:

At December 31,

2023

2022

(in thousands)

    

Amortized
Cost

    

Fair
Value
(FV)

FV As
% of
Total

    

Amortized
Cost

    

Fair
Value
(FV)

    

FV As
% of
Total

Securities Available-for-Sale:

U.S. government agencies

$

7,000

$

6,034

6%

$

11,044

$

9,462

8%

Residential mortgage-backed agencies

24,781

20,563

21%

45,052

37,401

30%

Commercial mortgage-backed agencies

36,258

28,417

29%

37,393

30,732

23%

Collateralized mortgage obligations

19,725

16,356

17%

25,828

21,044

17%

Obligations of states and political subdivisions

10,486

10,312

11%

10,848

10,492

8%

Corporate bonds

1,000

778

1%

1,000

887

1%

Collateralized debt obligations

18,671

14,709

15%

18,664

15,871

13%

Total available for sale

$

117,921

$

97,169

100%

$

149,829

$

125,889

100%

Securities Held to Maturity:

U.S. treasuries

$

37,462

$

37,219

20%

$

37,204

$

35,611

18%

U.S. government agencies

68,014

57,029

31%

67,734

54,473

27%

Residential mortgage-backed agencies

29,588

26,717

14%

28,624

25,122

12%

Commercial mortgage-backed agencies

21,413

16,052

9%

22,389

17,821

9%

Collateralized mortgage obligations

53,261

43,288

24%

57,085

47,084

23%

Obligations of states and political subdivisions

4,604

4,110

2%

22,623

22,969

11%

Total held to maturity

$

214,342

$

184,415

100%

$

235,659

$

203,080

100%

Total AFS and HTM securities totaled $311.5 million at December 31, 2023, representing a $50.1 million decrease compared to December 31, 2022.   In the third quarter of 2023, management elected to redeem $17.8 million from a non-rated municipal TIF bond at par. During December of 2023, management made a strategic decision to restructure the balance sheet by selling AFS investment securities totaling $20.4 million with a book value of $24.6 million, resulting in an after-tax loss of $3.2 million.  The securities had a weighted average book yield of approximately 1.3% and a weighted average life of approximately 6.65 years.  Additional decreases in the investment portfolio were primarily related to normal principal amortization.   Proceeds from sales and principal amortization during 2023 were used primarily to enhance on-balance sheet liquidity and to fund loan growth throughout the year.

The Corporation reassessed the classification of certain investments and, effective February 1, 2022, the Corporation transferred $139.0 million of callable agencies, obligation of state and political subdivisions, and collateralized mortgage obligations from available for sale to held to maturity securities.  The transfer occurred at fair value.  The related unrealized loss of $8.4 million included in other comprehensive loss remained in other comprehensive loss, to be amortized out of other comprehensive loss with an offsetting entry to interest income as a yield adjustment over the remaining term of the securities.  No gain or loss was recorded at the time of transfer.  The transfer of these securities was completed in an effect to mitigate further decline in fair market value value in a rising rate environment.  Management’s assessment of the potential included lower yielding bonds and the risk of extension in an up 300 basis point shock.

54

As discussed in Note 19 to the Consolidated Financial Statements presented elsewhere in this report, we measure fair market values based on the fair value hierarchy established in ASC Topic 820, Fair Value Measurements and Disclosures. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Level 3 prices or valuation techniques require inputs that are both significant to the valuation assumptions and are not readily observable in the market (i.e. supported with little or no market activity). These Level 3 instruments are valued based on both observable and unobservable inputs derived from the best available data, some of which is internally developed, and considers risk premiums that a market participant would require.

Approximately $82.5 million of the available-for-sale portfolio was valued using Level 2 pricing and had net unrealized losses of $16.8 million at December 31, 2023. The remaining $14.7 million of the securities available-for-sale represents the entire collateralized debt obligation (“CDO”) portfolio, which was valued using significant unobservable inputs, or Level 3 pricing. The $4.0 million in net unrealized losses associated with the CDO portfolio relates to nine pooled trust preferred securities that comprise the CDO portfolio.  

The following table sets forth the contractual or estimated maturities of the components of our investment securities portfolio as of December 31, 2023 and the weighted average yields on a tax-equivalent basis.

Investment Security Maturities, Yields, and Fair Values at December 31, 2023

(in thousands)

    

Within
1 Year

    

1 Year
To 5 Years

    

5 Years
To 10 Years

    

Over
10 Years

    

Total
Fair Value

Securities Available-for-Sale:

U.S. government agencies

$

$

4,703

$

$

1,331

$

6,034

Residential mortgage-backed agencies

13,404

7,159

20,563

Commercial mortgage-backed agencies

18,767

9,650

28,417

Collateralized mortgage obligations

1,107

7,536

7,713

16,356

Obligations of states and political subdivisions

2,640

250

1,389

6,033

10,312

Corporate bonds

778

778

Collateralized debt obligations

14,709

14,709

Total available for sale

$

2,640

$

24,827

$

32,757

$

36,945

$

97,169

Percentage of total

2.72%

25.55%

33.71%

38.02%

100.00%

Weighted average yield

2.80%

2.18%

2.07%

7.70%

4.26%

Held to Maturity:

US treasuries

$

37,219

$

$

$

$

37,219

U.S. government agencies

11,706

32,590

12,733

57,029

Residential mortgage-backed agencies

201

4,942

5,712

15,862

26,717

Commercial mortgage-backed agencies

7,069

8,983

16,052

Collateralized mortgage obligations

2,221

41,067

43,288

Obligations of states and political subdivisions

1,905

2,205

4,110

Total held to maturity

$

37,420

$

25,938

$

49,190

$

71,867

$

184,415

Percentage of total

20.29%

14.07%

26.67%

38.97%

100.00%

Weighted average yield

0.08%

1.67%

3.05%

2.62%

2.08%

The weighted average yield was calculated using historical cost balances and does not give effect to changes in fair value.

55

Deposits

The following table sets forth the deposit balances by major category for 2023 and 2022:

Deposit Balances

2023

2022

(in thousands)

    

Actual Balance

    

Percent

    


Actual Balance

    

Percent

Non-interest-bearing demand deposits

$

427,670

28%

$

506,613

32%

Interest-bearing deposits:

Demand

350,860

22%

327,685

21%

Money market

385,649

25%

365,192

23%

Savings deposits

191,265

12%

250,720

16%

Time deposits - retail

165,533

11%

120,523

8%

Time deposits - brokered

30,000

2%

0%

Total Deposits

$

1,550,977

100%

$

1,570,733

100%

Total deposits at December 31, 2023 decreased by $19.8 million when compared to December 31, 2022.  In March 2023, the Corporation obtained $61.1 million in new brokered deposits.  In August 2023, the Corporation obtained $30.0 million of brokered deposits to pre-fund the maturity of a $30.4 million brokered certificate of deposit that matured in September 2023.  In December 2023, $30.6 million in brokered deposits matured and were repaid.  In addition, retail certificates of deposit increased by $45.0 million due primarily to a promotional nine-month certificate of deposit product offered in 2023.  Interest-bearing demand deposits increased by $23.2 million and money market accounts increased by $20.5 million due to a shift in the deposit portfolio mix from non-interest-bearing accounts to interest-bearing accounts including the ICS product to ensure full FDIC insurance.  These increases were offset by decreases in non-interest-bearing deposits of $78.9 million and savings accounts of $59.5 million due to the shift to interest-bearing demand deposit accounts, two relationships having large, planned deposit withdrawals totaling $39.5 million during 2023 to fund business activity, the effects of consumer and commercial spending and the competitive market for deposits.  

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

December 31, 2023

December 31, 2022

(in thousands)

Balance

Percent

Balance

Percent

Insured deposits

$

1,212,934

78%

$

1,076,113

69%

Uninsured but collateralized deposits

116,723

8%

153,067

10%

Uninsured and uncollateralized deposits

221,320

14%

341,553

21%

$

1,550,977

100%

$

1,570,733

100%

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

December 31, 2023

December 31, 2022

(in thousands)

Balance

Percent

Balance

Percent

Retail deposits

$

820,954

53%

$

855,014

54%

Business deposits

730,023

47%

715,719

46%

$

1,550,977

100%

$

1,570,733

100%

56

Borrowed Funds

The following shows the composition of our borrowings at December 31:

(in thousands)

    

2023

    

2022

Securities sold under agreements to repurchase

$

45,418

$

64,565

Total short-term borrowings

$

45,418

$

64,565

Long-term FHLB advances

$

80,000

$

Junior subordinated debentures

$

30,929

$

30,929

Total long-term borrowings

$

110,929

$

30,929

Total borrowings

$

156,347

$

95,494

Average balance (from Table 1)

$

142,239

$

94,111

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

(in thousands)

    

2023

    

2022

Securities sold under agreements to repurchase:

Outstanding at end of year

$

45,418

$

64,565

Weighted average interest rate at year end

0.27%

0.12%

Maximum amount outstanding as of any month end

$

59,777

$

75,912

Average amount outstanding

50,498

63,182

Approximate weighted average rate during the year

0.24%

0.12%

Short-term borrowings decreased by $19.1 million when compared to December 31, 2022.  The decrease from December 31, 2022 was primarily related to one large municipal customer moving approximately $12.0 million in funds from an overnight investment sweep prodduct to a non-interest-bearing deposit product as well as regular fluctuations in other municipal customer balances.  Long-term boorowings increased by $80.0 million in 2023 due to the acquisition of $80.0 million in FHLB borrowings in the first quarter of 2023.

Management will continue to closely monitor interest rates within the context of its overall asset-liability management process. See the discussion under the heading “Interest Rate Sensitivity” in this Item 7 for further information on this topic.

At December 31, 2023, we had additional borrowing capacity with the FHLB totaling $145.4 million, an additional $140.0 million of unused lines of credit with various financial institutions, and $12.2 million of an unused secured line of credit with the Federal Reserve Discount Window.  Additionally, we had $69.5 million available through the Federal Reserve’s BTFP.  See Note 10 to the Consolidated Financial Statements presented elsewhere in this annual report for further details about our borrowings and additional borrowing capacity, which is incorporated herein by reference.

Off-Balance Sheet Arrangements

In the normal course of business, to meet the financing needs of its customers, the Bank is a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit, lines of credit, and standby letters of credit. Our exposure to credit loss in the event of nonperformance by the other party to these financial instruments is represented by the contractual amount of the instruments. The credit risks inherent in loan commitments and letters of credit are essentially the same as those involved in extending loans to customers, and these arrangements are subject to our normal credit policies. We use the same credit policies in making commitments and conditional obligations

57

as we do for on-balance sheet instruments. We generally require collateral or other security to support the financial instruments with credit risk. The amount of collateral or other security is determined based on management’s credit evaluation of the counterparty. We evaluate each customer’s creditworthiness on a case-by-case basis.

Loan commitments and letters of credit totaled $232.3 million and $11.0 million, respectively, at December 31, 2023. Management does not believe that any of the foregoing arrangements have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. We are not a party to any other off-balance sheet arrangements. See Note 18 to the Consolidated Financial Statements presented elsewhere in this annual report for additional information on these arrangements.

Capital Resources

We require capital to fund loans, satisfy our obligations under the Bank’s letters of credit, meet the deposit withdraw demands of the Bank’s customers, and satisfy our other monetary obligations. To the extent that deposits are not adequate to fund our capital requirements, we can rely on the funding sources identified below under the heading “Liquidity Management”.  At December 31, 2023, the Bank had $140.0 million available through unsecured lines of credit with correspondent banks, $12.2 million available through a secured line of credit with the Federal Reserve Discount Window and approximately $145.4 million available through the FHLB.  Additionally, we had $69.5 million available through the Federal Reserve’s BTFP.  Management is not aware of any demands, commitments, events or uncertainties that are likely to materially affect our ability to meet our future capital requirements.

In addition to operational requirements, the Bank and the Corporation are subject to risk-based capital regulations, which were adopted and are monitored by federal banking regulators. These regulations are used to evaluate capital adequacy and require an analysis of an institution’s asset risk profile and off-balance sheet exposures, such as unused loan commitments and stand-by letters of credit. Detailed information about these capital regulations and their requirements is set forth in the “Supervision and Regulation” section of Item 1 of Part I of this annual report under the heading “Capital Requirements”.

At December 31, 2023, the Corporation’s total risk-based capital ratio was 15.64% and the Bank’s total risk-based capital ratio was 14.05%, both of which were well above the regulatory minimum of 8%. The total risk-based capital ratios of the Corporation and the Bank at December 31, 2022 were 16.12% and 14.37%, respectively.  

At December 31, 2023, the most recent notification from the regulators categorizes the Corporation and the Bank as “well capitalized” under the regulatory framework for prompt corrective action. See Note 3 to the Consolidated Financial Statements presented elsewhere in this annual report for additional information regarding regulatory capital ratios.

Liquidity Management

Liquidity is a financial institution’s capability to meet customer demands for deposit withdrawals while funding all credit-worthy loans. The factors that determine the institution’s liquidity are:

Reliability and stability of core deposits;
Cash flow structure and pledging status of investments; and
Potential for unexpected loan demand.

We actively manage our liquidity position through meetings of a sub-committee of executive management, which looks forward 12 months at 30-day intervals. The measurement is based upon the projection of funds sold or purchased position, along with ratios and trends developed to measure dependence on purchased funds and core growth. Monthly reviews by management and quarterly reviews by the Asset and Liability Committee under prescribed policies and procedures are designed to ensure that we will maintain adequate levels of available funds.

58

It is our policy to manage our affairs so that liquidity needs are fully satisfied through normal Bank operations. That is, the Bank will manage its liquidity to minimize the need to make unplanned sales of assets or to borrow funds under emergency conditions. The Bank will use funding sources where the interest cost is relatively insensitive to market changes in the short run (periods of one year or less) to satisfy operating cash needs. The remaining normal funding will come from interest-sensitive liabilities, either deposits or borrowed funds. When the marginal cost of needed wholesale funding is lower than the cost of raising this funding in the retail markets, the Corporation may supplement retail funding with external funding sources such as:

Unsecured Fed Funds lines of credit with upstream correspondent banks (M&T Bank, Atlantic Community Bankers Bank, Community Bankers Bank, PNC Financial Services, Pacific Coast Banker’s Bank and Zions Bancorp).
Secured advances with the FHLB of Atlanta, which are collateralized by eligible one to four family residential mortgage loans, home equity lines of credit, commercial real estate loans. Cash and various securities may also be pledged as collateral.
Secured line of credit with the Federal Reserve Discount Window for use in borrowing funds up to 90 days, using municipal and corporate securities as collateral.
Brokered deposits, including CDs and money market funds, provide a method to generate deposits quickly. These deposits are strictly rate driven but often provide the most cost effective means of funding growth.
One Way Buy CDARS/ICS funding – a form of brokered deposits that has become a viable supplement to brokered deposits obtained directly.
Secured line of credit with the FRB BTFP for use in borrowing funds up to 365 days using US government agency bonds as collateral.

The following table presents sources of liquidity available to the Corporation as of December 31, 2023.

(in thousands)

Total Availability

Amount Used

Net Availability

Internal Sources

Excess cash

$

28,513

$

-

$

28,513

Unpledged securities

62,036

-

62,036

External Sources

Federal Reserve (discount window)

12,223

-

12,223

Correspondent unsecured lines of credit

140,000

-

140,000

FHLB

227,938

82,500

145,438

Bank Term Funding Program*

69,476

-

69,476

$

540,186

$

82,500

$

457,686

*Bank Term Funding Program has been established and eligible securities with a total par balance of $69.5 million have been pledged to the program as of December 31, 2023. In January 2024, the Company borrowed $40.0 million from the Bank Term Funding Program to enhance on-balance sheet liquidity.

We have adequate liquidity available to respond to current and anticipated liquidity demands and is not aware of any trends or demands, commitments, events or uncertainties that are likely to materially affect our ability to maintain liquidity at satisfactory levels.

Market Risk and Interest Sensitivity

Our primary market risk is interest rate fluctuation. Interest rate risk results primarily from the traditional banking activities that we engage in, such as gathering deposits and extending loans. Many factors, including economic and financial conditions, movements in interest rates and consumer preferences affect the difference between the interest earned on our assets and the interest paid on our liabilities. Interest rate sensitivity refers to the degree that earnings will

59

be impacted by changes in the prevailing level of interest rates. Interest rate risk arises from mismatches in the repricing or maturity characteristics between interest-bearing assets and liabilities. Management seeks to minimize fluctuating net interest margins, and to enhance consistent growth of net interest income through periods of changing interest rates. Management uses interest sensitivity gap analysis and simulation models to measure and manage these risks. The interest rate sensitivity gap analysis assigns each interest-earning asset and interest-bearing liability to a time frame reflecting its next repricing or maturity date. The differences between total interest-sensitive assets and liabilities at each time interval represent the interest sensitivity gap for that interval. A positive gap generally indicates that rising interest rates during a given interval will increase net interest income, as more assets than liabilities will reprice. A negative gap position would benefit us during a period of declining interest rates.

At December 31, 2023, we were asset sensitive.

Our interest rate risk management goals are:

Ensure that the Board of Directors and senior management will provide effective oversight and ensure that risks are adequately identified, measured, monitored and controlled;
Enable dynamic measurement and management of interest rate risk;
Select strategies that optimize our ability to meet our long-range financial goals while maintaining interest rate risk within policy limits established by the Board of Directors;
Use both income and market value oriented techniques to select strategies that optimize the relationship between risk and return; and
Establish interest rate risk exposure limits for fluctuation in net interest income (“NII”), net income and economic value of equity.

In order to manage interest sensitivity risk, management formulates guidelines regarding asset generation and pricing, funding sources and pricing, and off-balance sheet commitments. These guidelines are based on management’s outlook regarding future interest rate movements, the state of the regional and national economy, and other financial and business risk factors. Management uses computer simulations to measure the effect on net interest income of various interest rate scenarios. Key assumptions used in the computer simulations include cash flows and maturities of interest rate sensitive assets and liabilities, changes in asset volumes and pricing, and management’s capital plans. This modeling reflects interest rate changes and the related impact on net interest income over specified periods.

We evaluate the effect of a change in interest rates of -400 basis points to +400 basis points on both NII and Net Portfolio Value (“NPV”) / Economic Value of Equity (“EVE”). We concentrate on NII rather than net income as long as NII remains the significant contributor to net income.

NII modeling allows management to view how changes in interest rates will affect the spread between the yield earned on assets and the cost of deposits and borrowed funds. Unlike traditional Gap modeling, NII modeling takes into account the different degree to which installments in the same repricing period will adjust to a change in interest rates. It also allows the use of different assumptions in a falling versus a rising rate environment. The period considered by the NII modeling is the next eight quarters.

NPV / EVE modeling focuses on the change in the market value of equity. NPV / EVE is defined as the market value of assets less the market value of liabilities plus/minus the market value of any off-balance sheet positions. By effectively looking at the present value of all future cash flows on or off the balance sheet, NPV / EVE modeling takes a longer-term view of interest rate risk. This complements the shorter-term view of the NII modeling.

Measures of NII at risk produced by simulation analysis are indicators of an institution’s short-term performance in alternative rate environments. These measures are typically based upon a relatively brief period, usually one year. They do not necessarily indicate the long-term prospects or economic value of the institution.

60

Based on the simulation analysis performed at December 31, 2023 and 2022, management estimated the following changes in net interest income, assuming the indicated rate changes:

(in thousands)

    

2023

    

2022

+400 basis points

$

4,464

$

1,112

+300 basis points

$

3,353

$

225

+200 basis points

$

2,255

$

173

+100 basis points

$

1,155

$

121

-100 basis points

$

(1,280)

$

(776)

-200 basis points

$

(3,102)

$

(3,165)

-300 basis points

$

(5,249)

$

(7,382)

-400 basis points

$

(8,086)

$

N/A

This estimate is based on assumptions that may be affected by unforeseeable changes in the general interest rate environment and any number of unforeseeable factors. Rates on different assets and liabilities within a single maturity category adjust to changes in interest rates to varying degrees and over varying periods of time. The relationships between lending rates and rates paid on purchased funds are not constant over time. Management can respond to current or anticipated market conditions by lengthening or shortening the Bank’s sensitivity through loan repricings or changing its funding mix. The rate of growth in interest-free sources of funds will influence the level of interest-sensitive funding sources. In addition, the absolute level of interest rates will affect the volume of earning assets and funding sources. As a result of these limitations, the interest-sensitive gap is only one factor to be considered in estimating the net interest margin.

Impact of Inflation – Our assets and liabilities are primarily monetary in nature, and as such, future changes in prices do not affect the obligations to pay or receive fixed and determinable amounts of money. During inflationary periods, monetary assets lose value in terms of purchasing power and monetary liabilities have corresponding purchasing power gains. The concept of purchasing power is not an adequate indicator of the impact of inflation on financial institutions because it does not incorporate changes in our earnings.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, the Corporation is not required to provide the information contemplated by this item.  See Item 7 of Part II of this report under the heading “Market Risk and Interest Sensitivity” for a discussion of the Corporation’s primary market risk.

61

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and the Board of Directors of First United Corporation

Oakland, Maryland

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, 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

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.  Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

63

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.  The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for 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:
oDevelopment of the forecast models that are used to determine the quantitative component and used in determining the basis for qualitative adjustments.
oRelevance 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

We have served as the Company's auditor since 2021.

Washington, D.C.

March 15, 2024

64

First United Corporation and Subsidiaries

Consolidated Statements of Financial Condition

(In thousands, except per share amounts)

December 31,

    

2023

    

2022

Assets

Cash and due from banks

$

48,343

$

72,720

Interest bearing deposits in banks

1,410

1,595

Cash and cash equivalents

49,753

74,315

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

97,169

125,889

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)

214,297

235,659

Restricted investment in bank stock, at cost

5,250

1,027

Loans held for sale (at lower of cost or fair value)

443

Loans

1,406,667

1,279,494

Unearned fees

(340)

(174)

Allowance for credit losses

(17,480)

(14,636)

Net loans

1,388,847

1,264,684

Premises and equipment, net

31,459

34,948

Goodwill and other intangibles

12,103

12,433

Bank owned life insurance

47,607

46,346

Deferred tax assets

11,133

10,605

Other real estate owned

4,493

4,733

Right of use assets

1,367

1,898

Pension Asset

11,208

8,001

Accrued interest receivable

7,487

6,051

Other assets

23,244

21,580

Total Assets

$

1,905,860

$

1,848,169

Liabilities and Shareholders’ Equity

Liabilities:

Non-interest bearing deposits

$

427,670

$

506,613

Interest bearing deposits

1,123,307

1,064,120

Total deposits

1,550,977

1,570,733

Short-term borrowings

45,418

64,565

Long-term borrowings

110,929

30,929

Operating lease liability

1,556

2,373

SERP deferred compensation

9,777

7,194

Allowance for credit losses on unfunded commitments

873

133

Accrued interest payable

612

151

Other liabilities

22,515

19,099

Dividends payable

1,330

1,199

Total Liabilities

1,743,987

1,696,376

Shareholders’ Equity:

Common Stock – par value $0.01 per share;
  Authorized 25,000,000 shares; issued and outstanding 6,639,888 shares at December 31, 2023 and 6,666,428 shares at December 31, 2022

66

67

Surplus

23,734

24,409

Retained earnings

173,900

166,343

Accumulated other comprehensive loss

(35,827)

(39,026)

Total Shareholders’ Equity

161,873

151,793

Total Liabilities and Shareholders’ Equity

$

1,905,860

$

1,848,169

See notes to consolidated financial statement

65

First United Corporation and Subsidiaries

Consolidated Statements of Income

(In thousands, except per share data)

Year Ended

December 31,

    

2023

    

2022

Interest income

Interest and fees on loans

$

69,569

$

54,448

Interest on investment securities

Taxable

7,173

6,252

Exempt from federal income tax

714

1,106

Total investment income

7,887

7,358

Other

3,700

616

Total interest income

81,156

62,422

Interest expense

Interest on deposits

19,198

3,226

Interest on short-term borrowings

147

112

Interest on long-term borrowings

4,941

1,451

Total interest expense

24,286

4,789

Net interest income

56,870

57,633

Credit loss expense

Credit loss expense/(credit)- loans

1,700

(643)

Credit loss expense- debt securities held to maturity

45

Credit loss (credit)/expense- unfunded commitments

(125)

16

Total credit loss expense/(credit)

1,620

(627)

Net interest income after provision for credit losses

55,250

58,260

Other operating income

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

(4,214)

3

Net gains on investment, held to maturity

91

Net gains on sales of residential mortgage loans

381

45

Net (losses)/gains on disposal of fixed assets

(29)

33

Net (losses)/gains

(3,862)

172

Service charges on deposit accounts

2,198

1,981

Other service charges

929

925

Trust department

8,282

8,244

Debit card income

4,101

3,958

Bank owned life insurance

1,261

1,196

Brokerage commissions

1,160

1,049

Other

400

525

Total other income

18,331

17,878

Total other operating income

14,469

18,050

Other operating expenses

Salaries and employee benefits

27,503

24,130

FDIC premiums

992

636

Equipment

4,356

4,163

Occupancy

3,445

2,906

Data processing

3,980

3,444

Marketing

762

543

Professional services

2,160

1,538

Contract labor

643

618

Line rentals

466

482

Total OREO (income)/expense, net

(89)

590

Investor relations

345

300

Contributions

229

288

Other

5,451

3,491

Total other operating expenses

50,243

43,129

Income before income tax expense

$

19,476

$

33,181

Provision for income tax expense

4,416

8,133

Net Income

$

15,060

$

25,048

Basic net income per share

$

2.25

$

3.77

Diluted net income per share

$

2.25

$

3.76

Weighted average number of basic shares outstanding

6,686

6,650

Weighted average number of diluted shares outstanding

6,701

6,661

See notes to consolidated financial statements

66

First United Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(In thousands)

Year Ended

December 31,

Comprehensive Income

    

2023

    

2022

Net Income

$

15,060

$

25,048

Other comprehensive income, net of tax and reclassification adjustments

Available for sale securities:

Unrealized holding losses on investments with credit related impairment

(845)

(835)

Reclassification adjustment for gains realized in income

202

202

Other comprehensive losses on investments with credit related impairment

(1,047)

(1,037)

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

83

(22,792)

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

8,328

Reclassification adjustment for (losses)/gains realized in income

(4,214)

3

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

4,297

(14,467)

Held to maturity securities:

Unrealized holding losses on securities transferred to held to maturity

(8,328)

Reclassification adjustment for gains realized in income

91

Reclassification adjustment for amortization realized in income

(682)

(841)

Other comprehensive income/(losses) on HTM investments

682

(7,578)

Cash flow hedges:

Unrealized holding (losses)/gains on cash flow hedges

(310)

1,521

Other comprehensive (loss)/gain on cash flow hedges

(310)

1,521

Pension plan liability:

Unrealized holding gains on pension plan liability

2,180

931

Reclassification adjustment for amortization of unrecognized loss realized in income

(998)

(1,117)

Other comprehensive income on pension plan liability

3,178

2,048

SERP liability:

Unrealized holding (gains)/losses on SERP liability

(2,448)

3,307

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

7

(271)

Other comprehensive (losses)/gains on SERP liability

(2,455)

3,578

Other comprehensive income/(loss) before income tax

4,345

(15,935)

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

(1,146)

4,223

Other comprehensive income/(loss), net of tax

3,199

(11,712)

Comprehensive Income

$

18,259

$

13,336

See notes to consolidated financial statements

67

First United Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

(In thousands, except number of shares)

    

Common
Stock

    

Surplus

    

Retained
Earnings

    

Accumulated
Other
Comprehensive
Loss, net of tax

    

Total
Shareholders'
Equity

Balance at January 1, 2022

$

66

23,661

145,487

(27,314)

141,900

Net income

25,048

25,048

Other comprehensive loss, net of tax

(11,712)

(11,712)

Common stock issued - 45,473 shares

1

216

217

Common stock dividend declared - $0.63 per share

(4,192)

(4,192)

Stock based compensation

532

532

Balance at December 31, 2022

67

24,409

166,343

(39,026)

151,793

Adoption of ASC 326- Financial Instruments- Credit Losses

(2,155)

(2,155)

Net income

15,060

15,060

Other comprehensive income, net of tax

3,199

3,199

Common stock issued- 55,558 shares

293

293

Common stock dividend declared - $0.80 per share

(5,348)

(5,348)

Stock based compensation

527

527

Stock repurchase- 82,098 shares

(1)

(1,495)

(1,496)

Balance at December 31, 2023

$

66

$

23,734

$

173,900

$

(35,827)

$

161,873

See notes to consolidated financial statements

68

First United Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

Year Ended

December 31,

    

2023

    

2022

Operating activities

Net income

$

15,060

$

25,048

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

Provision/(credit) for credit losses

1,620

(627)

Depreciation

3,799

3,077

Stock based compensation

527

532

Amortization of intangible assets

330

219

Gains on sales of other real estate owned, net

(599)

Write-downs of other real estate owned

23

Origination of loans held for sale

(4,832)

(1,401)

Proceeds from sales of loans held for sale

4,770

1,513

Gains on sales of loans held for sale

(381)

(45)

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

29

(33)

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

(51)

83

Net accretion of investment securities discounts and premiums- HTM

(805)

(850)

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

4,214

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

(3)

Net gains on investment securities – held to maturity

(91)

Amortization of deferred loan fees

(98)

(150)

Deferred tax (benefit)/expense

(889)

595

Earnings on bank owned life insurance

(1,261)

(1,196)

Amortization of operating lease right of use assets

787

349

Amortization of operating lease liabilities

(1,073)

(388)

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

(4,932)

648

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

6,232

(737)

Net cash provided by operating activities

22,470

26,543

Investing activities

Proceeds from maturities/calls of investment securities available-for-sale

7,497

14,248

Proceeds from maturities/calls of investment securities held-to-maturity

26,110

16,263

Proceeds from sales of investment securities available-for-sale

20,249

1,023

Purchases of investment securities available-for-sale

(17,652)

Purchases of investment securities held-to-maturity

(3,988)

(55,686)

Proceeds from sales of other real estate owned

1,041

Proceeds from disposal of fixed assets

14

281

Net (increase)/decrease in FHLB stock

(4,223)

2

Net increase in loans

(128,056)

(126,707)

Acquisition of mortgage company

(600)

Purchases of premises and equipment

(353)

(3,576)

Net cash used in investing activities

(81,709)

(172,404)

Financing activities

Net (decrease)/increase in deposits

(19,756)

101,359

Proceeds from issuance of common stock

293

217

Cash dividends paid on common stock

(5,217)

(3,986)

Net (decrease)/increase in short-term borrowings

(19,147)

6,866

Stock repurchase

(1,496)

Proceeds from long-term borrowings

80,000

Net cash provided by financing activities

34,677

104,456

Decrease in cash and cash equivalents

(24,562)

(41,405)

Cash and cash equivalents at beginning of the year

74,315

115,720

Cash and cash equivalents at end of period

$

49,753

$

74,315

Supplemental information

Interest paid

$

23,825

$

4,775

Taxes paid

$

6,126

$

7,508

Non-cash investing activities:

Transfers from loans to other real estate owned

$

225

$

256

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

$

$

139,036

See notes to consolidated financial statements

69

First United Corporation and Subsidiaries

Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies

Business

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.  The Trusts were formed for the purpose of selling trust preferred securities that qualified as Tier 1 capital. The Bank has two consumer finance company subsidiaries - OakFirst Loan Center, Inc., a West Virginia corporation, and OakFirst Loan Center, LLC, a Maryland limited liability company - and two subsidiaries that it uses to hold real estate acquired through foreclosure or by deed in lieu of foreclosure - First OREO Trust, a Maryland statutory trust, and FUBT OREO I, LLC, a Maryland limited liability company. In addition, the Bank owns 99.9% of the limited partnership interests in Liberty Mews Limited Partnership, a Maryland limited partnership formed for the purpose of acquiring, developing and operating low-income housing units in Garrett County, Maryland (“Liberty Mews”), and a 99.9% non-voting membership interest in MCC FUBT Fund, LLC, an Ohio limited liability company formed for the purpose of acquiring, developing and operating low-income housing units in Allegany County, Maryland (the “MCC Fund”).

First United Corporation and its subsidiaries operate principally in four counties in Western Maryland and four counties in West Virginia.

As used in these Notes, the terms “the Corporation”, “we”, “us”, and “our” mean First United Corporation and, unless the context clearly suggests otherwise, its consolidated subsidiaries.

Basis of Presentation

The financial information is presented in accordance with generally accepted accounting principles and general practice for financial institutions in the United States of America (“GAAP”).  All significant intercompany transactions and accounts have been eliminated.  Certain reclassifications have been made to prior year amounts to conform with current year classifications.  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.  

Principles of Consolidation

The consolidated financial statements of the Corporation include the accounts of First United Corporation, the Bank, the OakFirst Loan Centers, First OREO Trust and FUBT OREO I, LLC. All significant inter-company accounts and transactions have been eliminated.

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, 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

70

$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. Note 4 discusses the types of securities in which the Corporation invests and Note 5 discusses the Corporation’s lending activities.

Investments

The investment portfolio is classified and accounted for based on the guidance of Accounting Standards Codification (“ASC”) Topic 320, Investments – Debt and Equity Securities. Securities bought and held principally for the purpose of selling them in the near term are classified as trading account securities and reported at fair value with unrealized gains and losses included in net gains/losses in other operating income. Securities purchased with the intent and ability to hold the securities to maturity are classified as held-to-maturity securities and are recorded at amortized cost. All other investment securities are classified as available-for-sale. These securities are held for an indefinite period of time and may be sold in response to changing market and interest rate conditions or for liquidity purposes as part of our overall asset/liability management strategy. Available-for-sale securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of other comprehensive income included in the consolidated statement of comprehensive income, net of applicable income taxes.

The amortized cost of debt securities is adjusted for the amortization of premiums to the first call date, if applicable, or to maturity, and for the accretion of discounts to maturity, or, in the case of mortgage-backed securities, over the estimated life of the security. Such amortization and accretion is included in interest income from investments. Interest and dividends are included in interest income from investments. Gains and losses on the sale of securities are recorded using the specific identification method.

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

71

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

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.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or full repayment by the borrower are reported at their unpaid principal balance outstanding, adjusted for any deferred fees or costs pertaining to origination. 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 $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. The commercial real estate (“CRE”) loan segment is further disaggregated into two classes. Non-owner occupied CRE loans, which include loans secured by non-owner occupied nonfarm nonresidential properties, generally have a greater risk profile than all other CRE loans, which include loans secured by farmland, multifamily structures and owner-occupied commercial structures. The acquisition and development (“A&D”) loan segment is further disaggregated into two classes. One-to-four family residential construction loans are generally made to individuals for the acquisition of and/or construction on a lot or lots on which a residential dwelling is to be built. All other A&D loans are generally made to developers or investors for the purpose of acquiring, developing and constructing residential or commercial structures. These loans have a higher risk profile because the ultimate buyer, once development is completed, is generally not known at the time of the A&D loan. The commercial and industrial (“C&I”) loan segment consists of loans made for the purpose of financing the activities of commercial customers. The residential mortgage loan segment is further disaggregated into two classes: amortizing term loans, which are primarily first liens, and home equity lines of credit, which are generally second liens. The consumer loan segment consists primarily of installment loans (direct and indirect), student loans and overdraft lines of credit connected with customer deposit accounts.

Management uses a 10-point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are considered Substandard. 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

72

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

Interest on loans (other than those on non-accrual status) is recognized based upon the principal amount outstanding.  Loan fees in excess of the costs incurred to originate the loan are recognized as income over the life of the loan utilizing either the interest method or the straight-line method, depending on the type of loan. Generally, fees on loans with a specified maturity date, such as residential mortgages, are recognized using the interest method. Loan fees for lines of credit are recognized using the straight-line method.

A loan is considered to be past due when a payment has not been received for 30 days past its contractual due date. 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.  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. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

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 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.  

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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.  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 rom the security are 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 the ACL is recognized in other comprehensive income.

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.

Loans

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.

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

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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, 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; (ii) the loan’s observable market price; or (iii) the fair value of the collateral less selling costs. The method is selected on a loan-by-loan basis, with management utilizing the fair value of collateral or the discounted cash flow method for the analyses. If the fair value of the collateral less selling costs method is utilized for collateral securing loans in the commercial segments, then an updated external appraisal is ordered on the collateral supporting the loan if the loan balance is greater than $500,000 and the existing appraisal is greater than 18 months old. If the loan balance is less than $500,000, then the estimated fair value of the collateral is determined by adjusting the existing appraisal by the appropriate percentage from an internally prepared appraisal discount grid. This grid considers the age of a third-party appraisal and the geographic region where the collateral is located in order to discount an appraisal. The discount rates in the appraisal discount grid are updated at least annually to reflect the most current knowledge that management has available, including the results of current appraisals. If there is a delay in receiving an updated appraisal or if the appraisal is found to be deficient in our internal appraisal review process and re-ordered, the Bank continues to use a discount factor from the appraisal discount grid based on the collateral location and current appraisal age in order to determine the estimated fair value. 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 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.  

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

75

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

Land is carried at cost. Premises and equipment are carried at cost, less accumulated depreciation. The provision for depreciation for financial reporting has been made by using the straight-line method based on the estimated useful lives of the assets, which range from 10 to 31.5 years for buildings and 3 to 20 years for furniture and equipment.

Goodwill and Other Intangible Assets

Goodwill represents the excess purchase price paid over the fair value of the net assets acquired in a business combination. Goodwill is not amortized but is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. Impairment testing requires that the fair value of each of the Corporation’s reporting units be compared to the carrying amount of the reporting unit’s net assets, including goodwill. If the fair values of the reporting units exceed their book values, no write-down of recorded goodwill is required. If the fair value of a reporting unit is less than book value, an expense may be required to write-down the related goodwill to the proper carrying value. Any impairment would be realized through a reduction of goodwill or the intangible and an offsetting charge to non-interest expense. Annually, the Corporation performs an impairment test of goodwill as of December 31 of each year. During the year, any triggering event that occurs may affect goodwill and could require an impairment assessment. Determining the fair value of a reporting unit requires the Corporation to use a degree of subjectivity. The Corporation's annual impairment test of goodwill and other intangible assets did not identify any impairment.

Accounting guidance provides the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

Other intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset, or liability. Other intangible assets have finite lives and are reviewed for impairment annually. At December 31, 2023, other intangible assets included $0.6 million for the purchase of certain assets from a wealth company and $0.5 million for the purchase of certain assets of a mortgage company.  These assets are amortized over their estimated useful lives either on a straight-line or sum-of-the-years basis over varying periods that initially did not exceed 5 years.

Bank-Owned Life Insurance (“BOLI”)

BOLI policies are recorded at their cash surrender values. Changes in the cash surrender values are recorded as other operating income.

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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 ACL, 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. Changes in the valuation allowance, sales gains and losses, and revenue and expenses from holding and operating properties are all included in net expenses from other real estate owned.

Income Taxes

First United Corporation and its subsidiaries file a consolidated federal income tax return. Income taxes are accounted for using the asset and liability method. Under the asset and liability method, the deferred tax liability or asset is determined based on the difference between the financial statement and tax bases of assets and liabilities (temporary differences) and is measured at the enacted tax rates that will be in effect when these differences reverse. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.  Deferred tax expense is determined by the change in the net liability or asset for deferred taxes adjusted for changes in any deferred tax asset valuation allowance, or reserve.  This reserve was based on the portion of the tax asset for which it is more likely than not that a tax benefit will not be realized by the Corporation.

A tax provision is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur.  The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examinations for tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

State corporate income tax returns are filed annually. Federal and state returns may be selected for examination by the Internal Revenue Service and the states where we file, subject to statutes of limitations. At any given point in time, the Corporation may have several years of filed tax returns that may be selected for examination or review by taxing authorities.

Interest and penalties on income taxes are recognized as a component of income tax expense.

Defined Benefit Plans

The defined benefit pension plan and supplemental executive retirement plan are accounted for in accordance with ASC Topic 715, Compensation – Retirement Benefits. Under the provisions of Topic 715, the defined benefit pension plan and the supplemental executive retirement plan are recognized as liabilities in the Consolidated Statement of Financial Condition, and unrecognized net actuarial losses, prior service costs and a net transition asset are recognized as a separate component of other comprehensive loss, net of tax. Actuarial gains and losses in excess of 10 percent of the greater of plan assets or the pension benefit obligation are amortized over a blend of future service of active employees and life expectancy of inactive participants. Refer to Note 15 for a further discussion of the pension plan and supplemental executive retirement plan obligations.

Statement of Cash Flows

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

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Trust Assets and Income

Assets held in an agency or fiduciary capacity are not the Bank’s assets and, accordingly, are not included in the Consolidated Statements of Financial Condition. Income from the Bank’s trust department represents fees charged to customers and recognized through revenue recognition.  Refer to Note 21 for further discussion.

Business Segments

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

Under the Maryland General Corporation Law, shares of capital stock that are repurchased are cancelled and treated as authorized but unissued shares. 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. In 2023, the Corporation repurchased 82,098 shares of common stock at a weighted average price of $16.79 per share.  The Corporation did not repurchase shares of common stock during 2022.  

Recent Accounting Pronouncements

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.

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

January 1, 2023

(in thousands)

As Reported Under ASU 2016-13

Pre
ASU 2016-13

Impact of ASU 2016-13 Adoption

Assets

Allowance for credit losses on loans

Commercial real estate

$

5,202

$

6,345

$

(1,143)

Acquisition and development

964

979

(15)

Commercial and industrial

4,179

2,845

1,334

Residentail mortgage

5,272

3,160

2,112

Consumer

1,085

877

208

Unallocated

-

430

(430)

Allowance for Credit Losses on Loans

$

16,702

$

14,636

$

2,066

Assets:

Investment securities- available for sale (at fair value)

$

125,889

$

125,889

$

-

Investment securities- held to maturity

245,659

245,659

-

Total loans held for investments, net

1,262,792

1,264,858

(2,066)

Net deferred tax asset

11,381

10,605

776

Liabilities:

Life-of-loss reserve on unfunded loan commitments

$

998

$

133

$

865

Equity:

Retained earnings

$

149,638

$

151,793

$

(2,155)

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, 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

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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. 2022-06: “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.

           

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2. Earnings Per Common Share

Basic earnings per common share is derived by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period and does not include the effect of any potentially dilutive common stock equivalents. Diluted earnings per share is derived by dividing net income available to common shareholders by the weighted-average number of shares outstanding, adjusted for the dilutive effect of outstanding common stock equivalents. There were no anti-dilutive shares at December 31, 2023 or 2022.

The following table sets forth the calculation of basic and diluted earnings per common share for the years ended December 31, 2023 and 2022:

2023

2022

Average

Per Share

Average

Per Share

(in thousands, except for per share amount)

    

Income

    

Shares

    

Amount

    

Income

    

Shares

    

Amount

Basic Earnings Per Share:

Net income

$

15,060

6,686

$

2.25

$

25,048

6,650

$

3.77

Diluted Earnings Per Share:

Restricted stock units

15

11

Net income

$

15,060

6,701

$

2.25

$

25,048

6,661

$

3.76

3. Regulatory Capital Requirements

Banks and holding companies are subject to regulatory capital requirements administered by federal banking agencies.  Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices.  Capital amounts and classifications are also subject to qualitative judgments by regulators.  Failure to meet capital requirements can initiate regulatory action.  The net unrealized gain or loss on available for sale securities is included in computing regulatory capital.  Management believes that, as of December 31, 2023, the Corporation and Bank met all capital adequacy requirements to which they are subject.  

Prompt corrective action regulations provide five classifications:  well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition.  If adequately capitalized, regulatory approval is required to accept brokered deposits.  If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.  As of December 31, 2023, the most recent regulatory notification categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.  There are no conditions or events since that notification that management believes have changed the Bank’s category.

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

Actual

For Capital Adequacy
Purposes

To Be Well Capitalized
Under Prompt Corrective
Action Provisions

(in thousands)

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

December 31, 2023

Total Capital (to risk-weighted assets)

207,767

14.05%

118,292

8.00%

147,865

10.00%

Tier 1 Capital (to risk-weighted assets)

189,370

12.81%

88,719

6.00%

118,292

8.00%

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

189,370

12.81%

66,540

4.50%

96,112

6.50%

Tier 1 Capital (to average assets)

189,370

9.92%

76,233

4.00%

95,291

5.00%

Actual

For Capital Adequacy
Purposes

To Be Well Capitalized
Under Prompt Corrective
Action Provisions

(in thousands)

Amount

Ratio

Amount

Ratio

Amount

Ratio

December 31, 2022

Total Capital (to risk-weighted assets)

196,442

14.37%

109,396

8.00%

136,745

10.00%

Tier 1 Capital (to risk-weighted assets)

181,673

13.29%

82,047

6.00%

109,396

8.00%

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

181,673

13.29%

61,535

4.50%

88,884

6.50%

Tier 1 Capital (to average assets)

181,673

10.01%

72,354

4.00%

90,443

5.00%

Federal and state banking regulations place certain restrictions on the amount of dividends paid and loans or advances made by the Bank to First United Corporation. The total amount of dividends that may be paid at any date is generally limited to the retained earnings of the Bank, and loans or advances are limited to 10% of the Bank’s capital stock and surplus on a secured basis. 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.

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.

82

4. Investment Securities

The following table shows a comparison of amortized cost and fair values of investment securities at December 31, 2023 and 2022:

(in thousands)

    

Amortized
Cost

    

Gross
Unrealized
Gains

    

Gross
Unrealized
Losses

    

Allowance for Credit Losses

    

Estimated Fair Value

December 31, 2023

Available for Sale:

U.S. government agencies

$

7,000

$

$

966

$

$

6,034

Residential mortgage-backed agencies

24,781

4,218

20,563

Commercial mortgage-backed agencies

36,258

7,841

28,417

Collateralized mortgage obligations

19,725

3,369

16,356

Obligations of states and political subdivisions

10,486

15

189

10,312

Corporate Bonds

1,000

222

778

Collateralized debt obligations

18,671

3,962

14,709

Total available for sale

$

117,921

$

15

$

20,767

$

$

97,169

(in thousands)

    

Amortized
Cost

    

Gross
Unrecognized
Gains

    

Gross
Unrecognized
Losses

    

Estimated Fair Value

    

Allowance for Credit Losses

December 31, 2023

Held to Maturity:

U.S. treasuries

$

37,462

$

$

243

$

37,219

$

U.S. government agencies

68,014

10,985

57,029

Residential mortgage-backed agencies

29,588

42

2,913

26,717

Commercial mortgage-backed agencies

21,413

5,361

16,052

Collateralized mortgage obligations

53,261

9,973

43,288

Obligations of states and political subdivisions

4,604

177

671

4,110

45

Total held to maturity

$

214,342

$

219

$

30,146

$

184,415

$

45

83

(in thousands)

    

Amortized
Cost

    

Gross
Unrealized
Gains

    

Gross
Unrealized
Losses

    

Estimated Fair Value

December 31, 2022

Available for Sale:

U.S. government agencies

$

11,044

$

$

1,582

$

9,462

Residential mortgage-backed agencies

    

45,052

7,651

37,401

Commercial mortgage-backed agencies

37,393

6,661

30,732

Collateralized mortgage obligations

25,828

4,784

21,044

Obligations of states and political subdivisions

10,848

4

360

10,492

Corporate Bonds

1,000

113

887

Collateralized debt obligations

18,664

2,793

15,871

Total available for sale

$

149,829

$

4

$

23,944

$

125,889

(in thousands)

    

Amortized
Cost

    

Gross
Unrecognized
Gains

    

Gross
Unrecognized
Losses

    

Estimated Fair Value

December 31, 2022

Held to Maturity:

U.S. treasuries

$

37,204

$

$

1,593

$

35,611

U.S. government agencies

67,734

13,261

54,473

Residential mortgage-backed agencies

28,624

1

3,503

25,122

Commercial mortgage-backed agencies

22,389

4,568

17,821

Collateralized mortgage obligations

57,085

10,001

47,084

Obligations of states and political subdivisions

22,623

946

600

22,969

Total held to maturity

$

235,659

$

947

$

33,526

$

203,080

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)

    

2023

    

2022

Proceeds

$

20,249

$

1,023

Gross realized gains

3

Gross realized losses

4,214

84

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

Less than 12 months

12 months or more

(in thousands)

    

Fair
Value

    

Unrealized
Losses

    

Number of
Investments

    

Fair
Value

    

Unrealized
Losses

    

Number of
Investments

December 31, 2023

Available for Sale:

U.S. government agencies

$

$

$

6,034

$

966

2

Residential mortgage-backed agencies

20,563

4,218

3

Commercial mortgage-backed agencies

28,417

7,841

8

Collateralized mortgage obligations

16,356

3,369

9

Obligations of states and political subdivisions

1,445

20

2

6,668

169

3

Corporate Bonds

778

222

1

Collateralized debt obligations

14,709

3,962

9

Total available for sale

$

1,445

$

20

2

$

93,525

$

20,747

35

Less than 12 months

12 months or more

(in thousands)

    

Fair
Value

    

Unrecognized
Losses

    

Number of
Investments

    

Fair
Value

    

Unrecognized
Losses

    

Number of
Investments

December 31, 2023

Held to Maturity:

U.S. treasuries

$

$

$

37,219

$

243

4

U.S. government agencies

57,029

10,985

9

Residential mortgage-backed agencies

22,613

2,913

35

Commercial mortgage-backed agencies

16,052

5,361

2

Collateralized mortgage obligations

43,288

9,973

8

Obligations of states and political subdivisions

2,205

671

1

Total held to maturity

$

$

$

178,406

$

30,146

59

85

Less than 12 months

12 months or more

(in thousands)

    

Fair
Value

    

Unrealized
Losses

    

Number of
Investments

    

Fair
Value

    

Unrealized
Losses

    

Number of
Investments

December 31, 2022

Available for Sale:

U.S. government agencies

$

4,598

$

402

1

$

4,865

$

1,180

2

Residential mortgage-backed agencies

37,401

7,651

5

Commercial mortgage-backed agencies

4,044

455

3

26,688

6,206

6

Collateralized mortgage obligations

1,600

210

5

19,444

4,574

5

Obligations of states and political subdivisions

8,906

360

7

Corporate Bonds

887

113

1

Collateralized debt obligations

15,871

2,793

9

Total available for sale

$

20,035

$

1,540

17

$

104,269

$

22,404

27

Less than 12 months

12 months or more

(in thousands)

    

Fair
Value

    

Unrecognized
Losses

    

Number of
Investments

    

Fair
Value

    

Unrecognized
Losses

    

Number of
Investments

December 31, 2022

Held to Maturity:

U.S. treasuries

$

$

$

35,611

$

1,593

4

U.S. government agencies

38,883

9,617

7

15,591

3,644

2

Residential mortgage-backed agencies

16,893

1,425

29

8,138

2,078

7

Commercial mortgage-backed agencies

17,821

4,568

3

Collateralized mortgage obligations

47,083

10,001

8

Obligations of states and political subdivisions

2,269

600

1

Total held to maturity

$

122,949

$

26,211

48

$

59,340

$

7,315

13

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.

86

The amortized cost and estimated fair value of securities by contractual maturity at December 31, 2023 are shown in the following table. Actual maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

(in thousands)

    

Amortized
Cost

    

Fair
Value

Contractual Maturity

Available for sale:

Due in one year or less

$

2,670

$

2,640

Due after one year through five years

5,250

4,952

Due after five years through ten years

2,410

2,168

Due after ten years

26,827

22,073

37,157

31,833

Residential mortgage-backed agencies

24,781

20,563

Commercial mortgage-backed agencies

36,258

28,417

Collateralized mortgage obligations

19,725

16,356

Total available for sale

$

117,921

$

97,169

Held to Maturity:

Due in one year or less

$

37,462

$

37,219

Due after one year through five years

12,500

11,706

Due after five years through ten years

40,456

34,495

Due after ten years

19,662

14,938

110,080

98,358

Residential mortgage-backed agencies

29,588

26,717

Commercial mortgage-backed agencies

21,413

16,052

Collateralized mortgage obligations

53,261

43,288

Total held to maturity

$

214,342

$

184,415

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.

5. 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:

(in thousands)

    

Commercial
Real Estate

    

Acquisition
and
Development

    

Commercial
and
Industrial

    

Residential
Mortgage

    

Consumer

    

Total

December 31, 2023

Individually evaluated for impairment

$

826

$

$

$

2,137

$

$

2,963

Collectively evaluated for impairment

492,877

77,060

274,604

497,734

61,429

1,403,704

Total loans

$

493,703

$

77,060

$

274,604

$

499,871

$

61,429

$

1,406,667

December 31, 2022

Individually evaluated for impairment

$

2,262

$

356

$

$

3,880

$

$

6,498

Collectively evaluated for impairment

456,569

70,240

245,396

440,531

60,260

1,272,996

Total loans

$

458,831

$

70,596

$

245,396

$

444,411

$

60,260

$

1,279,494

87

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 loan customers of the Bank. Changes in the dollar amount of loans outstanding to officers, directors and their associates were as follows for the year ended December 31:

(in thousands)

    

2023

Balance at January 1

$

3,302

Loans or advances

481

Repayments

(937)

Balance at December 31

$

2,846

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)

    

Current

    

30-59 Day
Past Due

    

60-89 Days
Past Due

    

90 Days+
Past Due

    

Total
Past Due
and still
accruing

    

Non-
Accrual

    

Total Loans

December 31, 2023

Commercial real estate

Non owner-occupied

$

296,343

$

$

$

$

$

227

$

296,570

All other CRE

196,123

411

411

599

197,133

Acquisition and development

1-4 family residential construction

18,224

18,224

All other A&D

58,723

113

58,836

Commercial and industrial

274,465

120

19

139

274,604

Residential mortgage

Residential mortgage - term

433,878

130

717

384

1,231

2,720

437,829

Residential mortgage – home equity

61,021

520

158

75

753

268

62,042

Consumer

60,576

463

277

84

824

29

61,429

Total

$

1,399,353

$

1,644

$

1,171

$

543

$

3,358

$

3,956

$

1,406,667

December 31, 2022

Commercial real estate

Non owner-occupied

$

269,971

$

$

$

$

$

87

$

270,058

All other CRE

188,715

58

188,773

Acquisition and development

1-4 family residential construction

19,637

19,637

All other A&D

50,813

146

50,959

Commercial and industrial

245,342

54

54

245,396

Residential mortgage

Residential mortgage - term

380,502

31

722

239

992

2,893

384,387

Residential mortgage – home equity

59,223

399

48

43

490

311

60,024

Consumer

59,789

363

83

25

471

60,260

Total

$

1,273,992

$

847

$

853

$

307

$

2,007

$

3,495

$

1,279,494

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

88

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; 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 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.  

89

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)

    

Real Estate

    

Non-Accrual Loans with No Allowance

Commercial real estate

$

826

$

826

Residential mortgage

2,137

2,137

Total Loans

$

2,963

$

2,963

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

90

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

(in thousands)

    

Commercial
Real Estate

    

Acquisition
and
Development

    

Commercial
and
Industrial

    

Residential
Mortgage

    

Consumer

    

Unallocated

    

Total

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

$

6,345

$

979

$

2,845

$

3,160

$

877

$

430

$

14,636

Impact of adopting ASC 326

(1,143)

(15)

1,334

2,112

208

(430)

2,066

Loan charge-offs

(87)

(423)

(55)

(874)

(1,439)

Recoveries collected

7

11

186

73

240

517

Credit loss (credit)/expense

(2)

(35)

(225)

1,484

478

1,700

ACL balance at December 31, 2023

$

5,120

$

940

$

3,717

$

6,774

$

929

$

$

17,480

ALL balance at January 1, 2022

$

6,032

$

2,615

$

2,460

$

3,484

$

934

$

430

$

15,955

Charge-offs

(20)

(134)

(46)

(921)

(1,121)

Recoveries

1

22

93

184

145

445

Loan loss expense/(credit)

312

(1,638)

426

(462)

719

(643)

ALL balance at December 31, 2022

$

6,345

$

979

$

2,845

$

3,160

$

877

$

430

$

14,636

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.

91

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.

92

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

Total

2018 and

Portfolio

(in thousands)

    

2023

    

2022

    

2021

    

2020

    

2019

    

Prior

    

Revolving

    

Loans

December 31, 2023

Commercial real estate:

Non-owner-occupied

Pass

$

23,511

$

65,878

$

30,332

$

54,270

$

40,575

$

65,134

$

1,138

$

280,838

Special Mention

4,331

4,331

Substandard

11,401

11,401

Total non-owner occupied

23,511

65,878

30,332

54,270

40,575

80,866

1,138

296,570

Current period gross charge-offs

87

87

All other CRE

Pass

30,130

27,379

27,042

20,691

22,879

60,054

4,495

192,670

Special Mention

644

644

Substandard

1,847

1,372

600

3,819

Total all other CRE

30,130

27,379

27,042

21,335

24,726

61,426

5,095

197,133

Current period gross charge-offs

Acquisition and development:

1-4 family residential construction

Pass

13,745

3,446

1,033

18,224

Special Mention

Substandard

Total acquisition and development

13,745

3,446

1,033

18,224

Current period gross charge-offs

All other A&D

Pass

12,184

25,099

2,966

3,046

1,301

9,946

4,181

58,723

Special Mention

Substandard

113

113

Total all other A&D

12,184

25,099

2,966

3,046

1,301

10,059

4,181

58,836

Current period gross charge-offs

Commercial and industrial:

Pass

52,004

66,559

24,387

11,753

8,872

10,052

78,992

252,619

Special Mention

558

558

Substandard

9,352

1,854

6,806

98

837

2,480

21,427

Total commercial and industrial

52,562

75,911

26,241

18,559

8,970

10,889

81,472

274,604

Current period gross charge-offs

100

103

35

166

19

423

Residential mortgage:

Residential mortgage - term

Pass

51,625

94,723

88,835

38,228

25,375

130,402

1,577

430,765

Special Mention

Substandard

138

929

17

98

5,825

57

7,064

Total residential mortgage - term

51,625

94,861

89,764

38,245

25,473

136,227

1,634

437,829

Current period gross charge-offs

13

13

Residential mortgage - home equity

Pass

1,127

4,657

864

475

286

489

53,467

61,365

Special Mention

Substandard

38

16

623

677

Total residential mortgage - home equity

1,127

4,657

864

513

286

505

54,090

62,042

Current period gross charge-offs

42

42

Consumer:

Pass

18,299

10,616

6,361

2,206

510

20,365

2,873

61,230

Special Mention

Substandard

14

35

113

23

6

2

6

199

Total consumer

18,313

10,651

6,474

2,229

516

20,367

2,879

61,429

Current period gross charge-offs

236

223

74

8

4

329

874

Total Portfolio Loans

Pass

202,625

298,357

180,787

130,669

99,798

296,442

147,756

1,356,434

Special Mention

558

644

4,331

5,533

Substandard

14

9,525

2,896

6,884

2,049

19,566

3,766

44,700

Total Portfolio Loans

$

203,197

$

307,882

$

183,683

$

138,197

$

101,847

$

320,339

$

151,522

$

1,406,667

Current YTD Period:

Current period gross charge-offs

$

336

$

326

$

109

$

174

$

4

$

490

$

$

1,439

93

Total

2017 and

Portfolio

(in thousands)

    

2022

    

2021

    

2020

    

2019

    

2018

    

Prior

    

Revolving

    

Loans

December 31, 2022

Commercial real estate:

Non-owner-occupied

Pass

$

67,429

$

31,710

$

48,421

$

41,221

$

19,414

$

42,069

$

1,570

$

251,834

Special Mention

6,289

6,289

Substandard

11,935

11,935

Total non-owner occupied

67,429

31,710

48,421

41,221

19,414

60,293

1,570

270,058

Current period gross charge-offs

All other CRE

Pass

24,655

26,947

22,906

27,213

8,873

67,691

4,790

183,075

Special Mention

1,111

1,111

Substandard

3,006

357

1,224

4,587

Total all other CRE

24,655

28,058

22,906

30,219

8,873

68,048

6,014

188,773

Current period gross charge-offs

Acquisition and development:

1-4 family residential construction

Pass

15,629

1,453

151

210

2,194

19,637

Special Mention

Substandard

Total acquisition and development

15,629

1,453

151

210

2,194

19,637

Current period gross charge-offs

20

20

All other A&D

Pass

18,733

4,979

9,755

1,408

558

12,961

2,419

50,813

Special Mention

Substandard

146

146

Total all other A&D

18,733

4,979

9,755

1,408

558

13,107

2,419

50,959

Current period gross charge-offs

Commercial and industrial:

Pass

83,608

30,451

15,982

12,707

5,013

9,528

63,668

220,957

Special Mention

2,555

338

2,134

5,027

Substandard

8,923

7,167

173

634

311

2,204

19,412

Total commercial and industrial

92,531

33,006

23,149

12,880

5,647

10,177

68,006

245,396

Current period gross charge-offs

97

34

3

134

Residential mortgage:

Residential mortgage - term

Pass

64,930

93,665

42,784

27,120

14,132

133,397

2,306

378,334

Special Mention

Substandard

16

237

143

5,634

23

6,053

Total residential mortgage - term

64,930

93,665

42,800

27,357

14,275

139,031

2,329

384,387

Current period gross charge-offs

28

28

Residential mortgage - home equity

Pass

5,739

957

538

328

97

478

51,232

59,369

Special Mention

Substandard

44

21

40

550

655

Total residential mortgage - home equity

5,739

957

582

328

118

518

51,782

60,024

Current period gross charge-offs

12

6

18

Consumer:

Pass

16,748

10,495

3,845

1,596

687

24,096

2,654

60,121

Special Mention

Substandard

92

27

9

7

4

139

Total consumer

16,748

10,587

3,872

1,605

694

24,096

2,658

60,260

Current period gross charge-offs

36

494

18

37

11

40

636

Total Portfolio Loans

Pass

297,471

200,657

144,382

111,593

48,774

290,430

130,833

1,224,140

Special Mention

3,666

6,627

2,134

12,427

Substandard

8,923

92

7,254

3,425

805

18,423

4,005

42,927

Total Portfolio Loans

$

306,394

$

204,415

$

151,636

$

115,018

$

49,579

$

315,480

$

136,972

$

1,279,494

Current YTD Period:

Current period gross charge-offs

$

36

$

591

$

52

$

40

$

23

$

94

$

$

836

94

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:

Total

2018 and

Portfolio

(in thousands)

    

2023

    

2022

    

2021

    

2020

    

2019

    

Prior

    

Revolving

    

Loans

December 31, 2023

Commercial real estate:

Non-owner-occupied

Performing

$

23,511

$

65,878

$

30,332

$

54,270

$

40,575

$

80,639

$

1,138

$

296,343

Nonperforming

227

227

Total non-owner occupied

23,511

65,878

30,332

54,270

40,575

80,866

1,138

296,570

All other CRE

Performing

30,130

27,379

27,042

21,335

24,726

60,827

5,095

196,534

Nonperforming

599

599

Total all other CRE

30,130

27,379

27,042

21,335

24,726

61,426

5,095

197,133

Acquisition and development:

1-4 family residential construction

Performing

13,745

3,446

1,033

18,224

Nonperforming

Total acquisition and development

13,745

3,446

1,033

18,224

All other A&D

Performing

12,184

25,099

2,966

3,046

1,301

9,946

4,181

58,723

Nonperforming

113

113

Total all other A&D

12,184

25,099

2,966

3,046

1,301

10,059

4,181

58,836

Commercial and industrial:

Performing

52,562

75,911

26,241

18,559

8,970

10,889

81,472

274,604

Nonperforming

Total commercial and industrial

52,562

75,911

26,241

18,559

8,970

10,889

81,472

274,604

Residential mortgage:

Residential mortgage - term

Performing

51,625

94,722

89,629

38,245

25,375

133,526

1,603

434,725

Nonperforming

139

135

98

2,701

31

3,104

Total residential mortgage - term

51,625

94,861

89,764

38,245

25,473

136,227

1,634

437,829

Residential mortgage - home equity

Performing

1,127

4,657

864

475

286

488

53,802

61,699

Nonperforming

38

17

288

343

Total residential mortgage - home equity

1,127

4,657

864

513

286

505

54,090

62,042

Consumer:

Performing

18,304

10,616

6,405

2,229

516

20,367

2,879

61,316

Nonperforming

9

35

69

113

Total consumer

18,313

10,651

6,474

2,229

516

20,367

2,879

61,429

Total Portfolio Loans

Performing

203,188

307,708

183,479

138,159

101,749

316,682

151,203

1,402,168

Nonperforming

9

174

204

38

98

3,657

319

4,499

Total Portfolio Loans

$

203,197

$

307,882

$

183,683

$

138,197

$

101,847

$

320,339

$

151,522

$

1,406,667

95

Total

2017 and

Portfolio

(in thousands)

    

2022

    

2021

    

2020

    

2019

    

2018

    

Prior

    

Revolving

    

Loans

December 31, 2022

Commercial real estate:

Non-owner-occupied

Performing

$

67,429

$

31,710

$

48,421

$

41,221

$

19,414

$

60,206

$

1,570

$

269,971

Nonperforming

87

87

Total non-owner occupied

67,429

31,710

48,421

41,221

19,414

60,293

1,570

270,058

All other CRE

Performing

24,655

28,058

22,906

30,219

8,873

67,990

6,014

188,715

Nonperforming

58

58

Total all other CRE

24,655

28,058

22,906

30,219

8,873

68,048

6,014

188,773

Acquisition and development:

1-4 family residential construction

Performing

15,629

1,453

151

210

2,194

19,637

Nonperforming

Total acquisition and development

15,629

1,453

151

210

2,194

19,637

All other A&D

Performing

18,733

4,979

9,755

1,408

558

12,962

2,419

50,814

Nonperforming

145

145

Total all other A&D

18,733

4,979

9,755

1,408

558

13,107

2,419

50,959

Commercial and industrial:

Performing

92,531

33,006

23,149

12,880

5,647

10,177

68,006

245,396

Nonperforming

Total commercial and industrial

92,531

33,006

23,149

12,880

5,647

10,177

68,006

245,396

Residential mortgage:

Residential mortgage - term

Performing

64,930

93,665

42,800

27,120

14,198

136,228

2,313

381,254

Nonperforming

237

77

2,803

16

3,133

Total residential mortgage - term

64,930

93,665

42,800

27,357

14,275

139,031

2,329

384,387

Residential mortgage - home equity

Performing

5,739

957

538

328

115

478

51,515

59,670

Nonperforming

44

3

40

267

354

Total residential mortgage - home equity

5,739

957

582

328

118

518

51,782

60,024

Consumer:

Performing

16,748

10,581

3,872

1,605

694

24,077

2,658

60,235

Nonperforming

6

19

25

Total consumer

16,748

10,587

3,872

1,605

694

24,096

2,658

60,260

Total Portfolio Loans

Performing

306,394

204,409

151,592

114,781

49,499

312,328

136,689

1,275,692

Nonperforming

6

44

237

80

3,152

283

3,802

Total Portfolio Loans

$

306,394

$

204,415

$

151,636

$

115,018

$

49,579

$

315,480

$

136,972

$

1,279,494

96

6. Other Real Estate Owned

The following table presents the components of OREO, net of related valuation allowance, as of December 31, 2023 and 2022:

(in thousands)

    

2023

    

2022

Acquisition and development

$

4,281

$

4,670

Residential mortgage

212

63

Total OREO

$

4,493

$

4,733

The following table presents the activity in the OREO valuation allowance for the years ended December 31, 2023 and 2022:

(in thousands)

    

2023

    

2022

Balance January 1

$

453

$

453

Fair value write-downs, net

23

Sales of OREO

(163)

Balance December 31

$

313

$

453

The following table presents the components of OREO expenses, net, for the years ended December 31, 2023 and 2022:

(in thousands)

    

2023

    

2022

Gains on real estate, net

$

(599)

$

Fair value write-down

23

Expenses, net

491

595

Rental and other income

(4)

(5)

Total OREO (income)/expense, net

$

(89)

$

590

7. Premises and Equipment

The following table presents the components of premises and equipment at December 31, 2023 and 2022:

(in thousands)

    

2023

    

2022

Land

$

7,745

$

7,753

Land improvements

1,384

1,548

Premises

34,922

35,972

Furniture and equipment

18,873

20,117

62,924

65,390

Less accumulated depreciation

(31,465)

(30,442)

Total

$

31,459

$

34,948

The Corporation recorded depreciation expense of $3.8 million and $3.1 million for the years ended December 31, 2023 and 2022, respectively.  

8. Leases

Substantially all of the leases in which the Corporation is the lessee are comprised of real estate property for branches, ATM locations, and office equipment with terms extending through 2030. All of the Corporation’s leases are classified as operating leases. The present value of lease payments is reported as a lease liability and right of use asset on the Corporation’s Consolidated Statement of Financial Condition.

97

The following table represents the Consolidated Statements of Financial Condition classification of the Corporation’s right-of-use assets and lease liabilities. The Corporation elected not to include short-term leases (i.e., leases with remaining terms of 12 months or less), or equipment leases that were deemed immaterial on the Consolidated Statement of Financial Condition.

(in thousands)

    

December 31, 2023

    

December 31, 2022

Lease Right-of Use Assets

Operating lease right-of-use assets

$

1,367

$

1,898

Lease Liabilities

Operating lease liabilities

$

1,556

$

2,373

In calculating the present value of the lease payments, the Corporation has utilized its incremental borrowing rate based on electing the original lease term to account for each lease component.

The following table presents the weighted-average lease term and discount rate for operating leases at December 31, 2023:

December 31, 2023

December 31, 2022

Weighted-average remaining lease term

Operating leases

5.33 years

6.17 years

Weighted-average discount rate

Operating leases

5.16%

5.00%

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

(in thousands)

    

Amount

2024

$

368

2025

356

2026

283

2027

285

2028

240

Thereafter

270

Total future minimum lease payments

1,802

Amounts representing interest

(246)

Present value of net future minimum lease payments

$

1,556

98

9. Deposits

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

(in thousands)

    

December 31, 2023

    

December 31, 2022

Balance

Percent

Balance

Percent

Non-Interest-bearing deposits:

$

427,670

    

28%

$

506,613

32%

Interest-bearing deposits:

Demand

350,860

22%

327,685

21%

Money market

385,649

25%

365,192

23%

Savings deposits

191,265

12%

250,720

16%

Time deposits- retail

165,533

11%

120,523

8%

Time deposits- brokered

30,000

2%

0%

Total Deposits

$

1,550,977

100%

$

1,570,733

100%

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.

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

(in thousands)

Time deposits- brokered

Time deposits- retail

2024

    

$

30,000

$

146,683

2025

13,990

2026

4,154

2027

491

2028

170

Thereafter

45

Total

$

30,000

$

165,533

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. At December 31, 2023, executive officers and directors had approximately $17.2 million in deposits with the Bank compared to $14.0 million at December 31, 2022.

10. Borrowed Funds

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

(in thousands)

    

2023

    

2022

Securities sold under agreements to repurchase:

Outstanding at end of year

$

45,418

$

64,565

Weighted average interest rate at year end

0.27%

0.12%

Maximum amount outstanding as of any month end

$

59,777

$

75,912

Average amount outstanding

$

50,498

$

63,182

Approximate weighted average rate during the year

0.24%

0.12%

99

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

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

(in thousands)

    

2023

    

2022

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

$

80,000

$

Junior subordinated debt

$

30,929

$

30,929

Total long-term debt

$

110,929

$

30,929

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 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. First United Corporation has the right, without triggering a default, to defer interest on all of the TPS Debentures for up to 20 quarterly periods, in which case distributions on the preferred securities will also be deferred. Should this occur, the Corporation may not pay dividends or distributions on, or repurchase, redeem or acquire any shares of its capital stock.

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. The available line of credit equaled $571.4  million at December 31, 2023 and $544.1 million at December 31, 2022. This line of credit, which can be used for both short and long-term funding, can only be utilized to the extent of available collateral. The line is secured by certain qualified mortgage, commercial and home equity loans as follows (in thousands):

1-4 family mortgage loans

    

$

144,572

Commercial loans

52,753

Multi-family loans

11,453

Home equity loans

19,160

Total available borrowing capacity

227,938

Less: borrowings and letters of credit outstanding

(82,500)

$

145,438

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.

100

11. Goodwill and Other Intangible Assets

The gross carrying amounts and accumulated amortization of intangible assets and goodwill are presented at December 31, 2023 and 2022 in the following table:

December 31, 2023

December 31, 2022

(in thousands)

Gross
Carrying
Amount

Accumulated Amortization

Net
Carrying
Amount

Weighted Average Remaining Life

Gross
Carrying
Amount

Accumulated Amortization

Net
Carrying
Amount

Weighted Average Remaining Life

Amortizing intangible assets:

Intangible assets associated with purchase of wealth portfolio

$

1,048

$

419

$

629

3.00 years

$

1,048

$

209

$

839

4.00 years

Intangible assets associated with acquisition of mortgage company

600

130

470

3.92 years

600

10

590

4.92 years

Total Other intangibles

$

1,648

$

549

$

1,099

3.38 years

$

1,648

$

219

$

1,429

4.38 years

Goodwill

$

11,004

$

11,004

$

11,004

$

11,004

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

(in thousands)

    

Amount

2024

$

330

2025

330

2026

330

2027

109

Total amortizing intangible assets

$

1,099

101

12. Accumulated Other Comprehensive Loss (“AOCL”)

The following table presents the changes in each component of accumulated other comprehensive loss for the years ended December 31, 2023 and 2022:

(in thousands)

    

Investment
securities-
with credit related impairment
AFS

    

Investment
securities-
all other
AFS

    

Investment
securities-
HTM

    

Cash Flow
Hedge

    

Pension
Plan

    

SERP

    

Total

Accumulated OCL, net:

Balance - January 1, 2022

$

(949)

$

(5,749)

$

(134)

$

(319)

$

(18,108)

$

(2,055)

$

(27,314)

Other comprehensive income/(loss) before reclassifications

(614)

(10,629)

(6,120)

1,116

684

2,430

(13,133)

Amounts reclassified from accumulated
  other comprehensive loss

(148)

(2)

551

821

199

1,421

Balance - December 31, 2022

$

(1,711)

$

(16,380)

$

(5,703)

$

797

$

(16,603)

$

574

$

(39,026)

Other comprehensive (loss)/income before reclassifications

(622)

61

(228)

1,605

(1,802)

(986)

Amounts reclassified from accumulated
  other comprehensive loss

(149)

3,102

502

735

(5)

4,185

Balance - December 31, 2023

$

(2,482)

$

(13,217)

$

(5,201)

$

569

$

(14,263)

$

(1,233)

$

(35,827)

102

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

Components of Other Comprehensive Income
(in thousands)

    

Before Tax
Amount

    

Tax (Expense)
Benefit

    

Net

For the year ended December 31, 2023

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

Unrealized holding losses

$

(845)

$

223

$

(622)

Less: accretable yield recognized in income

202

(53)

149

Net unrealized losses on investments with credit-related impairment

(1,047)

276

(771)

Available for sale securities – all other:

Unrealized holding gains

83

(22)

61

Less: losses recognized in income

(4,214)

1,112

(3,102)

Net unrealized gains on all other AFS securities

4,297

(1,134)

3,163

Held to maturity securities:

Unrealized holding losses on securities transferred to held to maturity

Less: amortization recognized in income

(682)

180

(502)

Net unrealized gains on HTM securities

682

(180)

502

Cash flow hedges:

Unrealized holding losses

(310)

82

(228)

Net unrealized losses on cash flow hedges

(310)

82

(228)

Pension Plan:

Unrealized net actuarial gain

2,180

(575)

1,605

Less: amortization of unrecognized loss

(998)

263

(735)

Net pension plan liability adjustment

3,178

(838)

2,340

SERP:

Unrealized net actuarial loss

(2,448)

646

(1,802)

Less: amortization of unrecognized loss

7

(2)

5

Net SERP liability adjustment

(2,455)

648

(1,807)

Other comprehensive income

$

4,345

$

(1,146)

$

3,199

103

Components of Other Comprehensive Loss
(in thousands)

    

Before Tax
Amount

    

Tax (Expense)
Benefit

    

Net

For the year ended December 31, 2022

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

Unrealized holding losses

$

(835)

$

221

$

(614)

Less: accretable yield recognized in income

202

(54)

148

Net unrealized losses on investments with credit related impairment

(1,037)

275

(762)

Available for sale securities – all other:

Unrealized holding losses

(22,792)

6,043

(16,749)

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

8,328

(2,208)

6,120

Less: gains recognized in income

3

(1)

2

Net unrealized losses on all other AFS securities

(14,467)

3,836

(10,631)

Held to maturity securities:

Unrealized holding losses on securities transferred to held to maturity

(8,328)

2,208

(6,120)

Less: gains recognized in income

91

(24)

67

Less: amortization recognized in income

(841)

223

(618)

Net unrealized losses on HTM securities

(7,578)

2,009

(5,569)

Cash flow hedges:

Unrealized holding gains

1,521

(405)

1,116

Net unrealized gains on cash flow hedges

1,521

(405)

1,116

Pension Plan:

Unrealized net actuarial gain

931

(247)

684

Less: amortization of unrecognized loss

(1,117)

296

(821)

Net pension plan liability adjustment

2,048

(543)

1,505

SERP:

Unrealized net actuarial gain

3,307

(877)

2,430

Less: amortization of unrecognized loss

(271)

72

(199)

Net SERP liability adjustment

3,578

(949)

2,629

Other comprehensive loss

$

(15,935)

$

4,223

$

(11,712)

104

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 Income Components

Amount Reclassified from Accumulated Other Comprehensive Loss

Affected Line Item in the Statement

(in thousands)

    

2023

    

Where Net Income is Presented

Net unrealized losses on investment securities with credit related impairment:

Accretable Yield

$

202

Interest income on taxable investment securities

Taxes

(53)

Provision for income tax expense

$

149

Net of tax

Net unrealized losses on available for sale
  investment securities - all other:

Loss on sales

$

(4,214)

Net gains

Taxes

1,112

Provision for income tax expense

$

(3,102)

Net of tax

Net unrealized gains on held to maturity
  investment securities:

Amortization

$

(682)

Interest income on taxable investment securities

Taxes

180

Provision for income tax expense

$

(502)

Net of tax

Net pension plan liability adjustment:

Amortization of unrecognized loss

$

(998)

Other expense

Taxes

263

Provision for income tax expense

$

(735)

Net of tax

Net SERP liability adjustment:

Amortization of unrecognized loss

$

7

Other expense

Taxes

(2)

Provision for income tax expense

$

5

Net of tax

Total reclassifications for the period

$

(4,185)

Net of tax

105

Details of Accumulated Other Comprehensive Loss Components

Amount Reclassified from Accumulated Other Comprehensive Loss

Affected Line Item in the Statement

(in thousands)

    

2022

    

Where Net Income is Presented

Net unrealized losses on investment securities with credit related impairment:

Accretable Yield

$

202

Interest income on taxable investment securities

Taxes

(54)

Provision for income tax expense

$

148

Net of tax

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

Gains on sales

$

3

Net gains

Taxes

(1)

Provision for income tax expense

$

2

Net of tax

Net unrealized gains on held to maturity
  investment securities:

Amortization

$

(841)

Interest income on taxable investment securities

Gains recognized

91

Provision for income tax expense

Taxes

199

Net of tax

$

(551)

Net pension plan liability adjustment:

Other expense

Amortization of unrecognized loss

$

(1,117)

Other expense

Taxes

296

Net of tax

$

(821)

Net SERP liability adjustment:

Other expense

Amortization of unrecognized loss

$

(271)

Other expense

Taxes

72

Net of tax

$

(199)

Net of tax

Total reclassifications for the period

$

(1,421)

13. Income Taxes

The provision for income taxes consists of the following for the years ended December 31, 2023 and 2022:

(in thousands)

    

2023

    

2022

Current Tax expense:

Federal

$

4,002

$

5,504

State

1,303

2,034

$

5,305

$

7,538

Deferred tax (benefit)/expense:

Federal

$

(774)

$

339

State

(115)

256

$

(889)

$

595

Income tax expense for the year

$

4,416

$

8,133

106

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:

    

2023

    

2022

Federal statutory rate

21.0%

21.0%

Tax-exempt income on securities and loans

(0.8)

(0.8)

Tax-exempt BOLI income

(1.3)

(0.8)

State income tax, net of federal tax benefit

4.7

5.6

Tax credits

(0.8)

(0.4)

Other

(0.1)

(0.1)

22.7%

24.5%

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Corporation’s temporary differences as of December 31, 2023 and 2022 are as follows:

(in thousands)

    

2023

    

2022

Deferred tax assets:

Allowance for credit losses

$

4,855

$

3,880

Deferred fees

96

54

Deferred compensation

1,285

1,163

Federal and state tax loss carry forwards

2,776

2,873

Unrealized loss on investment securities

7,356

8,419

SERP

2,622

1,948

Lease liability

362

471

Low income housing

439

511

Other than temporary impairment on investment securities

464

520

Other real estate owned

83

120

Other

392

133

Total deferred tax assets

20,730

20,092

Valuation allowance

(2,776)

(2,873)

Total deferred tax assets less valuation allowance

17,954

17,219

Deferred tax liabilities:

Goodwill and other intangibles

(2,762)

(2,736)

Lease right-of-use asset

(282)

(418)

Pension

(2,958)

(2,121)

Depreciation

(403)

(921)

Derivative contract

(200)

(283)

Other

(216)

(135)

Total deferred tax liabilities

(6,821)

(6,614)

Net deferred tax assets

$

11,133

$

10,605

In assessing the ability to realize deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income of the appropriate character (for example, ordinary income or capital gain) within the carry-back or carry-forward period available under the tax law during the periods in which temporary differences are deductible. The Corporation has considered future market growth, forecasted earnings, future taxable income, and feasible and permissible tax planning strategies in determining whether it will be able to realize the deferred tax asset. 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

107

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. There has been and continues to be a full valuation allowance on these NOLs based on management’s belief that it is more likely than not that these NOLs will not be realized prior to the expiration of their carry-forward periods because the Corporation will not generate sufficient taxable income in the future to fully utilize the NOLs. The valuation allowance was $2.8 million at December 31, 2023 and $2.9 million at December 31, 2022.

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 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. There were no amounts of accrued tax-related interest and penalties at December 31, 2023 and 2022. Furthermore, there were no net interest and penalties related to unrecognized tax benefits for the periods presented.

14. 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.

The Corporation complies with the provisions of ASC Topic 718, Compensation- Stock Compensation, in measuring and disclosing stock compensation cost.  The measurement objective in ASC Paragraph 718-10-30-6 requires public companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award.  The cost is recognized in expense over the period in which an employee is required to provide service in exchange for the award (the vesting period).

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 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.

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 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.

108

The RSUs granted to each of the foregoing officers consist of (i) a performance vesting award for a three year performance period and (ii) a time-vesting award that will vest ratably over a three year period. Target performance levels were set based on the annual budget which supports the Corporation’s long-term objective of achieving high performance as compared to peers. Threshold performance is the minimum level of acceptable performance as defined by the Committee and maximum performance represented a level potentially achievable under ideal circumstances. Achievement of the threshold performance level would result in each executive participant earning a payout at 50% of his or her respective target award opportunity. 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, 2022, the RSUs performance goals are based on earnings per share for the year ending December 31, 2022 and growth in tangible book value per share during the performance period. For the performance period ending December 31, 2023, the RSUs performance goals are based on earnings per share for the year ending December 31, 2023 and growth in tangible book value per share during the performance period.  For the performance period ending December 31, 2024, the RSUs performance goals are based on earnings per share for the year ending December 31, 2024 and growth in tangible book value per share during the performance period.  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.

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" levels.

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.  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 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

109

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.

15. Employee Benefit Plans

First United Corporation sponsors a noncontributory defined benefit Pension Plan (the “Pension Plan”) covering the employees who were hired prior to the freeze and others who were grandfathered into the Pension Plan. The benefits are based on years of service and the employees’ compensation during the last five years of employment.

Effective April 30, 2010, the Pension Plan was amended, resulting in a “soft freeze”, the effect of which prohibits new entrants into the Pension Plan and ceases crediting of additional years of service, after that date. Effective January 1, 2013, the Pension Plan was amended to unfreeze it for those employees for whom the sum of (i) their ages, at their closest birthday, plus (ii) years of service for vesting purposes equals 80 or greater. The “soft freeze” continues to apply to all other plan participants.  Pension benefits for these participants will be managed through discretionary contributions to the First United Corporation 401(k) Profit Sharing Plan (the “401(k) Plan”).

During 2001, the Bank established an unfunded Defined Benefit Supplemental Executive Retirement Plan (“Defined Benefit SERP”). The Defined Benefit SERP is available only to a select group of management or highly compensated employees to provide supplemental retirement benefits in excess of limits imposed on qualified plans by federal tax law.

The benefit obligation activity for both the Pension Plan and Defined Benefit SERP was calculated using an actuarial measurement date of January 1. Plan assets and the benefit obligations were calculated using an actuarial measurement date of December 31.

On January 9, 2015, First United Corporation and members of management who do not participate in the Defined Benefit SERP entered into participation agreements under the Deferred Compensation Plan, each styled as a Defined Contribution SERP Agreement (the “Contribution Agreement”). Pursuant to each Contribution Agreement, First United Corporation agreed, for each Plan Year (as defined in the Deferred Compensation Plan) in which it determines that it has been Profitable (as defined in the Contribution Agreement), to make a discretionary contribution to the participant’s Employer Account in an amount equal to 15% of the participant’s base salary level for such Plan Year, with the first Plan Year being the year ending December 31, 2015. The Contribution Agreement provides that the participant will become 100% vested in the amount maintained in his or her Employer Account upon the earliest to occur of the following events: (i) Normal Retirement (as defined in the Contribution Agreement); (ii)  Separation from Service (as defined in the Contribution Agreement) following a Change of Control (as defined in the Deferred Compensation Plan) and subsequent Triggering Event (as defined in the Contribution Agreement); (iii) Separation from Service due to a Disability (as defined in the Contribution Agreement); (iv) with respect to a particular award of Employer Contribution Credits, the participant’s completion of two consecutive Years of Service (as defined in the Contribution Agreement) immediately following the Plan Year for which such award was made; or (v) death. Notwithstanding the foregoing, however, a participant will lose entitlement to the amount maintained in his or her Employer Account in the event employment is terminated for Cause (as defined in the Contribution Agreement). In addition, the Contribution Agreement conditions entitlement to the amounts held in the Employer Account on the participant (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

110

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 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.

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:

Pension

Defined Benefit SERP

(in thousands)

    

2023

    

2022

    

2023

    

2022

Change in Benefit Obligation

Obligation at the beginning of the year

$

40,184

$

54,931

$

7,194

$

10,395

Service cost

25

57

102

165

Interest cost

2,050

1,535

367

286

Change in discount rate and mortality assumptions

314

(11,930)

Actuarial losses/(gains)

144

(736)

2,450

(3,316)

Benefits paid

(2,103)

(3,673)

(336)

(336)

Obligation at the end of the year

40,614

40,184

9,777

7,194

Change in Plan Assets

Fair value at the beginning of the year

48,185

59,696

Actual return on plan assets

5,740

(7,838)

Employer contribution

336

336

Benefits paid

(2,103)

(3,673)

(336)

(336)

Fair value at the end of the year

51,822

48,185

Funded/(Unfunded) Status

$

11,208

$

8,001

$

(9,777)

$

(7,194)

Pension

Defined Benefit SERP

(in thousands)

    

2023

    

2022

    

2023

    

2022

Components of Net Pension Cost

Service cost

$

25

$

57

$

102

$

165

Interest cost

2,050

1,535

367

286

Expected return on assets

(3,062)

(3,810)

Amortization of recognized loss

998

1,117

(7)

271

Net pension (income)/expense in employee benefits

$

11

$

(1,101)

$

462

$

722

Weighted Average Assumptions used to determine benefit obligations:

Discount rate for benefit obligations

5.02%

5.24%

4.99%

5.23%

Discount rate for net pension cost

5.24%

2.85%

Expected long-term return on assets

6.50%

6.50%

Rate of compensation increase

3.00%

3.00%

3.00%

3.00%

The accumulated benefit obligation for the Pension Plan was $38.3 million and $37.8 million at December 31, 2023 and 2022, respectively. The accumulated benefit obligation for the Defined Benefit SERP was $8.3 million and $6.9 million at December 31, 2023 and 2022, respectively.

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The investment assets of a defined benefit plan are managed with the goal of providing for retiree distributions while also supporting long-term plan obligations with a moderate level of portfolio risk. 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.

Asset Class

    

Normalized
Target

    

Range

Cash

2%

0% - 20%

Fixed Income

43%

30% - 50%

Equities

55%

45% - 65%

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. Such factors include, but are not limited to, the following:

Anticipated domestic and international economic growth as a whole;
The position of the economy within its longer term economic cycle; and
The expected impact of economic vitality, cycle positioning, financial market risks, industry/demographic trends and political forces on the various market sectors and investment styles.

With respect to individual company securities, additional company specific matters are considered, which could include management track record and guidance, future earnings expectations, current relative price expectations and the impact of identified risks on expected performance, among others. A core equity position of large cap stocks will be maintained, with more aggressive or volatile sectors meaningfully represented in the asset mix in pursuit of higher returns.

Strategic and specific investment decisions are guided by an in-house investment committee as well as a number of outside institutional resources that provide economic, industry and company data and analytics. It is management’s intent to give the Pension Plan’s investment managers flexibility with respect to investment decisions and their timing within the overall guidelines. However, certain investments require specific review and approval by management. Management is also informed of anticipated changes in nonproprietary investment managers, significant modifications of any previously approved investment, or the anticipated use of derivatives to execute investment strategies.

Portfolio risk is managed in large part by a focus on diversification across multiple levels as well as an emphasis on financial strength. For example, current investment policies restrict initial investments in debt securities to be rated investment grade at the time of purchase. Also, with the exception of the highest rated securities (e.g., U.S. Treasury or government-backed agency securities), no more than 10% of the portfolio may be invested in a single entity’s securities. As a result of the previously noted approaches to controlling portfolio risk, any concentrations of risk would be associated with general systemic risks faced by industry sectors or the portfolio as a whole.

Assets in the Pension Plan are valued by the Corporation’s accounting system provider who utilizes a third-party pricing service. Valuation data is based on actual market data for stocks and mutual funds (Level 1) and matrix pricing for bonds (Level 2). Cash and cash equivalents are also considered Level 1 within the fair value hierarchy.

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At December 31, 2023 and 2022, the value of Pension Plan investments was as follows:

December 31, 2023

Fair Value Hierarchy

(in thousands)

    

Assets at
Fair Value

    

% of
Portfolio

    

Level 1

    

Level 2

Cash and cash equivalents

$

1,217

2.3%

$

1,217

$

Fixed income securities:

U.S. Government and Agencies

5,554

10.7%

5,554

Taxable municipal bonds and notes

2,503

4.8%

2,503

Corporate bonds and notes

10,258

19.8%

10,258

Preferred stock

276

0.5%

276

Fixed income mutual funds

3,302

6.4%

3,302

Total fixed income

21,893

42.2%

3,302

18,591

Equities:

Large Cap

19,780

38.2%

19,780

Mid Cap

1,500

2.9%

1,500

Small Cap

4,564

8.8%

4,564

International

2,868

5.6%

2,868

Total equities

28,712

55.5%

28,712

Total market value

$

51,822

100.0%

$

33,231

$

18,591

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

December 31, 2022

Fair Value Hierarchy

(in thousands)

    

Assets at
Fair Value

    

% of
Portfolio

    

Level 1

    

Level 2

Cash and cash equivalents

$

985

2.0%

$

985

$

Fixed income securities:

U.S. Government and Agencies

2,770

5.8%

2,770

Taxable municipal bonds and notes

4,166

8.6%

4,166

Corporate bonds and notes

10,575

21.9%

10,575

Preferred stock

474

1.0%

474

Fixed income mutual funds

5,454

11.4%

5,454

Total fixed income

23,439

48.7%

5,454

17,985

Equities:

Large Cap

15,743

32.7%

15,743

Mid Cap

1,225

2.5%

1,225

Small Cap

3,815

7.9%

3,815

International

2,978

6.2%

2,978

Total equities

23,761

49.3%

23,761

Total market value

$

48,185

100.0%

$

30,200

$

17,985

As of December 31, 2023, the 25-year average return on pension portfolio assets was 6.59%, exceeding the expected long-term return of 6.50% utilized for 2023.  Considering that future equity returns are partially a function of current starting valuations and the general level of interest rates, return expectations by market analysts have risen due to the large equity pullback and interest rates rising to multiyear highs.  With equity valuations near historical averages and the monetary policy normalization process likely being near conclusion, it is considered appropriate to maintain the expected long-term rate of return of 6.50% for 2024.

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

(in thousands)

    

Pension
Plan

    

Defined
Benefit
SERP

2024

$

2,217

$

336

2025

2,267

336

2026

2,353

602

2027

2,401

655

2028

2,524

643

2029-2033

13,450

3,628

First United Corporation made no contributions to the Pension Plan in 2023 or 2022. First United Corporation will continue to evaluate future annual contributions to the Pension Plan based upon its funded status and an evaluation of the future benefits to be provided thereunder. The Bank expects to fund the annual projected benefit payments for the Defined Benefit SERP from operations.

The estimated costs that will be amortized from accumulated other comprehensive loss into net periodic pension cost during the next fiscal year are as follows:

(in thousands)

    

Pension

    

Defined
Benefit
SERP

Net actuarial loss

$

811

$

157

$

811

$

157

16. 401(k) Profit Sharing Plan

In furtherance of First United Corporation’s belief that every employee should have the ability to accrue retirement benefits, it adopted the 401(k) Profit Sharing Plan, which is available to all employees, including executive officers. Employees are automatically entered in the plan on the first of the month following completion of 30 days of service to First United Corporation and/or its subsidiaries. Employees have the opportunity to opt out of participation or change their deferral amounts under the plan at any time. In addition to contributions by participants, the plan contemplates employer matching and the potential of discretionary contributions to the accounts of participants. First United Corporation believes that matching contributions encourage employees to participate and thereby plan for their post-retirement financial future. Beginning with the 2008 plan year, First United Corporation enhanced the match formula to 100% on the first 1% of salary reduction and 50% on the next 5% of salary reduction. This match is accrued for all participants, including executive officers, immediately upon entering the plan on the first day of the month following the completion of 30 days of employment.  Additionally, First United Corporation accrued a non-elective employer contribution during 2023 for all employees other than employees who participate in the Defined Benefit SERP and Defined Contribution SERP and those employees meeting the age plus service requirement in the Pension Plan equal to 4.0% of each employee’s salary, and 0.5% of each employee’s salary hired before January 1, 2010, which will be paid in the first quarter of 2024. The employee must be a plan participant and be actively employed on the last day of the plan year to share in the discretionary profit sharing contribution, except in the case of death, disability, or retirement of the participant.  Expense charged to operations for the 401(k) Plan was $1.4 million in 2023 and $1.3 million in 2022.

17. Federal Reserve Requirements

The Bank is required to maintain cash reserves with the Federal Reserve Bank of Richmond based on specified deposit liabilities. Effective March 26, 2020, the FRB reduced reserve requirement ratios to 0%. This action eliminated reserve requirements for all depository institutions.

114

18. Contractual Obligations, Commitments and Contingent Liabilities

Contractual Obligations

The Corporation enters into contractual obligations in the normal course of business. Among these obligations are FHLB advances and junior subordinated debentures, operating lease agreements for banking and subsidiaries’ offices, and for data processing and telecommunications equipment.  At December 31, 2023, no large capital obligations are anticipated.

Commitments

Loan commitments are made to accommodate the financial needs of our customers. Loan commitments have credit risk essentially the same as that involved in extending loans to customers and are subject to normal credit policies. Commitments to extend credit generally have fixed expiration dates, may require payment of a fee, and contain cancellation clauses in the event of an adverse change in the customer’s credit quality.

Commitments to extend credit in the form of consumer, commercial and business as of December 31, 2023 and December 31, 2022 are as follows:

(in thousands)

    

2023

    

2022

Residential mortgage - home equity

$

72,080

$

70,845

Residential mortgage - construction

17,684

25,499

Commercial

160,196

153,235

Consumer - personal credit lines

4,186

4,323

Standby letters of credit

11,037

14,325

Total

$

265,183

$

268,227

We do not issue any guarantees that would require liability recognition or disclosure other than the standby letters of credit issued by the Bank. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party to support contractual obligations and to ensure job performance. Generally, the Bank’s letters of credit are issued with expiration dates within one year. Historically, most letters of credit expire unfunded, and therefore, cash requirements are substantially less than the total commitment. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank generally holds collateral and/or personal guarantees supporting letters of credit.

19. Fair Value of Financial Instruments

The Corporation complies with the guidance of ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements required under other accounting pronouncements. The Corporation also follows the guidance on matters relating to all financial instruments found in ASC Subtopic 825-10, Financial Instruments – Overall.

Fair value is defined as the price to sell an asset or to transfer a liability in an orderly transaction between willing market participants as of the measurement date. Fair value is best determined by values quoted through active trading markets. Active trading markets are characterized by numerous transactions of similar financial instruments between willing buyers and willing sellers. Because no active trading market exists for various types of financial instruments, many of the fair values disclosed were derived using present value discounted cash flows or other valuation techniques described below. As a result, the Corporation’s ability to actually realize these derived values cannot be assumed.

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

115

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:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets and liabilities. This level is the most reliable source of valuation.

Level 2: Quoted prices that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability. Level 2 inputs include inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates). It also includes inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs). Several sources are utilized for valuing these assets, including a contracted valuation service, Standard & Poor’s (“S&P”) evaluations and pricing services, and other valuation matrices.

Level 3: Prices or valuation techniques that require inputs that are both significant to the valuation assumptions and not readily observable in the market (i.e. supported with little or no market activity). Level 3 instruments are valued based on the best available data, some of which is internally developed, and consider risk premiums that a market participant would require.

The level established within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Transfers in and out of Level 1, 2 or 3 are recorded at fair value at the beginning of the reporting period.

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

The fair value of investments available-for-sale is determined using a market approach. At December 31, 2023 and 2022, the U.S. Government agencies and treasuries, residential and commercial mortgage-backed securities, and municipal bonds segments are classified as Level 2 within the valuation hierarchy. Their fair values were determined based upon market-corroborated inputs and valuation matrices, which were obtained through third party data service providers or securities brokers through which we have historically transacted both purchases and sales of investment securities.

Derivative financial instruments (cash flow hedge) – The Corporation’s open derivative positions are interest rate swap agreements. Those classified as Level 2 open derivative positions are valued using externally developed pricing models based on observable market inputs provided by a third party and validated by management.  The Corporation has considered counterparty credit risk in the valuation of its interest rate swap assets.

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 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.

116

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. These values were determined based on the sales prices of similar properties in the approximate geographic area. These assets are included as Level 3 fair values based upon the lowest level of input that is significant to the fair value measurements.

For assets 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:

Fair Value Measurements at

December 31, 2023 Using

(in Thousands)

    

Assets & Liabilities
Measured at

    

Quoted Prices
in Active
Markets for
Identical Assets

    

Significant
Other
Observable
Inputs

    

Significant
Unobservable
Inputs

Description

12/31/23

(Level 1)

(Level 2)

(Level 3)

Recurring:

Investment securities available-for-sale:

U.S. government agencies

$

6,034

$

6,034

Residential mortgage-backed agencies

$

20,563

$

20,563

Commercial mortgage-backed agencies

$

28,417

$

28,417

Collateralized mortgage obligations

$

16,356

$

16,356

Obligations of states and political subdivisions

$

10,312

$

10,312

Corporate bonds

$

778

$

778

Collateralized debt obligations

$

14,709

$

14,709

Financial derivative

$

756

$

756

Non-recurring:

Individually evaluated loans

$

$

Equity investments

$

3,087

$

3,087

Other real estate owned

$

4,443

$

4,443

Fair Value Measurements at

December 31, 2022 Using

(in Thousands)

    

Assets & Liabilities
Measured at

    

Quoted Prices
in Active
Markets for
Identical Assets

    

Significant
Other
Observable
Inputs

        

Significant
Unobservable
Inputs

Description

12/31/22

(Level 1)

(Level 2)

(Level 3)

Recurring:

Investment securities available-for-sale:

U.S. treasuries

$

9,462

$

9,462

U.S. government agencies

$

37,401

$

37,401

Residential mortgage-backed agencies

$

30,732

$

30,732

Commercial mortgage-backed agencies

$

21,044

$

21,044

Collateralized mortgage obligations

$

10,492

$

10,492

Obligations of states and political subdivisions

$

887

$

887

Collateralized debt obligations

$

15,871

$

15,871

Financial derivative

$

1,068

$

1,068

Non-recurring:

Individually evaluated loans

$

211

$

211

Equity investment

$

1,796

$

1,796

Other real estate owned

$

$

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

117

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:

(in thousands)

    

Fair Value at
December 31,
2023

    

Valuation
Technique

    

Significant
Unobservable
Inputs

    

Significant
Unobservable
Input Value

Recurring:

Investment Securities – available for sale - CDO

$

14,709

Discounted Cash Flow

Discount Rate

Range of low to mid 500 and low to mid 600

Non-recurring:

Equity Investments

$

3,087

Market Method

Revenue Multiples

2.8x

Other Real Estate Owned

$

4,443

Market Comparable Properties

Marketability Discount

5.0% to 15.0%
(weighted avg 5.9%)

(in thousands)

    

Fair Value at
December 31,
2022

    

Valuation
Technique

    

Significant
Unobservable
Inputs

    

Significant
Unobservable
Input Value

Recurring:

Investment Securities –  available for sale - CDO

$

15,871

Discounted Cash Flow

Discount Rate

Range of low to mid 300 and low to high 400

Non-recurring:

Individually Evaluated Loans

$

211

Market Comparable Properties

Marketability Discount

10.0% to 15.0%

Equity Investment

$

1,796

Market Method

Revenue Multiples

2.8x

Other Real Estate Owned

$

Market Comparable Properties

Marketability Discount

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

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

Fair Value Measurement Using Unobservable Inputs (Level 3)

(in thousands)

    

Investment Securities Available for Sale

Beginning balance January 1, 2023

$

15,871

Total gains/(losses) realized/unrealized:

Included in other comprehensive income

(1,162)

Ending balance December 31, 2023

$

14,709

Fair Value Measurement Using Unobservable Inputs (Level 3)

(in thousands)

    

Investment Securities Available for Sale

Beginning balance January 1, 2022

$

17,192

Total gains/(losses) realized/unrealized:

Included in other comprehensive income

(1,321)

Ending balance December 31, 2022

$

15,871

Gains and losses (realized and unrealized) included in earnings for the periods above are reported in the Consolidated Statement of Income in other operating income.

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The fair values disclosed may vary significantly between institutions based on the estimates and assumptions used in the various valuation methodologies. The derived fair values are subjective in nature and involve uncertainties and significant judgment. Therefore, they cannot be determined with precision. Changes in the assumptions could significantly impact the derived estimates of fair value. Disclosure of non-financial assets such as buildings as well as certain financial instruments such as leases is not required. Accordingly, the aggregate fair values presented do not represent the underlying value of the Corporation.

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. The actual carrying amounts and estimated fair values of the Corporation’s financial instruments that are included in the statement of financial condition are as follows:

December 31, 2023

Fair Value Measurements

Carrying

Fair

Quoted Prices
in Active
Markets for
Identical
Assets

Significant
Other
Observable
Inputs

Significant
Unobservable
Inputs

(in thousands)

    

Amount

    

Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

Financial Assets:

Cash and due from banks

$

48,343

$

48,343

$

48,343

Interest bearing deposits in banks

1,410

1,410

1,410

Investment securities - AFS

97,169

97,169

$

82,460

$

14,709

Investment securities - HTM

214,297

184,415

182,510

1,905

Restricted bank stock

5,250

N/A

Loans, net

1,388,847

1,319,456

1,319,456

Financial derivative

778

778

778

Accrued interest receivable

7,487

7,487

828

6,659

Financial Liabilities:

Deposits – non-maturity

1,355,444

1,355,444

1,355,444

Deposits – time deposits

195,533

193,337

193,337

Short-term borrowed funds

45,418

45,418

45,418

Long-term borrowed funds

110,929

110,809

110,809

Accrued interest payable

612

612

612

December 31, 2022

Fair Value Measurements

Carrying

Fair

Quoted Prices
in Active
Markets for
Identical
Assets

Significant
Other
Observable
Inputs

Significant
Unobservable
Inputs

(in thousands)

    

Amount

    

Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

Financial Assets:

Cash and due from banks

$

72,720

$

72,720

$

72,720

Interest bearing deposits in banks

1,595

1,595

1,595

Investment securities - AFS

125,889

125,889

$

110,018

$

15,871

Investment securities - HTM

235,659

203,080

182,380

20,700

Restricted bank stock

1,027

N/A

Loans, net

1,264,684

1,177,702

1,177,702

Financial derivative

1,068

1,068

1,068

Accrued interest receivable

6,051

6,051

933

5,118

Financial Liabilities:

Deposits – non-maturity

1,450,210

1,450,210

1,450,210

Deposits – time deposits

120,523

120,083

120,083

Financial derivative

Short-term borrowed funds

64,565

64,565

64,565

Long-term borrowed funds

30,929

30,909

30,909

Accrued interest payable

151

151

151

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20. Derivative Financial Instruments

As a part of managing interest rate risk, the Corporation entered into interest rate swap agreements to modify the re-pricing characteristics of certain interest-bearing liabilities. The Corporation has designated its interest rate swap agreements as cash flow hedges under the guidance of ASC Subtopic 815-30, Derivatives and Hedging – Cash Flow Hedges. Cash flow hedges have the effective portion of changes in the fair value of the derivative, net of taxes, recorded in net accumulated other comprehensive income.

In March 2016, the Corporation entered into four interest rate swap contracts totaling $30.0 million notional amount, hedging future cash flows associated with floating rate trust preferred debt. As of 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, 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. There was no hedge ineffectiveness recorded for the year ended December 31, 2023. The Corporation does not expect any material losses relating to these hedges to be reclassified into earnings within the next 12 months.

Interest rate swap agreements are entered into with counterparties that meet established credit standards and the Corporation believes that the credit risk inherent in these contracts is not significant at December 31, 2023.

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

Derivative in Cash Flow Hedging Relationships

(in thousands)

    

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)

    

Amount of gain or (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing) (2)

Interest rate contracts:

December 31, 2023

$

(228)

$

$

December 31, 2022

$

1,116

$

$

Notes:

(1)Reported as interest expense
(2)Reported as other income

21. Revenue Recognition

ASC Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. ASC Topic 606 is applicable to noninterest revenue streams such as wealth management, including trust and brokerage services, service charges on deposit accounts, interchange fee income – debit card income and gains/losses on OREO sales. Noninterest revenue streams in-scope of ASC Topic 606 are discussed below.

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Wealth Management – Trust and Brokerage

Trust and asset management income is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Corporation’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. The Corporation’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered.

Service Charges on Deposit Accounts

Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, and other deposit account related fees. The Corporation’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Corporation’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.

Other Service Charges

Fees, exchange, and other service charges are primarily comprised of ATM fees, loan servicing fees and other service charges. ATM fees are primarily generated when a Bank cardholder uses a non-Bank ATM or a non-Bank cardholder uses a Bank ATM.  Loan servicing fees are comprised of fees earned on servicing of loan portfolios sold to the secondary market.  Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services.   The Corporation’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion.

Interchange Fees – Debit and Credit Card Income

Debit and credit card income is primarily comprised of interchange fees earned whenever the Corporation’s debit cards are processed through card payment networks such as Visa. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Payment is typically received immediately or in the following month.

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of ASC Topic 606, for the years ended December 31, 2023 and 2022.

Year Ended

December 31,

(in thousands)

    

2023

    

2022

Noninterest income

In-scope of Topic 606:

Service charges on deposit accounts

$

2,198

$

1,981

Other service charges

929

925

Trust department

8,282

8,244

Debit card income

4,101

3,958

Brokerage commissions

1,160

1,049

Noninterest income (in-scope of Topic 606)

16,670

16,157

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

1,661

1,721

Total Noninterest Income

$

18,331

$

17,878

121

22. 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.

122

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

December 31, 2023

Trust and

Community

Investment

(in thousands)

Banking

    

Services

    

Total

Interest income

$

81,156

$

$

81,156

Interest expense

24,286

24,286

Credit loss expense

1,620

1,620

Non-interest income

5,027

9,442

14,469

Non-interest expense

45,098

5,145

50,243

Income before income taxes and intercompany fees

15,179

4,297

19,476

Intercompany management fee income (expense)

12

(12)

Income before income taxes

15,191

4,285

19,476

Income tax expense

3,514

902

4,416

Net income

$

11,677

$

3,383

$

15,060

December 31, 2022

Trust and

Community

Investment

(in thousands)

Banking

    

Services

    

Total

Interest income

$

62,422

$

$

62,422

Interest expense

4,789

4,789

Loan loss credit

(627)

(627)

Non-interest income

8,757

9,293

18,050

Non-interest expense

38,435

4,694

43,129

Income before income taxes and intercompany fees

28,582

4,599

33,181

Intercompany management fee income (expense)

12

(12)

Income before income taxes

28,594

4,587

33,181

Income tax expense

7,168

965

8,133

Net income

$

21,426

$

3,622

$

25,048

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.

123

23. Parent Company Only Financial Information

Condensed Statements of Financial Condition

December 31,

(in thousands)

    

2023

    

2022

Assets

Cash

$

9,739

$

11,296

Investment securities- Available for Sale (at fair value)

13,591

14,603

Investment in bank subsidiary

164,878

153,245

Investment in non-bank subsidiaries

929

929

Other assets

9,794

8,273

Total Assets

$

198,931

$

188,346

Liabilities and Shareholders' Equity

Accrued interest and other liabilities

$

4,799

$

4,425

Dividends payable

1,330

1,199

Junior subordinated debt

30,929

30,929

Shareholders' equity

161,873

151,793

Total Liabilities and Shareholders' Equity

$

198,931

$

188,346

Condensed Statements of Income

Year Ended

December 31,

(in thousands)

    

2023

    

2022

Income:

Dividend income from bank subsidiary

$

6,130

$

14,995

Interest income on investments

1,715

780

Other income

75

63

Total other income

1,790

843

Total Income

7,920

15,838

Expenses:

Interest expense

1,950

1,451

Other expenses

715

249

Total Expenses

2,665

1,700

Income before income taxes and equity in undistributed net income of subsidiaries

5,255

14,138

Applicable income tax benefit

213

194

Net income before equity in undistributed net income of subsidiaries

5,468

14,332

Equity in undistributed net income of subsidiaries:

Bank

9,592

10,716

Net Income

$

15,060

$

25,048

Condensed Statements of Comprehensive Income

Year Ended

December 31,

Components of Comprehensive Income (in thousands)

    

2023

    

2022

Net Income

$

15,060

$

25,048

Unrealized losses on AFS Securities, net of tax

(771)

(954)

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

(228)

1,116

Other comprehensive (loss)/income, net of tax

(999)

162

Comprehensive income

$

14,061

$

25,210

124

Condensed Statements of Cash Flows

Year Ended

December 31,

(in thousands)

    

2023

    

2022

Operating Activities

Net Income

$

15,060

$

25,048

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

Equity in undistributed net income of subsidiaries

(9,592)

(10,716)

Increase in other assets

(1,280)

(448)

Increase in accrued interest payable and other liabilities

273

655

Stock compensation

527

532

Net cash provided by operating activities

4,988

15,071

Financing Activities

Proceeds from issuance of common stock

293

217

Repurchase of common stock

(1,495)

Cash dividends on common stock

(5,343)

(4,192)

Net cash used in financing activities

(6,545)

(3,975)

Increase in cash and cash equivalents

(1,557)

11,096

Cash and cash equivalents at beginning of year

11,296

200

Cash and cash equivalents at end of year

$

9,739

$

11,296

125

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

The Corporation maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Corporation’s reports filed under the Exchange Act with the SEC, such as this annual report, is recorded, processed, summarized and reported within the time periods specified in those rules and forms, and that such information is accumulated and communicated to the Corporation’s management, including the principal executive officer (“PEO”) and the principal financial officer (“PFO”), as appropriate, to allow for timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

This annual report does not include an integrated audit report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to audit by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company (a non-accelerated filer) to provide only management’s report in this annual report.

An evaluation of the effectiveness of these disclosure controls and procedures as of December 31, 2023 was carried out under the supervision and with the participation of the Corporation’s management, including the PEO and the PFO. Based on that evaluation, the Corporation’s management, including the PEO and the PFO, has concluded that the Corporation’s disclosure controls and procedures are, in fact, effective at the reasonable assurance level.

As required by Section 404 of the Sarbanes-Oxley Act of 2002, management has performed an evaluation and testing of the Corporation’s internal control over financial reporting as of December 31, 2023. Management’s report on the Corporation’s internal control over financial reporting is included on the following page.

126

Management’s Report on Internal Control Over Financial Reporting

The Board of Directors and Shareholders

First United Corporation

First United Corporation’s management is responsible for establishing and maintaining adequate internal control over financial reporting. This internal control system was designed to provide reasonable assurance to management and the Board of Directors as to the reliability of First United Corporation’s financial reporting and the preparation and presentation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States, as well as to safeguard assets from unauthorized use or disposition.

An internal control system, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation and may not prevent or detect misstatements in the financial statements or the unauthorized use or disposition of First United Corporation’s assets. Also, projections of any evaluation of effectiveness of internal controls to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies and procedures may deteriorate.

Management assessed the effectiveness of First United Corporation’s internal control over financial reporting as of December 31, 2023, based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control--Integrated Framework (2013 Framework). Based on this assessment and on the foregoing criteria, management has concluded that, as of December 31, 2023, First United Corporation’s internal control over financial reporting is effective.

Dated:

March 15, 2024

    

/s/ Carissa L. Rodeheaver

/s/ Tonya K. Sturm

Carissa L. Rodeheaver, CPA

Tonya K. Sturm

Chairman of the Board, President

Senior Vice President and

And Chief Executive Officer

Chief Financial Officer

(Principal Executive Officer)

(Principal Financial Officer)

127

ITEM 9B. OTHER INFORMATION

None.

ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTION

Not Applicable

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The Corporation has adopted a Code of Business Conduct and Ethics (the “Code of Ethics”) applicable to its principal executive officer, principal financial officer, principal accounting officer, or controller, or persons performing similar functions.  A copy of the Code of Ethics is available free of charge upon request to Mr. Jason B. Rush, Senior Vice President and Chief Operating Officer, First United Corporation, c/o First United Bank & Trust, 19 S. Second Street, Oakland, MD 21550. This Code of Ethics is also available on the Investor Relations page of the Corporation’s website at https://s25.q4cdn.com/317318878/files/doc_downloads/2022/01/Senior-Financial-Officer-Code-of-Business-Conduct-and-Ethics.pdf

The Corporation has adopted an Insider Trading Policy that applies to directors and executive officers of the Corporatiin and its Subsidiaries.   See Exhibit 19.1:  First United Corporation Insider Trading Policy.

All other information required by this item is incorporated herein by reference to the following sections of the Corporation’s definitive Proxy Statement for the 2024 Annual Meeting of Shareholders to be filed with the SEC pursuant to Regulation 14A (the “2024 Proxy Statement”):

Election of Directors (Proposal 1);
Continuing Directors;
Qualifications of Director Nominees and Current Directors;
Executive Officers;
Delinquent Section 16(a) Reports; and
Corporate Governance and Related Matters (under Committees of the Board - Audit Committee).

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference to the sections of the 2024 Proxy Statement entitled “Director Compensation” and “Executive Compensation” (excluding the information under the subheading “Pay Versus Performance”).

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Equity Compensation Plan Information

At the 2018 Annual Meeting of Shareholders, the Corporation’s shareholders approved the First United Corporation 2018 Equity Compensation Plan (the “Equity Plan”), which authorizes the grant of stock options, stock appreciation rights, stock awards, dividend equivalents, and other stock-based awards. Subject to the anti-dilution provisions of the Equity Plan, the maximum number of shares for which awards may be granted to any one participant in

128

any calendar year is 20,000 shares, without regard to whether an award is paid in cash or shares. The following table contains information as of December 31, 2023 regarding securities that are authorized for issuance under the Equity Plan:

    

Number of securities to be issued upon exercise of outstanding options, warrants, and rights

    

Weighted-average exercise price of outstanding options, warrants, and rights

    

Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))

Plan Category

(a)

(b)

(c)

Equity compensation plans approved by security holders

27,467

(1)

N/A

154,038

(2)

Equity compensation plans not approved by security holders

N/A

N/A

Total

27,467

N/A

154,038

Notes:

(1)As of December 31, 2023, no options, warrants, or rights have been granted under the Equity Plan. Unexercised equity awards outstanding as of December 31, 2023 consist of time vesting and performance vesting restricted stock units (“RSUs”). The amounts shown in column (a)
(2)Performance vesting RSUs and assume that such RSUs will vest based on the achievement of the maximum performance levels applicable thereto.  The amounts shown in column (a) would be 9,154 or 18,310 if only the RSUs’ threshold performance levels or target performance levels, respectively, were to be achieved.
(3)The amounts shown in column (c) take into account 13,312 shares subject to time vesting RSUs that have been granted but have not yet vested.

All other information required by this item is incorporated herein by reference to the section of the 2024 Proxy Statement entitled “Beneficial Ownership of Common Stock by Principal Shareholders and Management”.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item is incorporated herein by reference to the sections of the 2024 Proxy Statement entitled “Certain Relationships and Related Transactions” and “Corporate Governance and Related Matters” (“Director Independence”).

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated herein by reference to the section of the 2024 Proxy Statement entitled “Audit Fees and Services”.

129

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1), (2) and (c)  Financial Statements.

Reports of Independent Registered Public Accounting Firms

Consolidated Statement of Financial Condition as of December 31, 2023 and 2022

Consolidated Statement of Income for the years ended December 31, 2023 and 2022

Consolidated Statement of Comprehensive Income for the years ended December 31, 2023 and 2022

Consolidated Statement of Changes in Shareholders’ Equity for the years ended December 31, 2023 and 2022

Consolidated Statement of Cash Flows for the years ended December 31, 2023 and 2022

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

(a)(3) and (b)  Exhibits.

The exhibits filed or furnished with this annual report are listed in the following Exhibit Index.

130

Exhibit

    

Description

3.1(i)

Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to First United Corporation’s Quarterly Report on Form 10-Q for the period ended June 30, 1998)

3.1(ii)

Articles of Amendment to Articles of Amendment and Restatement of First United Corporation (incorporated by reference to Exhibit 3.1 to First United Corporation’s Current Report on Form 8-K filed on June 3, 2021

3.2

First United Corporation Bylaws as Amended and Restated on November 17, 2021 (incorporated by reference to Exhibit 3.1 to First United Corporation’s Current Report on Form 8-K filed on November 19, 2021.)

4.1

Certificate of Notice, including the Certificate of Designations incorporated therein, relating to the Fixed Rate Cumulative Perpetual Preferred Stock, Series A (incorporated by reference Exhibit 4.1 to First United Corporation’s Form 8-K filed on February 2, 2009)

4.2

Sample Stock Certificate for Series A Preferred Stock for the Series A Preferred Stock (incorporated by reference Exhibit 4.3 to First United Corporation’s Form 8-K filed on February 2, 2009)

10.1

First United Bank & Trust Amended and Restated Defined Benefit Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.1 to First United Corporation’s Current Report on Form 8-K filed on February 1, 2019)

10.2

Form of Amended and Restated Participation Agreement under the Defined Benefit Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.2 to First United Corporation’s Current Report on Form 8-K filed on February 1, 2019)

10.3

Form of Endorsement Split Dollar Agreement between the Bank and each of William B. Grant, Robert W. Kurtz, Jeannette R. Fitzwater, Phillip D. Frantz, Eugene D. Helbig, Jr., Steven M. Lantz, Robin M. Murray, Carissa L. Rodeheaver, and Frederick A. Thayer, IV (incorporated by reference to Exhibit 10.3 to First United Corporation’s Quarterly Report on Form 10-Q for the period ended September 30, 2003)

10.4

Amended and Restated First United Corporation Executive and Director Deferred Compensation Plan (incorporated by reference to Exhibit 10.1 to First United Corporation’s Current Report on Form 8-K filed on November 24, 2008)

10.5

Form of Amended and Restated First United Corporation Defined Contribution SERP Agreement (incorporated by reference to Exhibit 10.5 to First United Corporation’s annual report on Form 10-K for the year ended December 31, 2019)

10.6

Amended and Restated First United Corporation Change in Control Severance Plan (incorporated by reference to Exhibit 10.5 to First United Corporation’s Current Report on Form 8-K filed on June 23, 2008)

10.7

Amended and Restated Agreement Under the First United Corporation Change in Control Severance Plan, dated as of January 8, 2021 (incorporated by reference to Exhibit 10.1 to First United Corporation’s Current Report on Form 8-K filed on January 8, 2021)

10.8

First United Corporation 2018 Equity Compensation Plan (incorporated by reference to Exhibit 10.1 to First United Corporation’s Current Report on Form 8-K filed on May 21, 2019)

10.9

First United Corporation Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to First United Corporation’s Current Report on Form 8-K filed on March 16, 2020)

10.10

Appendix A to the First United Corporation Long-Term Incentive Plan (incorporated by reference to Exhibit 10.2 of the Corporation’s Current Report on Form 8-K filed on March 15, 2022)

10.11

First United Corporation Short-Term Incentive Plan (incorporated by reference to Exhibit 10.2 to First United Corporation’s Current Report on Form 8-K filed on March 16, 2020)

10.12

Appendix A to the First United Corporation Short-Term Incentive Plan (incorporated by reference to Exhibit 10.1 of the Corporation’s Current Report on Form 8-K filed on March 15, 2022)*

10.13

Form of Restricted Stock Unit Award Agreement (Performance-Vesting) (incorporated by reference to Exhibit 10.1 to First United Corporation’s Current Report on Form 8-K filed on March 27, 2020, Film No. 20747391)

10.14

Form of Restricted Stock Unit Award Agreement (Time-Vesting) (incorporated by reference to Exhibit 10.2 to First United Corporation’s Current Report on Form 8-K filed on March 27, 2020, Film No. 20747391)

10.15

Stock Purchase Agreement, dated as of April 16, 2021, by and between First United Corporation and Driver Opportunity Partners I LP (incorporated by reference to Exhibit 10.1 to First United Corporation’s Current Report on Form 8-K filed on April 19, 2021)

131

10.16

Cooperation and Settlement Agreement, dated as of April 16, 2021, by and between First United Corporation, Driver Opportunity Partners I LP and other parties named therein (incorporated by reference to Exhibit 10.2 to First United Corporation’s Current Report on Form 8-K filed on April 19, 2021)

19.1

21

First United Corporation Insider Trading Policy

Subsidiaries (filed herewith)

23.1

Consent of Crowe LLP, Independent Registered Public Accounting Firm (filed herewith)

31.1

Certifications of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith)

31.2

Certifications of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith)

32.1

Certifications pursuant to Section 906 of the Sarbanes-Oxley Act (furnished herewith)

97

Incentive Compensation Recovery Policy

101.INS

Inline XBRL Instance Document (filed herewith)

101.SCH

Inline XBRL Taxonomy Extension Schema (filed herewith)

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase (filed herewith)

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase (filed herewith)

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase (filed herewith)

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase (filed herewith)

104

The cover page of First United Corporation’s Annual Report on Form 10K for the year ended December 31, 2022, formatted in Inline XBRL, included within the Exhibit 101 attachments (filed herewith).

*

Portions of Exhibit 10.12, identified in brackets, were excluded because they were immaterial and would have likely caused competitive harm to the Corporation if publicly disclosed.  Such information will be disclosed in “Executive Compensation” section of the 2024 Proxy Statement.

ITEM 16. FORM 10-K SUMMARY

None

132

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

FIRST UNITED CORPORATION

Date:

March 15, 2024

By:

/s/ Carissa L. Rodeheaver

Carissa L. Rodeheaver, CPA

Chairman of the Board, President

and Chief Executive Officer

(Principal Executive Officer)

Date:

March 15, 2024

By:

/s/ Tonya K. Sturm

Tonya K. Sturm,

Senior Vice President and

Chief Financial Officer,

(Principal Financial Officer

and Principal Accounting Officer)

133

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.

/s/ John F. Barr

    

/s/ Brian R. Boal

John F. Barr – Director

Brian R. Boal - Director

March 15, 2024

March 15, 2024

/s/ Sanu Chadha

/s/ Christy DiPietro

Sanu Chadha - Director

Christy DiPietro– Director

March 15, 2024

March 15, 2024

/s/ Kevin R. Hessler

/s/ Patricia Milon

Kevin R. Hessler- Director

Patricia Milon– Director

March 15, 2024

March 15, 2024

/s/ Beth E. Moran

/s/ Carissa L. Rodeheaver

Beth E. Moran – Director

Carissa L. Rodeheaver – Director, President

March 15, 2024

and Chief Executive Officer

March 15, 2024

/s/ I. Robert Rudy

/s/ Marisa A. Shockley

I. Robert Rudy - Director

Marisa A. Shockley - Director

March 15, 2024

March 15, 2024

/s/ H. Andrew Walls, III

/s/ Tonya K. Sturm

H. Andrew Walls, III - Director

Tonya K. Sturm – Senior Vice President and

March 15, 2024

Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

March 15, 2024

134