FIRST UNITED CORP/MD/ - Quarter Report: 2023 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For quarterly period ended June 30, 2023

◻ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

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

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 for such shorter periods 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 non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):


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 standard provided pursuant to Section 13(a) of the Exchange Act. ◻

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 6,711,442 shares of common stock, par value $.01 per share, as of July 31, 2023.

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INDEX TO QUARTERLY REPORT

FIRST UNITED CORPORATION


		Page
PART I. FINANCIAL INFORMATION		3
Item 1.	Financial Statements (unaudited)	3
	Consolidated Statements of Financial Condition – June 30, 2023 and December 31, 2022	3
	Consolidated Statements of Operations – for the six and three months ended June 30, 2023 and 2022	4
	Consolidated Statements of Comprehensive Income/(Loss) – for the six and three months ended June 30, 2023 and 2022	6
	Consolidated Statements of Changes in Shareholders’ Equity – for six and three months ended June 30, 2023 and 2022	8
	Consolidated Statements of Cash Flows – for the six months ended June 30, 2023 and 2022	9
	Notes to Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	52
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	71
Item 4.	Controls and Procedures	71

PART II. OTHER INFORMATION		72
Item 1.	Legal Proceedings	72
Item 1A.	Risk Factors	72
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	72
Item 3.	Defaults upon Senior Securities	72
Item 4.	Mine Safety Disclosures	72
Item 5.	Other Information	72
Item 6.	Exhibits	73
SIGNATURES		74

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

First United Corporation and Subsidiaries

Consolidated Statements of Financial Condition

(In thousands, except share data - Unaudited)



	June 30, 2023		December 31, 2022

Assets
Cash and due from banks	$	86,901	$	72,720
Interest bearing deposits in banks		1,650		1,595
Cash and cash equivalents		88,551		74,315
Investment securities – available for sale (at fair value)		120,085		125,889
Investment securities – held to maturity (fair value $199,071 at June 30, 2023 and $203,080 at December 31, 2022)		230,759		235,659
Restricted investment in bank stock, at cost		4,490		1,027
Loans held for sale		500		—
Loans		1,350,038		1,279,494
Unearned fees		(327)		(174)
Allowance for credit losses		(16,905)		(14,636)
Net loans		1,332,806		1,264,684
Premises and equipment, net		33,532		34,948
Goodwill and other intangibles		12,268		12,433
Bank owned life insurance		46,963		46,346
Deferred tax assets		11,771		10,605
Other real estate owned, net		4,842		4,733
Right of use assets		1,990		1,898
Pension asset		8,620		8,001
Accrued interest receivable		6,956		6,051
Other assets		24,260		21,580
Total Assets	$	1,928,393	$	1,848,169
Liabilities and Shareholders’ Equity
Liabilities:
Non-interest bearing deposits	$	466,628	$	506,613
Interest bearing deposits		1,113,331		1,064,120
Total deposits		1,579,959		1,570,733
Short-term borrowings		50,078		64,565
Long-term borrowings		110,929		30,929
Operating lease liability		2,443		2,373
SERP deferred compensation		7,261		7,194
Allowance for credit losses on off-balance sheet credit exposures		1,089		133
Accrued interest payable and other liabilities		20,136		19,250
Dividends payable		1,342		1,199
Total Liabilities		1,773,237		1,696,376
Shareholders’ Equity:
Common Stock – par value $0.01 per share; Authorized 25,000,000 shares; issued and outstanding 6,711,422 shares at June 30, 2023 and 6,666,428 at December 31, 2022		67		67
Surplus		24,901		24,409
Retained earnings		170,298		166,343
Accumulated other comprehensive loss		(40,110)		(39,026)
Total Shareholders’ Equity		155,156		151,793
Total Liabilities and Shareholders’ Equity	$	1,928,393	$	1,848,169

See accompanying notes to the consolidated financial statements

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First United Corporation and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share data)


	Six Months Ended
	June 30,
	2023		2022

	(Unaudited)
Interest income
Interest and fees on loans	$	32,224	$	25,293
Interest on investment securities
Taxable		3,547		2,946
Exempt from federal income tax		538		561
Total investment income		4,085		3,507
Other		1,492		78
Total interest income		37,801		28,878
Interest expense
Interest on deposits:
Savings		135		36
Interest-bearing transaction accounts		5,128		319
Time deposits		1,765		521
Total interest on Deposits		7,028		876
Interest on short-term borrowings		60		39
Interest on long-term borrowings		2,021		651
Total Interest Expense		9,109		1,566
Net Interest income		28,692		27,312
Credit loss expense - loans		848		205
Credit loss expense - off-balance sheet credit exposures		90		5
Credit loss expense		938		210
Net interest income after provision for credit losses		27,754		27,102
Other operating income
Net gains on investments, available for sale		—		3
Net gains on sale of residential mortgage loans		140		28
Net gains on disposal of fixed assets		—		34
Net gains		140		65
Other Income
Service charges on deposit accounts		1,062		928
Other service charges		476		445
Trust department		3,995		4,233
Debit card income		1,986		1,869
Bank owned life insurance		616		589
Brokerage commissions		555		533
Other		132		198
Total other income		8,822		8,795
Total other operating income		8,962		8,860
Other operating expenses
Salaries and employee benefits		14,155		11,761
FDIC premiums		470		329
Equipment expense		2,139		2,073
Occupancy expense of premises		1,527		1,438
Data processing expense		1,915		1,626
Marketing expense		254		257
Professional services		1,040		1,084
Contract labor		298		323
Telephone		226		253
Total OREO expenses, net		142		247
Investor relations		189		219
Contributions		143		63
Other		2,651		1,537
Total other operating expenses		25,149		21,210
Income before income tax expense		11,567		14,752
Provision for income tax expense		2,778		3,609
Net Income	$	8,789	$	11,143
Basic net income per share	$	1.32	$	1.68
Diluted net income per share	$	1.31	$	1.68
Weighted average number of basic shares outstanding		6,689		6,639
Weighted average number of diluted shares outstanding		6,707		6,649
Dividends declared per common share	$	0.40	$	0.30

See accompanying notes to the consolidated financial statements

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First United Corporation and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share data)


	Three Months Ended
	June 30,
	2023		2022

	(Unaudited)
Interest income
Interest and fees on loans	$	16,780	$	12,861
Interest on investment securities
Taxable		1,779		1,540
Exempt from federal income tax		268		279
Total investment income		2,047		1,819
Other		1,145		51
Total interest income		19,972		14,731
Interest expense
Interest on deposits:
Savings		56		18
Interest-bearing transaction accounts		2,941		167
Time deposits		1,353		216
Total interest on Deposits		4,350		401
Interest on short-term borrowings		29		21
Interest on long-term borrowings		1,419		338
Total Interest Expense		5,798		760
Net Interest income		14,174		13,971
Credit loss expense - loans		434		624
Credit loss (credit)/expense - off-balance sheet credit exposures		(39)		7
Credit loss expense		395		631
Net interest income after provision for credit losses		13,779		13,340
Other operating income
Gains on sale of residential mortgage loans		86		7
Gains on disposal of fixed assets		—		6
Net gains		86		13
Other Income
Service charges on deposit accounts		546		463
Other service charges		244		232
Trust department		2,025		2,044
Debit card income		1,031		983
Bank owned life insurance		311		297
Brokerage commissions		258		313
Other		68		81
Total other income		4,483		4,413
Total other operating income		4,569		4,426
Other operating expenses
Salaries and employee benefits		6,865		5,793
FDIC premiums		277		155
Equipment		1,047		1,029
Occupancy		743		711
Data processing		946		805
Marketing		137		151
Professional services		522		564
Contract labor		159		158
Line rentals		116		139
Total OREO expenses, net		18		152
Investor relations		132		123
Contributions		79		42
Other		1,470		808
Total other operating expenses		12,511		10,630
Income before income tax expense		5,837		7,136
Provision for income tax expense		1,423		1,708
Net Income	$	4,414	$	5,428
Basic net income per common share	$	0.66	$	0.82
Diluted net income per common share	$	0.66	$	0.82
Weighted average number of basic shares outstanding		6,704		6,650
Weighted average number of diluted shares outstanding		6,718		6,661
Dividends declared per common share	$	0.20	$	0.15

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First United Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income/(Loss)

(In thousands)



	Six Months Ended
	June 30,
	2023		2022

Comprehensive Income/(Loss)	(Unaudited)
Net Income	$	8,789	$	11,143
Other comprehensive loss, net of tax and reclassification adjustments:
Available for sale securities:
Unrealized holding losses on investments with OTTI	$	(1,408)	$	(654)
Reclassification adjustment for accretable yield realized in income		101		101
Other comprehensive loss on investments with OTTI		(1,509)		(755)

Unrealized holding losses on all other AFS investments	$	(881)	$	(16,203)
Unrealized holding losses on securities transferred from available for sale to held to maturity		—		8,328
Reclassification adjustment for gains realized in income		—		3
Other comprehensive losses on all other AFS investments		(881)		(7,878)

Held to Maturity Securities
Unrealized holding losses on securities transferred to held to maturity	$	—	$	(8,328)
Reclassification adjustment for amortization realized in income		(345)		(324)
Other comprehensive income/(losses) on HTM investments		345		(8,004)

Cash flow hedges:
Unrealized holding gains on cash flow hedges	$	16	$	1,088
Other comprehensive income on cash flow hedges		16		1,088

Pension plan liability:
Unrealized holding gains/(losses) on pension plan liability	$	105	$	(10,542)
Reclassification adjustment for amortization of unrecognized loss realized in income		(499)		(558)
Other comprehensive income/(loss) on pension plan liability		604		(9,984)

SERP liability:
Unrealized holding losses on SERP liability	$	—	$	—
Reclassification adjustment for amortization of unrealized loss realized in income		4		(135)
Other comprehensive (loss)/income on SERP liability		(4)		135

Other comprehensive losses before income tax		(1,429)		(25,398)
Income tax benefit related to other comprehensive income		345		6,796

Other comprehensive loss, net of tax		(1,084)		(18,602)
Comprehensive income/(loss)	$	7,705	$	(7,459)

See accompanying notes to the consolidated financial statements

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First United Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income/(Loss)

(In thousands)



	Three Months Ended
	June 30,
	2023		2022

Comprehensive Income/(Loss)	(Unaudited)
Net Income	$	4,414	$	5,428
Other comprehensive loss, net of tax and reclassification adjustments:
Available for sale securities:
Unrealized holding gains/(losses) on investments with OTTI	$	198	$	(795)
Reclassification adjustment for accretable yield realized in income		51		51
Other comprehensive income/(losses) on investments with OTTI		147		(846)

Unrealized holding losses on all other AFS investments	$	(2,221)	$	(5,359)
Reclassification adjustment for gains realized in income		—		—
Other comprehensive losses on all other AFS investments		(2,221)		(5,359)

Held to Maturity Securities
Unrealized holding losses on HTM investments	$	—	$	—
Reclassification adjustment for amortization realized in income		(164)		(230)
Other comprehensive income on HTM investments		164		230

Cash flow hedges:
Unrealized holding gains on cash flow hedges	$	204	$	249
Other comprehensive income on cash flow hedges		204		249

Pension plan liability:
Unrealized holding losses on pension plan liability	$	(63)	$	(6,922)
Reclassification adjustment for amortization of unrecognized loss realized in income		(249)		(279)
Other comprehensive gains/(losses) on pension plan liability		186		(6,643)

SERP liability:
Unrealized holding losses on SERP liability	$	—	$	—
Reclassification adjustment for amortization of unrealized loss realized in income		2		(67)
Other comprehensive (loss)/income on SERP liability		(2)		67

Other comprehensive losses before income tax		(1,522)		(12,302)
Income tax benefit related to other comprehensive income		369		3,293

Other comprehensive loss, net of tax		(1,153)		(9,009)
Comprehensive income/(loss)	$	3,261	$	(3,581)

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First United Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

(In thousands, except per share data)


	Common Stock		Surplus		Retained Earnings		Accumulated Other Comprehensive Loss		Total Shareholders' Equity
Balance at January 1, 2023	$	67	$	24,409	$	166,343	$	(39,026)	$	151,793
Adoption of ASC 326- Financial Instruments- Credit Losses						(2,155)				(2,155)
Net income						4,375				4,375
Other comprehensive income								69		69
Stock based compensation				56						56
Common stock issued - 22,282 shares				64						64
Common stock dividend declared - $0.20 per share						(1,334)				(1,334)
Balance at March 31, 2023	$	67	$	24,529	$	167,229	$	(38,957)	$	152,868
Net income						4,414				4,414
Other comprehensive loss								(1,153)		(1,153)
Stock based compensation				298						298
Common stock issued - 18,416 shares				74						74
Common stock dividend declared - $0.20 per share						(1,345)				(1,345)
Balance at June 30, 2023	$	67	$	24,901	$	170,298	$	(40,110)	$	155,156

First United Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

(In thousands, except per share data)


	Common Stock		Surplus		Retained Earnings		Accumulated Other Comprehensive Loss		Total Shareholders' Equity
Balance at January 1, 2022	$	66	$	23,661	$	145,487	$	(27,314)	$	141,900
Net income						5,715				5,715
Other comprehensive loss								(9,593)		(9,593)
Stock based compensation				(4)						(4)
Common stock issued - 15,456 shares				55						55
Common stock dividend declared - $0.15 per share						(995)				(995)
Balance at March 31, 2022	$	66	$	23,712	$	150,207	$	(36,907)	$	137,078
Net income						5,428				5,428
Other comprehensive loss								(9,009)		(9,009)
Stock based compensation		1		339						340
Common stock issued - 18,416 shares				54						54
Common stock dividend declared - $0.15 per share						(999)				(999)
Balance at June 30, 2022	$	67	$	24,105	$	154,636	$	(45,916)	$	132,892

See accompanying notes to the consolidated financial statement

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First United Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)


	Six Months Ended
	June 30,
	2023		2022

	(Unaudited)
Operating activities
Net income	$	8,789	$	11,143
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses		938		210
Depreciation		1,700		1,645
Stock based compensation		354		336
Gain on sales of other real estate owned		(36)		—
Write-ups of other real estate owned, net		(69)		—
Originations of loans held for sale		(1,337)		(1,043)
Proceeds from sale of loans held for sale		977		1,138
Gains from sale of loans held for sale		(140)		(28)
Gains on disposal of fixed assets		—		(34)
Net (accretion)/ amortization of investment securities discounts and premiums- AFS		(25)		100
Net accretion of investment securities discounts and premiums- HTM		(405)		(405)
Amortization of intangible assets		165		105
Gains on sales/calls of investment securities – AFS		—		(3)
Earnings on bank owned life insurance		(617)		(589)
Amortization of deferred loan costs/(fees), net		27		(123)
Amortization of operating lease right of use asset		164		172
(Increase)/decrease in accrued interest receivable and other assets		(4,259)		1,295
Deferred tax expense/(benefit)		1,038		(6,796)
Operating lease liability		(186)		(191)
Increase in accrued interest payable and other liabilities		968		3,527
Net cash provided by operating activities		8,046		10,459
Investing activities
Proceeds from maturities/calls of investment securities - AFS		3,358		9,583
Proceeds from maturities/calls of investment securities - HTM		5,305		7,571
Proceeds from sales of investment securities - AFS		—		1,023
Purchases of investment securities - AFS		—		(12,892)
Purchases of investment securities - HTM		—		(52,459)
Proceeds from sales of other real estate owned		172		—
Proceeds from disposal of fixed assets		—		37
Net (increase)/decrease in restricted stock		(3,463)		3
Net increase in loans		(71,239)		(80,454)
Purchases of premises and equipment		(284)		(2,256)
Net cash used in by investing activities		(66,151)		(129,844)
Financing activities
Net increase in deposits		9,226		14,980
Issuance of common stock		138		109
Cash dividends paid on common stock		(2,536)		(1,988)
Net(decrease)/increase in short-term borrowings		(14,487)		12,215
Proceeds from long-term borrowings		80,000		—
Net cash provided by financing activities		72,341		25,316
Increase/(decrease) in cash and cash equivalents		14,236		(94,069)
Cash and cash equivalents at beginning of the year		74,315		115,720
Cash and cash equivalents at end of period	$	88,551	$	21,651
Supplemental information
Interest paid	$	8,726	$	1,667
Taxes paid	$	2,550	$	3,758
Non-cash investing activities:
Transfers from loans to other real estate owned	$	176	$	40
Transfers from securities available for sale to held to maturity	$	—	$	139,036

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FIRST UNITED CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 – 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”). First United Corporation has prepared these unaudited condensed consolidated financial statements in accordance with GAAP for interim financial information, rules of the Securities and Exchange Commission that permit reduced disclosure for interim periods, and Article 8 of Regulation S-X. Certain reclassifications have been made to prior year amounts to conform with current year classifications. These reclassifications did not have a material impact on the Corporation’s consolidated financial condition or results of operations. Operating results for the three- and six-month periods ended June 30, 2023, are not necessarily indicative of the results that may be expected for the full year or for any future interim period. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in First United Corporation’s Annual Report on Form 10-K for the year ended December 31, 2022.

In preparing financial statements, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities as of the date of financial statements. In addition, these estimates and assumptions affect revenues and expenses in the financial statements and as such, actual results could differ from those estimates.

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

Principles of Consolidation

The consolidated financial statements include the accounts of First United Corporation, First United Bank & Trust (the “Bank”), First United Statutory Trust I, First United Statutory Trust II, OakFirst Loan Center, LLC, Oakfirst Loan Center, Inc., First OREO Trust and FUBT OREO I, LLC. All significant inter-company accounts and transactions have been eliminated.

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

The Corporation has evaluated events and transactions occurring subsequent to the statement of financial condition date of June 30, 2023 and through the date these consolidated financial statements were issued, for items of potential recognition or disclosure.

Newly Adopted Pronouncements in 2023

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 (“ASU 2016-13”), universally referred to as CECL. The amendments in the ASU, among other things, requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied previously are still permitted, although the inputs to those techniques changed to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on purchased financial assets with credit deterioration. For periodic report filers that are smaller reporting companies, such as the 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.

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In addition, ASU 2016-13 amends the accounting for credit losses on certain debt securities. The Corporation did not record any allowance for credit losses (“ACL”) on its debt securities as a result of adopting this ASU.

The ultimate impact of adopting ASU 2016-13, and at each subsequent reporting period, is highly dependent on credit quality, macroeconomic forecasts and conditions, compensation of our loan portfolio, and other management judgments. The Corporation adopted ASU 2016-13 using the modified retrospective method. Results beginning after January 1, 2023 are presented under ASU 2016-13, while prior period amounts continue to be reported in accordance with previously applicable GAAP. We made the accounting policy election to not measure an ACL for accrued interest receivables for loans and securities. Accrued interest deemed uncollectible will be written off through interest income.

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


		January 1, 2023
(Dollars 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, the FASB issued ASU No. 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02, which eliminates the troubled debt restructuring (“TDR”) accounting model for creditors that have adopted ASU 2016-13, “Financial Instruments – Credit Losses.” Due to the removal of the TDR accounting model, all loan modifications were evaluated to determine if they resulted in a new loan or a continuation of the existing loan. The amendments in ASU 2022-02 also required that entities disclose current-period gross charge-offs by year of origination for loans and leases. The amendments in ASU 2022-02 were effective January 1, 2023. This change did not have a material effect on our consolidated financial statements. 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.

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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.

The Corporation’s methodology for estimating the ACL includes:

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

Specific Analysis. A specific reserve analysis is applied to certain individually evaluated loans. These loans are evaluated quarterly generally based on collateral value, observable market value or the present value of expected future cash flows. A specific reserve is established if the fair value is less than the loan balance. A charge-off is recognized when the loss is quantifiable. Individually evaluated loans not specifically analyzed reside in the Quantitative Analysis.

Quantitative Analysis. The Corporation elected to use Discounted Cash Flow (“DCF”). Economic forecasts include but are not limited to unemployment, the Consumer Price Index, the Housing Affordability Index and Gross State Product. These forecasts are assumed to revert to the long term average and are utilized in the model to estimate the probability of default and loss given default through regression. Model assumptions include, but are not limited to the discount rate, prepayments and curtailments. The product of the probability of default and the loss given default is the estimated loss rate, which varies over time. The estimated loss rate is applied within the appropriate periods in the cash flow model to determine net present value. Net present value is also impacted by assumptions related to the duration between default and recovery. The reserve is based on the differences between the summation of the principal balances taking amortized costs into consideration and the summation of the net present values.

Qualitative Analysis. Based on management’s review and analysis of internal, external and model risks, management may adjust the model output. Management reviews the peaks and troughs of the model’s calibration, taking into account economic forecasts to develop guardrails that serve as the basis for determining the reasonableness of the model’s output and makes adjustments as necessary. This process challenges unexpected variability resulting from outputs beyond the model’s calibration that appear to be unreasonable. Management also enhances the calculation through the use of Moody’s economic forecast data in its calculation. Additionally, management may adjust the economic forecast if it is incompatible with known market conditions based on Mangement’s experience and perspective.

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

Financial instruments include off-balance sheet credit instruments such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Corporation’s exposure to credit loss in the event of nonperformance

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by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.

The Corporation records a reserve for unfunded commitments (“RUC”) on off-balance sheet credit exposures through a charge to provision for credit loss expense in the Corporation’s Consolidated Statement of Income. The RUC on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the CECL model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur, and is included in the RUC on the Corporation’s Consolidated Balance Sheet.

Loan Restructurings

In situations where, for economic or legal reasons related to a borrower’s financial condition, management may grant a concession to the borrower that it would not otherwise consider, the related loan is classified as a restructured loan. Management strives to identify borrowers in financial difficulty early and work with them to modify the loan to more affordable terms before their loan reaches nonaccrual status. 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. In cases where borrowers are granted new terms that provide for a reduction of interest, management measures any impairment on the restructuring as noted above for loans experiencing financial difficulty.

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

The Corporation utilizes Accounting Standards Codification (“ASC”) 326 to evaluate its available-for-sale (“AFS”) and held-to-maturity (“HTM”) debt security portfolio for expected credit losses. For AFS debt securities in an unrealized loss position, the Corporation first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either criterion is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, the 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 that credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income, as a non-credit-related impairment.

The Corporation adopted ASC 326 using the prospective transition approach for debt securities for which other than temporary impairment (“OTTI”) had been recognized prior to January 1, 2023, such as AFS collateralized debt obligations. As a result, the amortized cost basis for such debt securities remained the same before and after the effective date of ASC 326. The effective interest rate on these debt securities was not changed. Amounts previously written recognized in other comprehensive income (OCI) as of January 1, 2023 relating to improvements in cash flows expected to be collected are accreted into income over the remaining life of the asset. Recoveries of amounts previously written off relating to improvements in cash flows after January 1, 2023 are recorded in earnings when received.

The entire amount of an impairment loss is recognized in earnings only when: (i) the Corporation intends to sell the security or; (ii) it is more likely than not that the Corporation will have to sell the security before recovery of its amortized cost basis; or (iii) the Corporation does not expect to recover the entire amortized cost basis of the security. In all other situations, only the portion of the impairment loss representing the credit loss must be recognized in earnings, with the remaining portion being recognized in shareholders’ equity as comprehensive income, net of deferred taxes.

Changes in the allowance for credit losses are not recorded as a provision for (or credit to) credit losses. Losses are charged against the allowance when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Any impairment not recorded through the an allowance for credit loss is recognized in other comprehensive income as a non-credit-related impairment.

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We have made a policy election to exclude accrued interest from the amortized cost basis of AFS debt securities and report accrued interest separately on the Consolidated Balance Sheet. AFS debt securities are placed on nonaccrual status when we no longer expect to receive all contractual amounts due, which is generally at 90 days past due. Accrued interest receivable is reversed against interest income when a security is placed on nonaccrual status. Accordingly, we do not recognized 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 included in the balance of investment securities held-to-maturity on the Consolidated Balance Sheets. If the Corporation determines that a security indicates evidence of deteriorated credit quality, the security is individually evaluated, and a discounted cash flow analysis is performed and compared to the amortized cost basis.

Note 2 – Accounting Statements Issued but Not Yet Adopted

In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of Reference Rate Reform on Financial Reporting.” The amendments in this ASU provide optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. The amendments provide optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from the London Interbank Offered Rate (“LIBOR”) toward new interest rate benchmarks. Modified contracts that meet certain scope guidance are eligible for relief from these modification accounting requirements in GAAP. The optional guidance generally allows for the modified contract to be accounted for as a continuation of the existing contract and does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. The amendments in this ASU are effective for all entities between March 12, 2020 and December 31, 2022. In December 2022, the FASB issued ASU No. 2022-06: “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848.” The amendments in this ASU defer the sunset date for applying the reference rate reform relief by two years to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848.

Note 3 – Earnings Per Common Share

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, such as restricted stock units (“RSUs”). There were no anti-dilutive shares outstanding at June 30, 2023 or 2022.

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


	Six months ended June 30,
	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	$	8,789	6,689	$	1.32	$	11,143	6,639	$	1.68

Diluted Earnings Per Share:

Restricted stock units			18					10

Net income	$	8,789	6,707	$	1.31	$	11,143	6,649	$	1.68



	Three months ended June 30,
	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	$	4,414	6,704	$	0.66	$	5,428	6,650	$	0.82

Diluted Earnings Per Share:

Restricted stock units			14					11

Net income	$	4,414	6,718	$	0.66	$	5,428	6,661	$	0.82

Note 4 – Investments

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



(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses		Estimated Fair Value
June 30, 2023
Available for Sale:
U.S. government agencies	$	11,028	$	—	$	1,487	$	—	$	9,541
Residential mortgage-backed agencies		43,224		—		7,357		—		35,867
Commercial mortgage-backed agencies		36,897		—		7,763		—		29,134
Collateralized mortgage obligations		24,836		—		4,711		—		20,125
Obligations of states and political subdivisions		10,837		14		285		—		10,566
Corporate bonds		1,000		—		253		—		747
Collateralized debt obligations		18,674		—		4,569		—		14,105
Total available for sale	$	146,496	$	14	$	26,425	$	—	$	120,085

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(in thousands)	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Estimated Fair Value		Allowance for Credit Losses
June 30, 2023
Held to Maturity:
U.S. treasuries	$	37,332	$	—	$	1,075	$	36,257	$	—
U.S. government agencies		67,873		—		12,111		55,762		—
Residential mortgage-backed agencies		26,970		—		3,264		23,706		—
Commercial mortgage-backed agencies		21,494		—		5,188		16,306		—
Collateralized mortgage obligations		55,104		—		10,124		44,980		—
Obligations of states and political subdivisions		21,986		688		614		22,060		—
Total held to maturity	$	230,759	$	688	$	32,376	$	199,071	$	—


(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		OTTI in AOCL
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		(1,695)
Total available for sale	$	149,829	$	4	$	23,944	$	125,889	$	(1,695)

(in thousands)	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value		OTTI in AOCL
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	$	—

The Corporation reassessed the classification of certain investments and, effective February 1, 2022, transferred $139.0 million of callable agencies, obligations 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.

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The following table shows the Corporation’s investment securities with gross unrealized and unrecognized losses and fair values at June 30, 2023 and December 31, 2022, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position:


	Less than 12 months					12 months or more
(in thousands)	Fair Value		Unrealized Losses		Number of Investments	Fair Value		Unrealized Losses		Number of Investments
June 30, 2023
Available for Sale:
U.S. government agencies	$	—	$	—	—	$	9,541	$	1,487	3
Residential mortgage-backed agencies		—		—	—		35,867		7,357	5
Commercial mortgage-backed agencies		1,715		189	1		27,419		7,574	8
Collateralized mortgage obligations		—		—	—		20,125		4,711	10
Obligations of states and political subdivisions		3,853		196	3		3,878		89	2
Corporate Bonds		—		—	—		747		253	1
Collateralized debt obligations		—		—	—		14,105		4,569	9
Total available for sale	$	5,568	$	385	4	$	111,682	$	26,040	38

	Less than 12 months					12 months or more
(in thousands)	Fair Value		Unrecognized Losses		Number of Investments	Fair Value		Unrecognized Losses		Number of Investments
June 30, 2023
Held to Maturity:
U.S. treasuries	$	—	$	—	—	$	36,257	$	1,075	4
U.S. government agencies		—		—	—		55,762		12,111	9
Residential mortgage-backed agencies		3,143		134	3		20,563		3,130	33
Commercial mortgage-backed agencies		—		—	—		16,306		5,188	2
Collateralized mortgage obligations		—		—	—		44,980		10,124	8
Obligations of states and political subdivisions		—		—	—		2,258		614	1
Total held to maturity	$	3,143	$	134	3	$	176,126	$	32,242	57

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	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

The Corporation utilizes ASC 326 to evaluate its available-for sale (“AFS”) and held-to-maturity (“HTM”) debt security portfolio for expected credit losses. For AFS debt securities in an unrealized loss position, the 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.

Changes in the allowance for credit losses are recorded as a provision for (or reversal of) credit losses. Losses are charged against the allowance when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Any impairment not recorded through an allowance for credit loss is recognized in other comprehensive income as a non-credit-related impairment.

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The Corporation has made the policy election to exclude accrued interest from the amortized cost basis of available-for-sale debt securities and report accrued interest separately in other assets in the Consolidated Balance Sheets. Available-for-sale debt securities are placed on nonaccrual status when we no longer expect to receive all contractual amounts due, which is generally at 90 days past due. Accrued interest receivable is reversed against interest income when a security is placed on nonaccrual status. Accordingly, we do not recognize an allowance for credit loss against accrued interest receivable.

The Corporation separately evaluates its HTM investment securities for any credit losses. The Corporation pools like securities and calculates expected credit losses through an estimate based on a security’s credit rating, which is recognized as part of the allowance for credit losses for held-to-maturity securities and is included in the balance of investment securities held to maturity on the Consolidated Balance Sheets. If the Corporation determines that a security indicates evidence of deteriorated credit quality, the security is individually evaluated and a discounted cash flow analysis is performed and compared to the amortized cost basis.

As of June 30, 2023, the Corporation recorded no ACL related to its AFS or HTM security portfolio.

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


	Six Months Ended
	June 30,
(in thousands)	2023		2022
Balance of credit-related impairment at January 1	$	1,841	$	2,043
Reduction for increases in cash flows expected to be collected		(101)		(101)
Balance of credit-related impairment at June 30	$	1,740	$	1,942


	Three Months Ended
	June 30,
(in thousands)	2023		2022
Balance of credit-related impairment at April 1	$	1,791	$	1,993
Reduction for increases in cash flows expected to be collected		(51)		(51)
Balance of credit-related impairment at June 30	$	1,740	$	1,942

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The amortized cost and estimated fair value of securities by contractual maturity at June 30, 2023 are shown in the following table. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.



	June 30, 2023
(in thousands)	Amortized Cost		Fair Value
Available for Sale:
Due in one year or less	$	340	$	340
Due after one year through five years		11,948		11,052
Due after five years through ten years		1,895		1,631
Due after ten years		27,356		21,936
		41,539		34,959
Residential mortgage-backed agencies		43,224		35,867
Commercial mortgage-backed agencies		36,897		29,134
Collateralized mortgage obligations		24,836		20,125
Total available for sale	$	146,496	$	120,085
Held to Maturity:
Due in one year or less	$	37,332	$	36,257
Due after one year through five years		12,500		11,338
Due after five years through ten years		33,094		27,382
Due after ten years		44,265		39,102
		127,191		114,079
Residential mortgage-backed agencies		26,970		23,706
Commercial mortgage-backed agencies		21,494		16,306
Collateralized mortgage obligations		55,104		44,980
Total held to maturity	$	230,759	$	199,071

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Note 5 – Loans and Related Allowance for Credit Losses

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



(in thousands)	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Residential Mortgage		Consumer		Total
June 30, 2023
Individually evaluated for impairment	$	—	$	—	$	—	$	2,151	$	—	$	2,151
Collectively evaluated for impairment		483,485		79,003		249,683		473,389		62,327		1,347,887
Total loans	$	483,485	$	79,003	$	249,683	$	475,540	$	62,327	$	1,350,038
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

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


(in thousands)	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days+ Past Due		Total Past Due and Accruing		Non- Accrual		Total Loans
June 30, 2023
Commercial real estate:
Non owner-occupied	$	284,580	$	—	$	—	$	—	$	—	$	—	$	284,580
All other CRE		198,905		—		—		—		—		—		198,905
Acquisition and development:
1-4 family residential construction		20,228		—		—		—		—		—		20,228
All other A&D		58,647		—		—		—		—		128		58,775
Commercial and industrial		249,425		177		81		—		258		—		249,683
Residential mortgage:
Residential mortgage - term		411,033		428		704		45		1,177		2,518		414,728
Residential mortgage - home equity		60,227		241		—		18		259		326		60,812
Consumer		61,591		498		141		97		736		—		62,327
Total	$	1,344,636	$	1,344	$	926	$	160	$	2,430	$	2,972	$	1,350,038
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 June 30, 2023 and $0.1 million at December 31, 2022. Loans secured by 1-4 family residential real estate properties in the process of foreclosure totaled $1.8 million at June 30, 2023. There were no loans subject to foreclosure at December 31, 2022. As a percentage of the loan portfolio, accruing

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

Effective January 1, 2023, the Corporation adopted the accounting guidance in ASU No. 2022-02, which eliminated the recognition and measurement of TDRs. Due to the removal of the TDR designation, the Corporation evaluates all loan restructurings according to the accounting guidance for loan modifications to determine if the restructuring results in a new loan or a continuation of the existing loan. Loan modifications to borrowers experiencing financial difficulty that result in a direct change in the timing or amount of contractual cash flows include situations where there is principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, and combinations of the above. Therefore, the disclosures related to loan restructurings are only for modifications that directly affect cash flows.

A loan that is considered a non-accrual or restructured loan may be subject to the individually evaluated loan analysis if the commitment is $0.1 million or greater; otherwise, the restructured loan remains in the appropriate segment in the ACL model and associated reserves are adjusted based on changes in the discounted cash flows resulting from the modification of the restructured loan. For a discussion with respect to reserve calculations regarding individually evaluated loans, refer to the “Nonrecurring Loans” section in Note 6, Fair Value Measurements. There were no loan modifications made to borrowers facing financial difficulties in the three- or six-month period ending June 30, 2023.

The Corporation maintains an ACL at a level determined to be adequate to absorb expected credit losses associated with the Corporation’s financial instruments over the life of those instruments as of the balance sheet date. The Corporation develops and documents a systematic ACL methodology based on the following portfolio segments: (i) commercial real estate, (ii) acquisition and development, (iii) commercial and industrial, (iv) residential mortgage, and (v) consumer. The Corporation’s loan portfolio is segmented by homogeneous loan types that behave similarly to economic cycles. The segmentation in the CECL model is different from the segmentation in the Incurred Loss model. The following is a discussion of the key risks by portfolio segment that management assesses in preparing the ACL.

Commercial Real Estate- loans are secured by commercial purpose real estate, including both owner occupied properties and investment properties, for various purposes such as hotels, strip malls and apartments. Operations of the individual projects as well as global cash flows of the debtors are the primary source of repayment of these loans. The condition of the local economy is an important indicator of risk, but there are more specific risks depending on the collateral type as well as the business.

Acquisition and Development- loans include both commercial and consumer. Commercial loans are made to finance construction of buildings or other structures, as well as to finance the acquisition and development of raw land for various purposes. While the risk of these loans is generally confined to the construction period, if there are problems, the project may not be completed, and as such, may not provide sufficient cash flow on its own to service the debt or have sufficient value in a liquidation to cover the outstanding principal. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the type of project and the experience and resources of the developer. Consumer loans are made for the construction of residential homes for which a binding sales contract exists and generally are for a period of time sufficient to complete construction. Residential construction loans to individuals generally provide for the payment of interest only during the construction phase. Credit risk for residential real estate construction loans can arise from construction delays, cost overruns, failure of the contractor to complete the project to specifications and economic conditions that could impact demand for supply of the property being constructed.

Commercial and Industrial- loans are made to operating companies or manufacturers for the purpose of production, operating capacity, accounts receivable, inventory or equipment financing. Cash flow from the operations of the borrower is the primary source of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the industry of the borrower. Collateral for these types of loans often do not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt. These loans are also made to local municipalities for various purposes including refinancing existing obligations, infrastructure up-fit and expansion, or to purchase new equipment. The primary repayment source for local municipalities include the tax base of the municipality, specific revenue streams related to the infrastructure financed, and other business operations of the municipal authority. The health and stability of state and local economies directly impacts each municipality’s tax basis and are important indicators of risk for this segment. The ability of each

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

Residential mortgage- loans are secured by first and second liens such as home equity lines of credit and 1-4 family residential mortgages. The primary source of repayment for these loans is the income of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The state of the local housing market can also have a significant impact on this segment because low demand and/or declining home values can limit the ability of borrowers to sell a property and satisfy debt.

Consumer- loans are made to individuals and may be either secured by assets other than 1-4 family residences or unsecured. This segment includes automobile loans and unsecured loans and lines of credit. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The value of the collateral, if there is any, is less likely to be a source of repayment due to less certain collateral values.

The following table summarizes the primary segments of the ACL at June 30, 2023 and allowance for loan loss (“ALL”) at December 31, 2022, segregated by the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment:



(in thousands)	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Residential Mortgage		Consumer		Unallocated		Total
June 30, 2023
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment		4,946		1,134		3,549		6,417		859		—		16,905
Total ACL	$	4,946	$	1,134	$	3,549	$	6,417	$	859	$	—	$	16,905
December 31, 2022
Individually evaluated for impairment	$	—	$	—	$	—	$	26	$	—	$	—	$	26
Collectively evaluated for impairment		6,345		979		2,845		3,134		877		430		14,610
Total ALL	$	6,345	$	979	$	2,845	$	3,160	$	877	$	430	$	14,636

Changes in the fair value of the types of collateral for individually evaluated loans are reported as provision for credit loss in the period of change. The evaluation of the need and amount of a specific allocation of the ACL and whether a loan can be removed from impairment status is made on a quarterly basis.

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


	June 30, 2023
(dollars in thousands)	Real Estate		Non-Accrual Loans with No Allowance
Residential mortgage	$	2,151	$	2,151
Total Loans	$	2,151	$	2,151

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


	Impaired Loans with Specific Allowance				Impaired Loans with No Specific Allowance		Total Impaired Loans
(in thousands)	Recorded Investment		Related Allowances		Recorded Investment		Recorded Investment (1)		Unpaid Principal Balance
December 31, 2022
Commercial real estate
Non owner-occupied	$	—	$	—	$	187	$	187	$	—
All other CRE		—		—		2,075		2,075		—
Acquisition and development
1-4 family residential construction		—		—		210		210		—
All other A&D		—		—		146		146		109
Commercial and industrial		—		—		—		—		—
Residential mortgage
Residential mortgage – term		345		26		3,225		3,570		41
Residential mortgage – home equity		—		—		310		310		—
Consumer		—		—		—		—		—
Total impaired loans	$	345	$	26	$	6,153	$	6,498	$	150

(1)

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

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



Three months ended (in thousands)	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)		—		(166)		(24)		(518)		—		(795)
Recoveries collected		5		7		9		36		93		—		150
Credit Loss Expense		(174)		163		(473)		1,133		199		—		848
ACL balance at June 30, 2023	$	4,946	$	1,134	$	3,549	$	6,417	$	859	$	—	$	16,905
ALL balance at January 1, 2022	$	6,032	$	2,615	$	2,460	$	3,484	$	934	$	430	$	15,955
Loan Charge-offs		—		—		(52)		(33)		(545)		—		(630)
Recoveries collected		1		20		9		101		76		—		207
Credit Loss Expense		187		(463)		413		(440)		508		—		205
ALL balance at June 30, 2022	$	6,220	$	2,172	$	2,830	$	3,112	$	973	$	430	$	15,737



Three months ended (in thousands)	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Residential Mortgage		Consumer		Unallocated		Total
ACL balance at April 1, 2023	$	4,862	$	1,103	$	3,755	$	6,324	$	827	$	—	$	16,871
Loan Charge-offs		(87)		—		(166)		(18)		(185)		—		(456)
Recoveries collected		—		2		5		18		31		—		56
Credit Loss Expense		171		29		(45)		93		186		—		434
ACL balance at June 30, 2023	$	4,946	$	1,134	$	3,549	$	6,417	$	859	$	—	$	16,905
ALL balance at April 1, 2022	$	5,922	$	2,542	$	2,513	$	2,945	$	940	$	430	$	15,292
Charge-offs		—		—		(4)		(24)		(299)		—		(327)
Recoveries		—		2		6		86		54		—		148
Credit Loss Expense		298		(372)		315		105		278		—		624
ALL balance at June 30, 2022	$	6,220	$	2,172	$	2,830	$	3,112	$	973	$	430	$	15,737

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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 DCF. Economic forecasts include but are not limited to unemployment, the Consumer Price Index, the Housing Affordability Index, and Gross State Product. These forecasts are assumed to revert to the long term average and are utilized in the model to estimate the probability of default and the loss given default is the estimated loss rate, which varies over time. The estimated loss rate is applied within the appropriate periods in the cash flow model to determine the net present value. Net present value is also impacted by assumption related to the duration between default and recovery. The reserve is based on the difference between the summation of the principal balances taking amortized costs into consideration and the summation of the net present values.

Qualitative Analysis. Based on management’s review and analysis of internal, external and model risks, management may adjust the model output. Management reviews the peaks and troughs of the model’s calibrations, taking into account economic forecasts to develop guardrails that serve as the basis for determining the reasonableness of the model’s output and makes adjustments as necessary. This process challenges unexpected variability resulting from outputs beyond the model’s calibrations that appear to be unreasonable. Management also enhances the calculation through the use of Moody’s economic forecast data in its calculation. Additionally, management may adjust the economic forecast if it is incompatible with known market conditions based on management’s experience and perspective.

The ACL is based on estimates, and actual losses may vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ACL that is representative of the risk found in the components of the portfolio at any given date.

Credit Quality Indicators:

The Corporation’s portfolio grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Corporation’s internal credit risk grading system is based on debt service coverage, collateral values and other subjective factors. Mortgage and consumer loans are defaulted to pass grade until a loan migrates to past due status.

The Corporation has a loan review policy and annual scope report that details the level of loan review for loans in a given year. The annual loan review provides the Credit Risk Committee with an independent analysis of the following: (i) credit quality of the loan portfolio, (ii) compliance with loan policy, (iii) adequacy of documentation in credit files and (iv) validity of risk ratings.

The Corporation’s internally assigned grades are as follows:

Pass- The Corporation uses six grades of pass, including its watch rating. Generally, a pass rating indicates that the loan is currently performing and is of high quality.

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

Substandard- Assets that are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Assets so classified have a well-defined weakness, or weaknesses that jeopardize the liquidation of

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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.

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


(in thousands)	2023		2022		2021		2020		2019		2018 and Prior		Revolving		Total Portfolio Loans
June 30, 2023
Commercial real estate:
Non owner-occupied
Pass	$	19,702	$	66,666	$	31,131	$	47,947	$	40,130	$	60,486	$	807	$	266,869
Special Mention		—		—		—		—		—		6,167		—		6,167
Substandard		—		—		—		—		—		11,544		—		11,544
Total non-owner occupied		19,702		66,666		31,131		47,947		40,130		78,197		807		284,580
Current period gross charge-offs		—		—		—		—		—		87		—		87
All other CRE
Pass		16,648		28,223		25,694		21,675		25,017		70,917		4,490		192,664
Special Mention		—		—		—		—		—		—		1,203		1,203
Substandard		—		—		1,080		—		1,888		1,471		599		5,038
Total all other CRE		16,648		28,223		26,774		21,675		26,905		72,388		6,292		198,905
Current period gross charge-offs		—		—		—		—		—		—		—		—
Acquisition and development:
1-4 family residential construction
Pass		3,905		12,561		1,198		—		—		195		2,369		20,228
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total acquisition and development		3,905		12,561		1,198		—		—		195		2,369		20,228
Current period gross charge-offs		—		—		—		—		—		—		—		—
All other A&D
Pass		6,966		20,364		5,072		9,427		1,328		11,501		3,989		58,647
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		128		—		128
Total all other A&D		6,966		20,364		5,072		9,427		1,328		11,629		3,989		58,775
Current period gross charge-offs		—		—		—		—		—		—		—		—
Commercial and industrial:
Pass		20,732		73,589		26,631		13,851		10,735		12,981		69,070		227,589
Special Mention		—		—		—		—		—		334		844		1,178
Substandard		—		8,923		2,140		6,896		135		876		1,946		20,916
Total commercial and industrial		20,732		82,512		28,771		20,747		10,870		14,191		71,860		249,683
Current period gross charge-offs		—		—		—		166		—		—		—		166
Residential mortgage:
Residential mortgage - term
Pass		29,970		80,804		90,055		40,502		26,163		138,450		2,004		407,948
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		926		156		101		5,557		40		6,780
Total residential mortgage - term		29,970		80,804		90,981		40,658		26,264		144,007		2,044		414,728
Current period gross charge-offs		—		—		—		—		—		13		—		13
Residential mortgage - home equity
Pass		1,060		5,301		909		505		307		571		51,535		60,188
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		41		—		19		564		624
Total residential mortgage - home equity		1,060		5,301		909		546		307		590		52,099		60,812
Current period gross charge-offs		—		—		—		—		—		11		—		11
Consumer:
Pass		12,170		13,199		8,094		2,895		930		22,045		2,733		62,066
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		56		163		24		7		5		6		261
Total consumer		12,170		13,255		8,257		2,919		937		22,050		2,739		62,327
Current period gross charge-offs		86		141		272		2		—		17		—		518
Total Portfolio Loans
Pass		111,153		300,707		188,784		136,802		104,610		317,146		136,997		1,296,199
Special Mention		—		—		—		—		—		6,501		2,047		8,548
Substandard		—		8,979		4,309		7,117		2,131		19,600		3,155		45,291
Total Portfolio Loans	$	111,153	$	309,686	$	193,093	$	143,919	$	106,741	$	343,247	$	142,199	$	1,350,038
Current YTD Period:
Current period gross charge-offs	$	86	$	141	$	272	$	168	$	—	$	128	$	—	$	795

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(in thousands)	2022		2021		2020		2019		2018		2017 and Prior		Revolving		Total Portfolio 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

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.

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


(in thousands)	2023		2022		2021		2020		2019		2018 and Prior		Revolving		Total Portfolio Loans
June 30, 2023
Commercial real estate:
Non owner-occupied
Performing	$	19,702	$	66,666	$	31,131	$	47,947	$	40,130	$	78,197	$	807	$	284,580
Nonperforming		—		—		—		—		—		—		—		—
Total non-owner occupied		19,702		66,666		31,131		47,947		40,130		78,197		807		284,580
All other CRE
Performing		16,648		28,223		26,774		21,675		26,905		72,388		6,292		198,905
Nonperforming		—		—		—		—		—		—		—		—
Total all other CRE		16,648		28,223		26,774		21,675		26,905		72,388		6,292		198,905
Acquisition and development:
1-4 family residential construction
Performing		3,905		12,561		1,198		—		—		195		2,369		20,228
Nonperforming		—		—		—		—		—		—		—		—
Total acquisition and development		3,905		12,561		1,198		—		—		195		2,369		20,228
All other A&D
Performing		6,966		20,364		5,072		9,427		1,328		11,501		3,989		58,647
Nonperforming		—		—		—		—		—		128		—		128
Total all other A&D		6,966		20,364		5,072		9,427		1,328		11,629		3,989		58,775
Commercial and industrial:
Performing		20,732		82,512		28,771		20,747		10,870		14,191		71,860		249,683
Nonperforming		—		—		—		—		—		—		—		—
Total commercial and industrial		20,732		82,512		28,771		20,747		10,870		14,191		71,860		249,683
Residential mortgage:
Residential mortgage - term
Performing		29,970		80,804		90,981		40,658		26,163		141,559		2,030		412,165
Nonperforming		—		—		—		—		101		2,448		14		2,563
Total residential mortgage - term		29,970		80,804		90,981		40,658		26,264		144,007		2,044		414,728
Residential mortgage - home equity
Performing		1,060		5,301		909		505		307		571		51,814		60,467
Nonperforming		—		—		—		41		—		19		285		345
Total residential mortgage - home equity		1,060		5,301		909		546		307		590		52,099		60,812
Consumer:
Performing		12,170		13,255		8,234		2,919		937		21,981		2,735		62,231
Nonperforming		—		—		23		—		—		69		4		96
Total consumer		12,170		13,255		8,257		2,919		937		22,050		2,739		62,327
Total Portfolio Loans
Performing		111,153		309,686		193,070		143,878		106,640		340,583		141,896		1,346,906
Nonperforming		—		—		23		41		101		2,664		303		3,132
Total Portfolio Loans	$	111,153	$	309,686	$	193,093	$	143,919	$	106,741	$	343,247	$	142,199	$	1,350,038

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(in thousands)	2022		2021		2020		2019		2018		2017 and Prior		Revolving		Total Portfolio 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

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Note 6 – 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 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 is determined using a market approach. As of June 30, 2023, the U.S. Government agencies and treasuries, residential and commercial mortgage-backed securities, collateralized mortgage obligations, and state and political subdivisions bonds, excluding the tax increment financing (“TIF”) bonds, were classified as Level 2 within the valuation hierarchy. Their fair values were determined based upon market-corroborated inputs and valuation matrices, which were obtained through third party data service providers or securities brokers through which the Corporation has historically transacted both purchases and sales of investment securities. The TIF bonds and CDO portfolio, which consists of pooled trust preferred securities issued by banks, thrifts, and insurance companies, are classified as Level 3 within the valuation hierarchy. The CDO fair values are determined by a third party using a discounted cash flow model.

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.

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Nonrecurring Basis –

Individually Evaluated Loans- Individual loans with borrowers experiencing financial difficulty and with a remaining principal balance of $0.1 million or more are evaluated for potential specific reserves and adjusted, if a shortfall exists, to fair value less costs to sell. Fair value is measured based on the value of the value of the underlying collateral securing the loan if repayment is expected solely from the sale of operation of the collateral or present value of estimated future cash flows discounted at the loan’s contractual interest rate if the loan is not determined to be collateral dependent.

Fair value for individually evaluated loans is determined using several methods. Generally, the fair value of real estate is determined based on appraisals by qualified licensed appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. These routine adjustments are made to adjust the value of a specific property relative to comparable properties for variations in qualitities such as location, size, and income production capacity relative to the subject property of the appraisal.

Subsequent to the initial impairment date, existing individually evaluated loans are reevaluated quarterly for additional impairment and adjustments to fair value less costs to sell are made, where appropriate. For individually evaluated loans, the first state of our impairment analysis involves inspection of the property in question to affirm the condition has not deteriorated since the previous impairment analysis date. Management also engages in conversations with local real estate professionals and market participants to determine the likely marketing time and value range for the property. The second state involves an assessment of current trends in the regional market. After thorough consideration of these factors, management will order a new appraisal.

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

Equity Investment- Equity investments included in the table below are considered impaired with losses recognized on the income statement in net gains. Fair value of the equity investment was based on an independent third-party valuation report where the value was determined based on the revenue multiples of like kind information technology businesses. These assets are included as Level 3 fair values based upon the lowest level of input that is significant to the fair value measurements.

Other real estate owned – Other real estate owned included in the table below are considered impaired with specific write-downs. Fair value of other real estate owned was based on independent third-party appraisals of the properties. 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.

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



			Fair Value Measurements at June 30, 2023 Using
			Quoted
			Prices in	Significant
	Assets		Active Markets	Other		Significant
	Measured at		for Identical	Observable		Unobservable
	Fair Value		Assets	Inputs		Inputs
(in thousands)	06/30/23		(Level 1)	(Level 2)		(Level 3)
Recurring:
Investment securities available-for-sale:
U.S. government agencies	$	9,541		$	9,541
Residential mortgage-backed agencies	$	35,867		$	35,867
Commercial mortgage-backed agencies	$	29,134		$	29,134
Collateralized mortgage obligations	$	20,125		$	20,125
Obligations of states and political subdivisions	$	10,566		$	10,566
Corporate bonds	$	747		$	747
Collateralized debt obligations	$	14,105				$	14,105
Financial derivatives	$	1,084		$	1,084
Non-recurring:
Equity Investment	$	2,545				$	2,545
Other real estate owned	$	—				$	—



			Fair Value Measurements at December 31, 2022 Using
			Quoted
			Prices in	Significant
	Assets/(liabilities)		Active Markets	Other		Significant
	Measured at		for Identical	Observable		Unobservable
	Fair Value		Assets	Inputs		Inputs
(in thousands)	12/31/22		(Level 1)	(Level 2)		(Level 3)
Recurring:
Investment securities available-for-sale:
U.S. government agencies	$	9,462		$	9,462
Residential mortgage-backed agencies	$	37,401		$	37,401
Commercial mortgage-backed agencies	$	30,732		$	30,732
Collateralized mortgage obligations	$	21,044		$	21,044
Obligations of states and political subdivisions	$	10,492		$	10,492
Corporate bonds	$	887			887
Collateralized debt obligations	$	15,871				$	15,871
Financial derivatives	$	1,068		$	1,068
Non-recurring:
Impaired loans, net	$	211				$	211
Equity investment	$	1,796				$	1,796
Other real estate owned	$	—				$	—

At June 30, 2023, individually evaluated loans had a net carrying amount of $2.2 million with no valuation allowance.

At December 31, 2022, the fair value of impaired loans with a valuation allowance or charge-off was $1.0 million, net of valuation allowances of $64,700 and charge-offs of $1.3 million. During the year ended December 31, 2022, changes to the valuation allowance or additional charge off activity was recorded on loans with a net balance of approximately $0.4 million.

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

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


(in thousands)	Fair Value at June 30, 2023		Valuation Technique	Significant Unobservable Inputs	Significant Unobservable Input Value
Recurring:
Investment Securities – available for sale -CDO	$	14,105	Discounted Cash Flow	Discount Margin	Range of high 500 to low to mid 600

Non-recurring:
Individually Evaluated Loans, net	$	-	Market Comparable Properties	Marketability Discount	N/A

Equity Investment	$	2,545	Market Method	Revenue Multiples	2.8x


(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:
Impaired Loans, net	$	211	Market Comparable Properties	Marketability Discount	10.0% - 15.0%

Equity Investment	$	1,796	Market Method	Revenue Multiples	2.8x

(1)

Range would include discounts taken since appraisal and estimated values

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The following tables show a reconciliation of the beginning and ending balances for fair valued assets measured on a recurring basis using Level 3 significant unobservable inputs for the six and three month periods ended June 30, 2023 and 2022:


	Fair Value Measurements
	Using Significant Unobservable Inputs
	(Level 3)
	Investment Securities
(in thousands)	Available for Sale
Beginning balance January 1, 2023	$	15,871
Total losses realized/unrealized:
Included in other comprehensive loss		(1,766)
Ending balance June 30, 2023	$	14,105


	Fair Value Measurements
	Using Significant Unobservable Inputs
	(Level 3)
	Investment Securities
(in thousands)	Available for Sale
Beginning balance January 1, 2022	$	17,192
Total losses realized/unrealized:
Included in other comprehensive loss		(934)
Ending balance June 30, 2022	$	16,258



	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
(in thousands)	Investment Securities Available for Sale
Beginning balance April 1, 2023	$	14,114
Total gains realized/unrealized:
Included in other comprehensive income		(9)
Ending balance June 30, 2023	$	14,105



	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
(in thousands)	Investment Securities Available for Sale
Beginning balance April 1, 2022	$	17,319
Total losses realized/unrealized:
Included in other comprehensive income		(1,061)
Ending balance June 30, 2022	$	16,258

There were no gains or losses included in earnings attributable to the change in realized/unrealized gains or losses related to the assets for the six or three month periods ended June 30, 2023 or 2022.

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

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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 tables present fair value information about financial instruments, whether or not recognized in the Consolidated 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 Consolidated Statement of Financial Condition are as follows:


	June 30, 2023				Fair Value Measurements
					Quoted
					Prices in		Significant
					Active Markets		Other		Significant
					for Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
(in thousands)	Amount		Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets:
Cash and due from banks	$	86,901	$	86,901	$	86,901
Interest bearing deposits in banks		1,650		1,650		1,650
Investment securities - AFS		120,085		120,085			$	105,980	$	14,105
Investment securities - HTM		230,759		199,071				179,270		19,801
Restricted bank stock		4,490		N/A
Loans held for sale		500		500						500
Loans, net		1,332,806		1,255,997						1,255,997
Financial derivatives		1,084		1,084				1,084
Accrued interest receivable		6,956		6,956				851		6,105
Financial Liabilities:
Deposits - non-maturity		1,372,823		1,372,823				1,372,823
Deposits - time deposits		207,136		207,774				207,774
Short-term borrowed funds		50,078		50,078				50,078
Long-term borrowed funds		110,929		110,666				110,666
Accrued interest payable		517		517				517


	December 31, 2022				Fair Value Measurements
					Quoted
					Prices in		Significant
					Active Markets		Other		Significant
					for Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		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 held for sale		—		—
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 derivatives		—		—				—
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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Note 7 – Accumulated Other Comprehensive Loss

The following table presents the changes in each component of accumulated other comprehensive loss for the 12 months ended December 31, 2022 and the three month periods ended March 31, 2023 and June 30, 2023:


	Investment		Investment
	securities-		securities-		Investment
	with OTTI		all other		securities-		Cash Flow		Pension
(in thousands)	AFS		AFS		HTM		Hedge		Plan		SERP		Total
Accumulated OCL, net:
Balance - January 1, 2022	$	(949)	$	(5,749)	$	(134)	$	(319)	$	(18,108)	$	(2,055)	$	(27,314)
Other comprehensive (loss)/income 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		(1,180)		985		—		(138)		123		—		(210)
Amounts reclassified from accumulated other comprehensive income		(37)		—		133		—		184		(1)		279
Balance - March 31, 2023	$	(2,928)	$	(15,395)	$	(5,570)	$	659	$	(16,296)	$	573	$	(38,957)
Other comprehensive income/(loss) before reclassifications		111		(1,654)		—		150		(42)		—		(1,435)
Amounts reclassified from accumulated other comprehensive loss		(40)		—		129		—		195		(2)		282
Balance - June 30, 2023	$	(2,857)	$	(17,049)	$	(5,441)	$	809	$	(16,143)	$	571	$	(40,110)

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


	Before		Tax
Components of Other Comprehensive Loss	Tax		(Expense)
(in thousands)	Amount		Benefit		Net
For the six months ended June 30, 2023
Available for sale (AFS) securities with OTTI:
Unrealized holding losses	$	(1,408)	$	339	$	(1,069)
Less: accretable yield recognized in income		101		(24)		77
Net unrealized losses on investments with OTTI		(1,509)		363		(1,146)
Available for sale securities – all other:
Unrealized holding losses		(881)		212		(669)
Held to maturity securities:
Unrealized holding losses on securities transferred to held to maturity		—		—		—
Less: amortization recognized in income		(345)		83		(262)
Net unrealized gains on HTM securities		345		(83)		262
Cash flow hedges:
Unrealized holding gains		16		(4)		12
Pension Plan:
Unrealized net actuarial gain		105		(24)		81
Less: amortization of unrecognized loss		(499)		120		(379)
Net pension plan liability adjustment		604		(144)		460
SERP:
Unrealized net actuarial loss		—		—		—
Less: amortization of unrecognized loss		4		(1)		3
Net SERP liability adjustment		(4)		1		(3)
Other comprehensive loss	$	(1,429)	$	345	$	(1,084)

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	Before		Tax
Components of Other Comprehensive Loss	Tax		(Expense)
(in thousands)	Amount		Benefit		Net
For the six months ended June 30, 2022
Available for sale (AFS) securities with OTTI:
Unrealized holding gains	$	(654)	$	175	$	(479)
Less: accretable yield recognized in income		101		(27)		74
Net unrealized losses on investments with OTTI		(755)		202		(553)
Available for sale securities – all other:
Unrealized holding losses		(16,203)		4,336		(11,867)
Unrealized holding losses on securities transferred from available for sale to held to maturity		8,328		(2,228)		6,100
Less: gains recognized in income		3		(1)		2
Net unrealized losses on all other AFS securities		(7,878)		2,109		(5,769)
Held to maturity securities:
Unrealized holding losses on securities transferred to held to maturity		(8,328)		2,228		(6,100)
Less: amortization recognized in income		(324)		87		(237)
Net unrealized losses on HTM securities		(8,004)		2,141		(5,863)
Cash flow hedges:
Unrealized holding gains		1,088		(292)		796
Pension Plan:
Unrealized net actuarial loss		(10,542)		2,822		(7,720)
Less: amortization of unrecognized loss		(558)		150		(408)
Net pension plan liability adjustment		(9,984)		2,672		(7,312)
SERP:
Unrealized net actuarial loss		—		—		—
Less: amortization of unrecognized loss		(135)		36		(99)
Less: amortization of prior service costs		—		—		—
Net SERP liability adjustment		135		(36)		99
Other comprehensive loss	$	(25,398)	$	6,796	$	(18,602)

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Components of Other Comprehensive Loss (in thousands)	Before Tax Amount		Tax (Expense) Benefit		Net
For the three months ended June 30, 2023
Available for sale (AFS) securities with OTTI:
Unrealized holding losses	$	198	$	(87)	$	111
Less: accretable yield recognized in income		51		(11)		40
Net unrealized gains on investments with OTTI		147		(76)		71
Available for sale securities – all other:
Net unrealized losses on all other AFS securities		(2,221)		567		(1,654)
Held to maturity securities:
Unrealized holding gains		—		—		—
Less: amortization recognized in income		(164)		35		(129)
Net unrealized gains on HTM securities		164		(35)		129
Cash flow hedges:
Unrealized holding gains		204		(54)		150
Pension Plan:
Unrealized net actuarial loss		(63)		21		(42)
Less: amortization of unrecognized loss		(249)		54		(195)
Net pension plan liability adjustment		186		(33)		153
SERP:
Unrealized net actuarial loss		—		—		—
Less: amortization of unrecognized loss		2		—		2
Net SERP liability adjustment		(2)		—		(2)
Other comprehensive loss	$	(1,522)	$	369	$	(1,153)

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Components of Other Comprehensive Loss (in thousands)	Before Tax Amount		Tax (Expense) Benefit		Net
For the three months ended June 30, 2022
Available for sale (AFS) securities with OTTI:
Unrealized holding gains	$	(795)	$	213	$	(582)
Less: accretable yield recognized in income		51		(14)		37
Net unrealized losses on investments with OTTI		(846)		227		(619)
Available for sale securities – all other:
Unrealized holding losses		(5,359)		1,435		(3,924)
Less: gains recognized in income		—		—		—
Net unrealized losses on all other AFS securities		(5,359)		1,435		(3,924)
Held to maturity securities:
Unrealized holding gains		—		—		—
Less: gains recognized in income		—		—		—
Less: amortization recognized in income		(230)		62		(168)
Net unrealized gains on HTM securities		230		(62)		168
Cash flow hedges:
Unrealized holding gains		249		(67)		182
Pension Plan:
Unrealized net actuarial loss		(6,922)		1,853		(5,069)
Less: amortization of unrecognized loss		(279)		75		(204)
Less: amortization of prior service costs		—		—		—
Net pension plan liability adjustment		(6,643)		1,778		(4,865)
SERP:
Unrealized net actuarial loss		—		—		—
Less: amortization of unrecognized loss		(67)		18		(49)
Less: amortization of prior service costs		—		—		—
Net SERP liability adjustment		67		(18)		49
Other comprehensive loss	$	(12,302)	$	3,293	$	(9,009)

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


Amounts Reclassified from	Six Months Ended
Accumulated Other Comprehensive Loss	June 30,				Affected Line Item in the Statement
(in thousands)	2023		2022		Where Net Income is Presented
Net unrealized gains on available for sale investment securities with OTTI:
Accretable yield	$	101	$	101	Interest income on taxable investment securities
Taxes		(24)		(27)	Credit for income tax expense
	$	77	$	74	Net of tax
Net unrealized gains on available for sale investment securities - all others:
Gains recognized	$	—	$	3	Net gains
Taxes		—		(1)	Provision for income tax expense
	$	—	$	2	Net of tax
Net unrealized losses on held to maturity securities:
Amortization	$	(345)	$	(324)	Interest income on taxable investment securities
Taxes		83		87	Provision for income tax expense
	$	(262)	$	(237)	Net of tax
Net pension plan liability adjustment:
Amortization of unrecognized loss	$	(499)	$	(558)	Other Expense
Taxes		120		150	Provision for income tax expense
	$	(379)	$	(408)	Net of tax
Net SERP liability adjustment:
Amortization of unrecognized gain/(loss)	$	4	$	(135)	Other Expense
Taxes		(1)		36	(Credit)/provision for income tax expense
	$	3	$	(99)	Net of tax
Total reclassifications for the period	$	(561)	$	(668)	Net of tax

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Amounts Reclassified from	Three Months Ended
Accumulated Other Comprehensive Loss	June 30,				Affected Line Item in the Statement
(in thousands)	2023		2022		Where Net Income is Presented
Net unrealized gains on available for sale investment securities with OTTI:
Accretable Yield	$	51	$	51	Interest income on taxable investment securities
Taxes		(11)		(14)	Provision for income tax expense
	$	40	$	37	Net of tax
Net unrealized losses on held to maturity securities:
Amortization	$	(164)	$	(230)	Interest income on taxable investment securities
Taxes		35		62	Provision for income tax expense
	$	(129)	$	(168)	Net of tax
Net pension plan liability adjustment:
Amortization of unrecognized loss	$	(249)	$	(279)	Other expense
Taxes		54		75	Provision for income tax expense
	$	(195)	$	(204)	Net of tax
Net SERP liability adjustment:
Amortization of unrecognized loss	$	2	$	(67)	Other expense
Taxes		—		18	Provision for income tax expense
	$	2	$	(49)	Net of tax
Total reclassifications for the period	$	(282)	$	(384)	Net of tax

Note 8 - Equity Compensation Plan Information

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. Director stock compensation was $138,001 for the six months ended June 30, 2023 and $125,588 for the six months ended June 30, 2022. Director stock compensation expense was $62,500 for the quarter ended June 30, 2023 and $66,730 for the quarter ended June 30, 2022.

During the six- and three- month periods ended June 30, 2023, employee stock compensation expense was $0.2 million and $0.1 million, respectively. Employee stock compensation expense was $0 for both the six- and three- month periods ended June 30, 2022.

Restricted Stock Units

On March 26, 2020, pursuant to the Corporation’s Long Term Incentive Plan (the "LTIP"), which is a sub-plan of the Equity Plan, the Compensation Committee of First United Corporation’s Board of Directors (the "Committee") granted RSUs to the

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Corporation’s principal executive officer, its principal financial officer, and certain of its other executive officers. An RSU contemplates the issuance of shares of common stock of First United Corporation if and when the RSU vests.

The RSUs granted to each of the foregoing officers consist of (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.

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 six months ended June 30, 2023, and $42,024 for the six months ended June 30, 2022. Stock compensation expense was $0 and $15,896 for the second quarters of 2023 and 2022, respectively. All compensation expense related to the 2019 LTIP year was recognized as of March 31, 2022. All compensation expense related to the 2020 LTIP plans was recognized as of March 31, 2023.

In May 2021, RSUs relating to 7,389 performance vesting shares and 3,693 time vesting shares (target level) for plan year 2021 were granted, which had a grant date fair market value of $17.93 per share of common stock underlying each RSU. 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. Stock compensation expense was $33,142 for the six-month periods ended of 2023 and 2022. Stock compensation expense was $16,571 for both of the three month periods ended June 30, 2023 and 2022. Unrecognized compensation expense as of June 30, 2023 related to unvested units was $183,017.

In March 2022, RSUs relating to 8,096 performance vesting shares and 6,238 time vesting shares (target level) for plan year 2022 were granted, which had a grant date fair market value of $21.88 per share of common stock underlying each RSU. 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 $52,290 and $26,145 for the six months ended June 30, 2023 and 2022, respectively. Stock compensation expense was $26,145 for both of the three month periods ended June 30, 2023 and 2022. Unrecognized compensation expense as of June 30, 2023 related to unvested units was $183,017.

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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 $27,585 for both the six and three month periods ended June 30, 2023. Unrecognized compensation expense as of June 30, 2023 related to unvested units was $303,434.

Note 9– Derivative Financial Instruments

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 June 30, 2023, $15.0 million notional amount remains. The interest rate swap creates an effective fixed interest rate of 4.6450% on the $15.0 million notional amount of the Corporation’s junior subordination debt until the interest rate swap’s maturity in March 2026.

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

For the six months ended June 30, 2023, the Corporation recorded an increase in the value of the derivatives of $16 thousand and the related deferred tax of $4 thousand in net accumulated other comprehensive loss to reflect the effective portion of cash flow hedges. For the three months ended June 30, 2023, the Corporation recorded an increase in the value of the derivatives of $0.2 million and the related deferred tax of $0.1 million in net accumulated other comprehensive income to reflect the effective portion of cash flow hedges. ASC Subtopic 815-30 requires the net accumulated other comprehensive loss to be reclassified to earnings if the hedge becomes ineffective or is terminated. There was no hedge ineffectiveness recorded for the six or three month periods ended June 30, 2023. The Corporation does not expect any material losses relating to these hedges to be reclassified into earnings within the next 12 months.

Interest rate swap agreements are entered into with counterparties that meet established credit standards and the Corporation believes that the credit risk inherent in these contracts is not significant as of June 30, 2023.

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


Derivative in Cash Flow Hedging Relationships
					Amount of gain or
					(loss) recognized in
	Amount of gain or		Amount of gain or		income or derivative
	(loss) recognized in		(loss) reclassified from		(ineffective portion
	OCI on derivative		accumulated OCI into		and amount excluded
	(effective portion),		income (effective		from effectiveness
(in thousands)	net of tax		portion) (a)		testing) (b)
Interest rate contracts:
Six months ended:
June 30, 2023	$	12	$	—	$	—
June 30, 2022		796		—		—
Three months ended:
June 30, 2023	$	150	$	—	$	—
June 30, 2022		182		—		—

Notes:

(a)

Reported as interest expense

(b)

Reported as other income

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Note 10 – Regulatory Capital Requirements

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


	June 30, 2023		December 31, 2022		Required for Capital Adequacy Purposes		Required to be Well Capitalized
Total Capital (to risk-weighted assets)	13.87	%	14.37	%	8.00	%	10.00	%
Tier 1 Capital (to risk-weighted assets)	12.64	%	13.29	%	6.00	%	8.00	%
Common Equity Tier 1 Capital (to risk-weighted assets)	12.64	%	13.29	%	4.50	%	6.50	%
Tier 1 Capital (to average assets)	9.78	%	10.01	%	4.00	%	5.00	%

As of June 30, 2023 and December 31, 2022, the Bank was considered “well capitalized” under the regulatory framework for prompt corrective action. We adopted CECL effective January 1, 2023 and elected not to implement the regulatory agencies’ capital transition and instead opted to record the impact to our capital ratios immediately upon implementation.

Effective with the implementation of CECL, a $2.2 million, net of tax, adjustment was made to retained earnings. The adjustment did not have a material impact to our capital ratios.

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Note 11 – Deposits

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


(dollars in thousands)	June 30, 2023			December 31, 2022

Non-Interest-bearing deposits:	$	466,628	30%	$	506,613	32%
Interest-bearing deposits:
Demand		393,234	25%		327,685	21%
Money Market		297,312	19%		365,192	23%
Savings deposits		215,649	13%		250,720	16%
Time deposits- retail		146,055	9%		120,523	8%
Time deposits- brokered		61,081	4%		—	0%
Total Deposits	$	1,579,959	100%	$	1,570,733	100%

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 June 30, 2023 and December 31, 2022.


	June 30, 2023			December 31, 2022
(dollars in thousands)		Balance	Percent		Balance	Percent
Insured/collateralized deposits	$	1,350,060	85%	$	1,118,190	71%
Uninsured deposits		229,899	15%		452,543	29%
	$	1,579,959	100%	$	1,570,733	100%

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


	June 30, 2023			December 31, 2022
(dollars in thousands)		Balance	Percent		Balance	Percent
Retail deposits	$	798,737	51%	$	855,014	54%
Business deposits		781,222	49%		715,719	46%
	$	1,579,959	100%	$	1,570,733	100%

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Note 12 – Borrowed Funds

The following is a summary of borrowings:



(Dollars in thousands)	Six Months Ended June 30, 2023		Year Ended December 31, 2022
Short-term Correspondent Bank Advance:
Securities sold under agreements to repurchase:
Outstanding at end of period	$	50,078	$	64,565
Weighted average interest rate at end of period		0.23%		0.12%
Maximum amount outstanding as of any month end	$	53,892	$	75,912
Average amount outstanding	$	51,988	$	63,182
Approximate weighted average rate during the period		0.21%		0.12%
FHLB advances, bearing fixed interest at rates ranging from 4.53% to 4.69% at June 30, 2023	$	80,000	$	-
Junior subordinated debt, bearing variable interest rate of 8.26% at June 30, 2023 and 7.49% at December 31, 2022		30,929		30,929
Total borrowings outstanding	$	161,007	$	95,494

At June 30, 2023, the repurchase agreements were secured by $66.4 million in investment securities issued by government related agencies. A minimum of 102% of fair value is pledged against account balances.

Note 13 – 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 six and three months ended June 30, 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 $104,000 for both of the six month periods ended June 30, 2023 and 2022 and $52,000 for both of the three month periods ended June 30, 2023 and 2022.

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


		Six Months Ended
		June 30, 2023
				Trust and
		Community		Investment
(in thousands)		Banking		Services		Total
Interest income	$	37,801	$	-	$	37,801
Interest expense		9,109		-		9,109
Credit loss expense		938		-		938
Non-interest income		4,411		4,551		8,962
Non-interest expense		22,562		2,587		25,149
Income before income taxes and intercompany fees		9,603		1,964		11,567
Intercompany management fee income (expense)		6		(6)		-
Income before income taxes		9,609		1,958		11,567
Income tax expense		2,367		411		2,778
Net income	$	7,242	$	1,547	$	8,789

		Six months ended
		June 30, 2022
				Trust and
		Community		Investment
(in thousands)		Banking		Services		Total
Interest income	$	28,878	$	-	$	28,878
Interest expense		1,566		-		1,566
Credit for loan losses		210		-		210
Non-interest income		4,094		4,766		8,860
Non-interest expense		18,805		2,405		21,210
Income before income taxes and intercompany fees		12,391		2,361		14,752
Intercompany management fee income (expense)		6		(6)		-
Income before income taxes		12,397		2,355		14,752
Income tax expense		3,115		494		3,609
Net income	$	9,282	$	1,861	$	11,143

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		Three Months Ended
		June 30, 2023
				Trust and
		Community		Investment
(in thousands)		Banking		Services		Total
Interest income	$	19,972	$	-	$	19,972
Interest expense		5,798		-		5,798
Credit loss expense		395		-		395
Non-interest income		2,285		2,284		4,569
Non-interest expense		11,177		1,334		12,511
Income before income taxes and intercompany fees		4,887		950		5,837
Intercompany management fee income (expense)		3		(3)		-
Income before income taxes		4,890		947		5,837
Income tax expense		1,224		199		1,423
Net income	$	3,666	$	748	$	4,414

		Three Months Ended
		June 30, 2022
				Trust and
		Community		Investment
(in thousands)		Banking		Services		Total
Interest income	$	14,731	$	-	$	14,731
Interest expense		760		-		760
Credit for loan losses		631		-		631
Non-interest income		2,069		2,357		4,426
Non-interest expense		9,427		1,203		10,630
Income before income taxes and intercompany fees		5,982		1,154		7,136
Intercompany management fee income (expense)		3		(3)		-
Income before income taxes		5,985		1,151		7,136
Income tax expense		1,467		241		1,708
Net income	$	4,518	$	910	$	5,428

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

Note 14 – Goodwill

ASC Topic 350, Intangibles- Goodwill and Other Intangibles provides guidance with respect to goodwill. Under this guidance, goodwill is not amortized but shall be tested at least annually for impairment at a level of accounting referred to as a reporting unit. The Corporation is considered the sole reporting unit. Goodwill of a reporting unit shall be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Impairment of goodwill is the condition that exists when the carrying amount of a reporting unit that includes goodwill exceeds the fair value. A goodwill impairment loss is recognized for the amount that the carrying amount of a reporting unit, including goodwill, exceeds fair value, limited to the total amount of goodwill allocated to that reporting unit.

An entity may assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill. If after assessing the totality of events or circumstances qualitatively, an entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the quantitative goodwill impairment test is unnecessary.

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Management notes that the heightened liquidity concerns that caused the failure of three banks in the United States in 2023 has had global impacts on some macroeconomic conditions and has created an unprecedented economic environment in which the Corporation and many other financial institutions are operating. The uncertainty has resulted in a significant decrease in the Corporation’s stock price, as well as the banking industry in general. Based on the totality of the circumstances and the impact of the economic conditions on the stock price, the events more likely than not reduce the fair value of a reporting unit below its carrying amount, including goodwill. An internal analysis of the fair value of the Corporation as of June 30, 2023, was performed. The results of the of the internal analysis determined fair value exceeded carrying value and, therefore, management has concluded there is no impairment at June 30, 2023. Management will continue to monitor the goodwill throughout the remainder of 2023.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION

The following discussion and analysis is intended as a review of material changes in and significant factors affecting the financial condition and results of operations of First United Corporation and its consolidated subsidiaries for the periods indicated. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and the notes thereto contained in Item 1 of Part I of this report, as well as the audited consolidated financial statements and related notes included in First United Corporation’s Annual Report on Form 10-K for the year ended December 31, 2022.

Unless the context clearly suggests otherwise, references in this report to “us”, “we”, “our”, and “the Corporation” are to First United Corporation and its consolidated subsidiaries.

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements do not represent historical facts, but are statements about management’s beliefs, plans and objectives about the future, as well as its assumptions and judgments concerning such beliefs, plans and objectives. These statements are evidenced by terms such as "anticipate," "estimate," "should," "expect," "believe," "intend," and similar expressions. Although these statements reflect management’s good faith beliefs and projections, they are not guarantees of future performance and they may not prove true. The beliefs, plans and objectives on which forward-looking statements are based involve risks and uncertainties that could cause actual results to differ materially from those addressed in the forward-looking statements. For a discussion of these risks and uncertainties, see the section of the periodic reports that First United Corporation files with the Securities and Exchange Commission entitled "Risk Factors".

FIRST UNITED CORPORATION

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, 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 June 30, 2023, the Corporation’s total assets were $1.9 billion, net loans were $1.3 billion, and deposits were $1.6 billion. Shareholders’ equity at June 30, 2023 was $155.2 million.

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The Corporation maintains an Internet site 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.

SELECTED FINANCIAL DATA

The following table sets forth certain selected financial data for the six month periods ended June 30, 2023 and 2022 and is qualified in its entirety by the detailed information and unaudited financial statements, including the notes thereto, included elsewhere in this quarterly report.


	As of the six months ended
	June 30,
	2023			2022
Per Share Data
Basic net income per common share	$	1.32		$	1.68
Diluted net income per common share	$	1.31		$	1.68
Basic book value per common share	$	23.12		$	20.22
Diluted book value per common share	$	23.07		$	20.19


Significant Ratios:

Return on Average Assets (a)		0.95	%		1.26	%

Return on Average Equity (a)		11.43	%		16.32	%

Average Equity to Average Assets		8.21	%		7.75	%

Capital Ratios:

Consolidated Total Capital (to risk weighted assets)		15.60	%		15.56	%
Consolidated Tier 1 Capital (to risk weighted assets)		14.40	%		14.41	%
Consolidated Common Equity Tier 1 Capital (to risk weighted assets)		12.40	%		12.35	%
Consolidated Tier 1 Capital (to average assets)		11.25	%		11.23	%

RESULTS OF OPERATIONS

Overview

Consolidated net income was $4.4 million for the second quarter of 2023, compared to $5.4 million for the second quarter of 2022 and $4.4 million for the first quarter of 2023. Basic and diluted net income was $0.66 per share for the second quarter of 2023, compared to basic and diluted net income per share of $0.82 for the second quarter of 2022. For the first quarter of 2023, basic net income was $0.66 per share and diluted net income was $0.65 per share.

The decrease in quarterly net income year-over-year was primarily driven by a $1.1 million increase in salaries and employee benefits due to an increase in health insurance costs related to unusually high claims, as well as increased salary expense for new hires, merit increases effective April 1, 2023, increased incentive compensation, and decreases in deferred loan costs due to decrease in loan reductions. Data processing expenses increased by $0.1 million, FDIC premiums increased by $0.1 million and miscellaneous expenses increased by $0.7 million primarily attributable to increased pension plan of $0.3 million, check fraud related expenses of $0.2 million, and increases in membership dues and licenses, mortgage escrow, debit card expense, and miscellaneous loan fees, partially offset by decreases in personnel related expense and loan service fees. An increase in net interest income of $0.2

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million and a decrease in income tax expense of $0.3 million also partially offset the decrease. The provision for credit losses was $0.4 million for the second quarter of 2023, compared to provision for loan loss of $0.6 million for the second quarter of 2022.

Year-to-date net income for the first six months of 2023 was $8.8 million compared to $11.1 million for the same period in 2022. The year-over-year decrease was primarily driven by a $2.4 million in salaries and employee benefits due primarily to increased salary expense of $1.1 million related to new hires and merit increases effective April 1, 2023, increased health insurance costs of $0.8 million associated with unusually high claims and increased incentive payouts of $0.2 million. Occupancy and equipment expense increased by $0.2 million, data processing expense increased by $0.3 million, and FDIC assessments increased by $0.1 million. Other miscellaneous expenses, such as loan service fees, dues and licenses, check fraud expenses, employee benefit plan expense, and miscellaneous expenses increased by $1.1 million. Provision for credit losses increased by $0.7 million when compared to the prior year period. These increases were partially offset by an increase in net interest income of $1.4 million, gains on sales of mortgages of $0.1 million, service charges on deposit accounts of $0.1 million, and debit card income of $0.1 million.

Other operating income, including gains, for the second quarter of 2023 increased slightly by $0.1 million when compared to the same period of 2022. Increases in service charges, debit card income, and gains on sales of mortgages were partially offset by decreases in wealth management income attributable to the decline in market values of assets under management.

Other operating income for the six months ended June 30, 2023 remained stable when compared to the same period of 2022. This increase was primarily due to the increase in gains on sales of residential mortgage loans of $0.1 million, service charges on deposit accounts of $0.1 million, and debit card income of $0.1 million, which was partially offset by decreases in wealth management income attributable to the decline in market values of assets under management.

Operating expenses increased by $1.9 million when comparing the second quarter of 2023 to the second quarter of 2022. This increase was primarily driven by a $1.1 million increase in salaries and employee benefits due to an increase in health insurance costs related to unusually high claims, as well as increased salary expense for new hires, merit increases effective April 1, 2023, and increased incentive compensation. Data processing expenses increased by $0.1 million, FDIC premiums increased by $0.1 million and miscellaneous expenses increased by $0.7 million primarily attributable to increased employee benefit plan costs of $0.3 million, check fraud related expenses of $0.2 million, and increases in membership dues and licenses, mortgage escrow interest expense, debit card expense, and miscellaneous loan fees, partially offset by decreases in personnel related expense and loan service fees.

For the six months ended June 30, 2023, non-interest expenses increased by $3.9 million when compared to the six months ended June 30, 2022. Salaries and employee benefits increased by $2.4 million year-over-year due primarily to increased salary expense of $1.1 million related to new hires and merit increases effective April 1, 2023, increased health insurance costs of $0.8 million associated with unusually high claims and increased incentive payouts of $0.2 million. Occupancy and equipment expense increased by $0.2 million, data processing expense increased by $0.3 million, and FDIC assessments increased by $0.1 million. Other miscellaneous expenses, such as loan service fees, dues and licenses, check fraud expenses, employee benefit plan expense, and miscellaneous expenses increased by $1.1 million.

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 a fully tax equivalent (“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 management believes it is not materially different than the corresponding GAAP disclosure.

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The tables below summarizes net interest income for the three month periods ended June 30, 2023 and 2022.


		Non-GAAP					GAAP
		Six Months Ended					Six Months Ended
		June 30,					June 30,
(dollars in thousands)		2023		2022			2023			2022
Interest income	$	38,253		$	29,355		$	37,801		$	28,878
Interest expense		9,109			1,566			9,109			1,566
Net interest income	$	29,144		$	27,789		$	28,692		$	27,312
Net interest margin %		3.39	%		3.40	%		3.34	%		3.46	%

		Three Months Ended					Three Months Ended
		June 30,					June 30,
(dollars in thousands)		2023			2022			2023			2022
Interest income	$	20,197		$	14,967		$	19,972		$	14,731
Interest expense		5,798			760			5,798			760
Net interest income	$	14,399		$	14,207		$	14,174		$	13,971
Net interest margin %		3.26	%		3.46	%		3.21	%		3.52	%

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The following tables set forth the average balances, net interest income and expense, and average yields and rates of our interest-earning assets and interest-bearing liabilities for the six- and three- month periods ended June 30 , 2023 and 2022:


	Six Months Ended
	June 30,
	2023						2022
	Average				Average		Average				Average
(dollars in thousands)	Balance		Interest		Yield/Rate		Balance		Interest		Yield/Rate
Assets
Loans	$	1,298,743	$	32,251	5.01	%	$	1,184,804	$	25,326	4.31	%
Investment Securities:
Taxable		338,817		3,547	2.11	%		356,878		2,946	1.66	%
Non taxable		26,099		963	7.44	%		27,447		1,005	7.38	%
Total		364,916		4,510	2.49	%		384,325		3,951	2.07	%
Federal funds sold		62,361		1,409	4.56	%		44,689		57	0.26	%
Interest-bearing deposits with other banks		3,342		45	2.72	%		4,487		5	0.21	%
Other interest earning assets		3,069		38	2.56	%		1,028		16	3.14	%
Total earning assets		1,732,431		38,253	4.45	%		1,619,333		29,355	3.66	%
Allowance for loan losses		(15,905)						(15,558)
Non-earning assets		172,461						172,839
Total Assets	$	1,888,987					$	1,776,614
Liabilities and Shareholders’ Equity
Interest-bearing demand deposits	$	365,491	$	2,021	1.11	%	$	291,220	$	182	0.13	%
Interest-bearing money markets		314,246		3,107	1.99	%		289,377		137	0.10	%
Savings deposits		236,383		135	0.12	%		247,573		36	0.03	%
Time deposits - Retail		124,684		832	1.35	%		148,377		521	0.71	%
Time deposits - Brokered		35,771		933	5.26	%		—		—	—	%
Short-term borrowings		52,332		60	0.23	%		60,144		39	0.13	%
Long-term borrowings		77,338		2,021	5.27	%		30,929		651	4.24	%
Total interest-bearing liabilities		1,206,245		9,109	1.52	%		1,067,620		1,566	0.30	%
Non-interest-bearing deposits		497,226						542,992
Other liabilities		30,497						29,337
Shareholders’ Equity		155,019						137,665
Total Liabilities and Shareholders’ Equity	$	1,888,987					$	1,777,614
Net interest income and spread			$	29,144	2.93	%			$	27,789	3.36	%
Net interest margin					3.39	%					3.46	%

(1)

The above table reflects the average rates earned or paid stated on an FTE basis assuming a 21% tax rate for 2023 and 2022. Non-GAAP interest income on a fully taxable equivalent was $452 and $477, respectively.

(2)

Net interest margin is calculated as net interest income divided by average earning assets.

(3)

The average yields on investments are based on amortized cost.

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	Three Months Ended
	June 30,
	2023						2022
(dollars in thousands)	Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate
Assets
Loans	$	1,317,728	$	16,794	5.11	%	$	1,200,651	$	12,876	4.30	%
Investment Securities:
Taxable		337,032		1,779	2.12	%		350,602		1,540	1.76	%
Non taxable		26,093		479	7.36	%		26,879		500	7.46	%
Total		363,125		2,258	2.49	%		377,481		2,040	2.17	%
Federal funds sold		84,629		1,102	5.22	%		36,151		39	0.43	%
Interest-bearing deposits with other banks		1,735		19	4.46	%		3,728		4	0.43	%
Other interest earning assets		4,490		24	2.23	%		1,026		8	3.13	%
Total earning assets		1,771,707		20,197	4.57	%		1,619,037		14,967	3.71	%
Allowance for loan losses		(16,982)						(15,221)
Non-earning assets		175,369						166,785
Total Assets	$	1,930,094					$	1,770,601
Liabilities and Shareholders’ Equity
Interest-bearing demand deposits	$	377,773	$	1,132	1.20	%	$	298,571	$	93	0.12	%
Interest-bearing money markets		304,322		1,809	2.38	%		282,083		74	0.11	%
Savings deposits		226,172		56	0.10	%		251,187		18	0.03	%
Time deposits - retail		130,634		552	1.69	%		142,013		216	0.61	%
Time deposits - brokered		61,081		801	5.26	%		—		—	—	%
Short-term borrowings		47,356		29	0.25	%		60,727		21	0.14	%
Long-term borrowings		110,929		1,419	5.13	%		30,929		338	4.38	%
Total interest-bearing liabilities		1,258,267		5,798	1.85	%		1,065,510		760	0.29	%
Non-interest-bearing deposits		484,952						539,488
Other liabilities		31,517						30,564
Shareholders’ Equity		155,358						136,039
Total Liabilities and Shareholders’ Equity	$	1,930,094					$	1,771,601
Net interest income and spread			$	14,399	2.72	%			$	14,207	3.42	%
Net interest margin					3.26	%					3.52	%

(1)

(2)

Net interest margin is calculated as net interest income divided by average earning assets.

(3)

The average yields on investments are based on amortized cost.

Net interest income, on a non-GAAP, FTE basis, increased by $0.2 million for the second quarter of 2023 when compared to the second quarter of 2022. This increase was driven by an increase of $5.2 million in interest income from an overall increase in yield of 86 basis points on interest earning assets and an increase in average balances of $152.7 million. Interest income on loans increased by $3.9 million due to the increase of 81 basis points in overall yield on the loan portfolio as new loans were booked at higher rates as well as adjustable-rate loans repricing in correlation to the rising rate environment and an increase in average balances of $117.1 million. Investment income increased by $0.2 million. The increase of $5.0 million in interest expense was driven by an increase of 142 basis points on interest paid on deposit accounts as well as an increase of $126.1 million in average balances of interest-bearing deposit accounts when compared to the same period of 2022. Increased deposit pricing is a result of the continued pressure on deposits as well as a shift in the deposit portfolio mix from non-interest-bearing deposits to interest-bearing accounts including the Insured Cash Sweep (“ICS”) product to ensure full FDIC insurance coverage. The net interest margin for the three months ended June 30, 2023 was 3.26%, compared to 3.52% for the three months ended June 30, 2022.

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Comparing the six months ended June 30, 2023 to the six months ended June 30, 2022, net interest income, on a non-GAAP, FTE basis, increased by $1.4 million. Interest income increased by $8.9 million and interest expense increased by $7.5 million. The yield on earning assets increased 79 basis points to 4.45% in 2023 compared to 3.66% in 2022 in correlation with the rising interest rate environment and new loans booked at higher rates. Interest expense on deposits increased $6.2 million while the average balances increased $100.0 million and interest on long-term borrowings increased $1.4 million relating to $80.0 million in Federal Home Loan Bank (“FHLB”) borrowings obtained during the first quarter of 2023 and an increase of interest rates on variable rate trust preferred borrowings. The increased interest expense resulted in an overall increase of 122 basis points on interest bearing liabilities. The net interest margin for the six months ended June 30, 2023 was 3.39%, compared to 3.46% for the six months ended June 30, 2022.

The following table sets forth an analysis of volume and rate changes in interest income and interest expense for our average interest-earning assets and average interest-bearing liabilities for the six and three month periods ended June 30, 2023 and 2022:


	For the Six months ended June 30, 2023
	compared to the Six months ended June 30, 2022
(in thousands and tax equivalent basis)	Volume		Rate		Net
Interest Income:
Loans	$	2,455	$	4,470	$	6,925
Taxable Investments		(150)		751		601
Non-taxable Investments		(50)		8		(42)
Federal funds sold		23		1,329		1,352
Interest-bearing deposits		(1)		41		40
Other interest earning assets		32		(10)		22
Total interest income		2,309		6,589		8,898
Interest Expense:
Interest-bearing demand deposits		48		1,791		1,839
Interest-bearing money markets		12		2,958		2,970
Savings deposits		(2)		101		99
Time deposits - Retail		(84)		395		311
Time deposits - Brokered		0		933		933
Short-term borrowings		(5)		26		21
Long-term borrowings		984		386		1,370
Total interest expense		953		6,590		7,543
Net interest income	$	1,356	$	(1)	$	1,355

(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.

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	For the Three months ended June 30, 2023 compared to the Three months ended June 30, 2022
(in thousands and tax equivalent basis)	Volume		Rate		Net
Interest Income:
Loans	$	1,259	$	2,659	$	3,918
Taxable Investments		(58)		297		239
Non-taxable Investments		(15)		(6)		(21)
Federal funds sold		52		1,011		1,063
Interest-bearing deposits		(2)		17		15
Other interest earning assets		27		(11)		16
Total interest income		1,263		3,967		5,230
Interest Expense:
Interest-bearing demand deposits		24		1,015		1,039
Interest-bearing money markets		6		1,729		1,735
Savings deposits		(2)		40		38
Time deposits - Retail		(17)		353		336
Time deposits - Brokered		0		801		801
Short-term borrowings		(5)		13		8
Long-term borrowings		876		205		1,081
Total interest expense		882		4,156		5,038
Net interest income	$	381	$	(189)	$	192

(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

Specific allocations have been made for loans where management has determined that the collateral supporting the loans is not adequate to cover the loan balance, and the qualitative factors affecting the allowance for credit losses (“ACL”) and allowance for loan losses (“ALL”) have been adjusted based on the current economic environment and the characteristics of the loan portfolio.

Other Income

The composition of other operating income for the six and three month periods ended June 30, 2023 and 2022 is illustrated in the following table:


	Income as % of						Income as % of
	Total Other Income						Total Other Income
	Six Months Ended						Three Months Ended
	June 30,						June 30,
(in thousands)	2023			2022			2023			2022
Service charges on deposit accounts	$	1,062	12%	$	928	11%	$	546	12%	$	463	11%
Other service charges		476	5%		445	5%		244	6%		232	5%
Trust department		3,995	46%		4,233	48%		2,025	45%		2,044	46%
Debit card income		1,986	23%		1,869	21%		1,031	23%		983	22%
Bank owned life insurance		616	7%		589	7%		311	7%		297	7%
Brokerage commissions		555	6%		533	6%		258	6%		313	7%
Other income		132	1%		198	2%		68	2%		81	2%
	$	8,822	100%	$	8,795	100%	$	4,483	100%	$	4,413	100%

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Other Operating Expenses

The composition of other operating expenses for the six and three month periods ended June 30, 2023 and 2022 is illustrated in the following table:


	Expense as % of						Expense as % of
	Total Other Operating Expenses						Total Other Operating Expenses
	Six Months Ended						Three Months Ended
	June 30,						June 30,
(in thousands)	2023			2022			2023			2022
Salaries and employee benefits	$	14,155	56%	$	11,761	55%	$	6,865	55%	$	5,793	54%
FDIC premiums		470	2%		329	2%		277	2%		155	2%
Equipment		2,139	9%		2,073	10%		1,047	8%		1,029	10%
Occupancy expense of premises		1,527	6%		1,438	7%		743	6%		711	7%
Data processing expense		1,915	8%		1,626	8%		946	8%		805	8%
Marketing expense		254	1%		257	1%		137	1%		151	1%
Professional services		1,040	3%		1,084	5%		522	4%		564	5%
Contract labor		298	1%		323	2%		159	1%		158	1%
Telephone		226	1%		253	1%		116	1%		139	1%
Other real estate owned		142	1%		247	1%		18	0%		152	1%
Investor relations		189	1%		219	1%		132	1%		123	1%
Contributions		143	1%		63	0%		79	1%		42	0%
Other		2,651	10%		1,537	7%		1,470	12%		808	9%
	$	25,149	100%	$	21,210	100%	$	12,511	100%	$	10,630	100%

Provision for Income Taxes

In reporting interim financial information, income tax provisions should be determined under the procedures set forth in Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) Topic 740, Income Taxes (Section 740-270-30). This guidance provides that at the end of each interim period, an entity should make its best estimate of the effective tax rate expected to be applicable for the full fiscal year. The rate so determined should be used in providing for income taxes on a current year-to-date basis. The effective tax rate should reflect anticipated investment tax credits, capital gains rates, and other available tax planning alternatives. In arriving at this effective tax rate, however, no effect should be included for the tax related to significant, unusual or extraordinary items that will be separately reported or reported net of their related tax effect in reports for the interim period or for the fiscal year.

The effective income tax rates as a percentage of income for the six-month periods ended June 30, 2023 and June 30, 2022 were 24.0% 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 is expected to continue through 2032.

FINANCIAL CONDITION

Balance Sheet Overview

Total assets at June 30, 2023 were $1.9 billion, representing an $80.2 million increase since December 31, 2022. During the first six months of 2023, cash and interest-bearing deposits in other banks increased by $14.2 million resulting from implementation of the contingency funding plan and obtaining $61.1 million of brokered certificates of deposit and $80.0 million in FHLB borrowings. Implementing the contingency funding plan and the increase in on-balance sheet liquidity was a precautionary move given the market disruption associated with the volatile banking environment and the near-term uncertainties regarding growth in the deposit portfolio. The increase in cash obtained from contingency funding was partially offset by the funding of loan growth during 2023. The investment portfolio decreased by $10.7 million associated with normal principal amortization and gross loans increased by $70.5 million. Other assets, including deferred taxes, premises and equipment, and accrued interest receivable,

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increased by $4.0 million as pension assets increased by $0.6 million, equity investments increased by $0.7 million, and deferred tax assets increased by $1.2 million.

Total liabilities at June 30, 2023 were $1.8 billion, representing a $76.9 million increase since December 31, 2022. Total deposits increased by $9.2 million since December 31, 2022. The increase in deposits during the first six months of 2023 was primarily attributable to $61.1 million in new brokered deposits, which was partially offset by a decrease of approximately $40.0 million in non-interest-bearing deposits due to a shift to interest bearing accounts, two large commercial customers having large 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. Short term borrowings decreased by $14.5 million since December 31, 2022 due to municipalities utilizing cash in our treasury management product for normal spending. Long term borrowings increased by $80.0 million in the first six months of 2023 when compared to December 31, 2022 due to the advance of $80.0 million in FHLB borrowings. The addition of brokered deposits and the FHLB borrowings was a precautionary move as described above.

Loan Portfolio

The following table presents the composition of our loan portfolio at the dates indicated:


(dollars in thousands)	June 30, 2023			December 31, 2022
Commercial real estate	$	483,485	36%	$	458,831	36%
Acquisition and development		79,003	6%		70,596	6%
Commercial and industrial *		249,683	18%		245,396	19%
Residential mortgage		475,540	35%		444,411	35%
Consumer		62,327	5%		60,260	5%
Total Loans	$	1,350,038	100%	$	1,279,494	100%

*Includes $0.1 million of Paycheck Protection Program loans at June 30, 2023 and $0.4 million at December 31, 2022

Outstanding loans of $1.4 billion at June 30, 2023 reflected growth of $70.5 million for the first six months of 2023. Since December 31, 2022, commercial real estate loans increased by $24.7 million and acquisition and development loans increased by $8.4 million. Commercial and industrial loans increased by $4.3 million since December 31, 2022. Growth in the commercial portfolios was driven by increased activity with existing clients as well as cultivating new business relationships. Residential mortgage loans increased by $31.1 million related to management’s strategic decision to book new mortgage loans at higher rates to our in-house portfolio. The consumer loan portfolio increased slightly by $2.1 million.

New commercial loan production for the three months ended June 30, 2023 was approximately $67.6 million. The pipeline of commercial loans as of June 30, 2023 was $22.5 million. At June 30, 2023, unfunded, committed commercial construction loans totaled approximately $42.6 million. Commercial amortization and payoffs were approximately $99.3 million through June 30, 2023 due primarily to pay-offs of short-term commercial loans as well as normal amortizations of the commercial loan portfolio.

New consumer mortgage loan production for the second quarter of 2023 was approximately $32.3 million, with most of this production comprised of in-house mortgages. The pipeline of in-house, portfolio loans as of June 30, 2023, was $6.2 million. The residential mortgage production level normalized in the second quarter of 2023 due to the increasing interest rates that occurred throughout 2022 and 2023. Unfunded commitments related to residential construction loans totaled $21.0 million at June 30, 2023. Management began shifting activity toward the secondary market in the second quarter of 2023 to reduce the need for additional funding.

Non-accrual loans totaled $3.0 million at June 30, 2023, compared to $3.5 million at December 31, 2022. The decrease in non-accrual balances at June 30, 2023 was primarily driven by principal reductions in the residential mortgage portfolio. Other real estate owned (“OREO”) balances increased by $0.1 million since December 31, 2022 due to the addition of a new OREO property during the second quarter of 2023, which was partially offset by sale of OREO held by the Bank at December 31, 2022.

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Risk Elements of Loan Portfolio

The following table presents the risk elements of our loan portfolio at the dates indicated. Management is not aware of any potential problem loans other than those listed in this table or discussed below.


(dollars in thousands)	June 30, 2023		% of Applicable Portfolio	December 31, 2022		% of Applicable Portfolio
Non-accrual loans:
Commercial real estate	$	—	0.00%	$	145	0.03%
Acquisition and development		128	0.16%		146	0.21%
Residential mortgage		2,844	0.60%		3,204	0.72%
Consumer		—	0.00%		—	0.00%
Total non-accrual loans	$	2,972	0.22%	$	3,495	0.27%
Accruing Loans Past Due 90 days or more:
Residential mortgage		63			282
Consumer		97			25
Total loans past due 90 days or more	$	160		$	307
Total non-accrual and accruing loans past due 90 days or more	$	3,132		$	3,802

Other real estate owned	$	4,842		$	4,733
Total Non-performing assets	$	7,974		$	8,535

Non-accrual loans to total loans (as %)		0.22%			0.27%
Non-performing loans to total loans (as %)		0.23%			0.30%
Non-performing assets to total assets (as %)		0.41%			0.46%
Allowance for credit losses to non-accrual loans (as %)		568.81%			418.77%
Allowance for credit losses to non-performing assets (as %)		212.00%			171.48%

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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 highly subjective estimates. The reasonableness of the ACL is reviewed quarterly by management.

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 following table presents a summary of the activity in the ACL and ALL for the six month periods ended June 30:


(dollars 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		—			—
Commercial and industrial		(166)			(52)
Residential mortgage		(24)			(33)
Consumer		(518)			(545)
Total charge-offs		(795)			(630)
Recoveries:
Commercial real estate		5			1
Acquisition and development		7			20
Commercial and industrial		9			9
Residential mortgage		36			101
Consumer		93			76
Total recoveries		150			207
Net losses		(645)			(423)
Credit Loss Expense/(Credit)		848			205
Balance at end of period	$	16,905		$	15,737

Allowance for credit/loan losses to gross loans outstanding (as %)		1.25	%		1.28	%

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

	2023		2022
Commercial real estate		(0.04)%		0.00%
Acquisition and development		0.02%		(0.07)%
Commercial and industrial		(0.13)%		(0.23)%
Residential mortgage		0.01%		0.02%
Consumer		(1.40)%		0.45%

Investment Securities

At June 30, 2023, the total amortized cost basis of the available-for-sale investment portfolio was $146.5 million, compared to a fair value of $120.1 million. Unrealized gains and losses on securities available-for-sale are reflected in accumulated other comprehensive loss, a component of shareholders’ equity. The amortized cost basis of the held to maturity portfolio was $230.8 million, compared to a fair value of $199.1 million.

The following table presents the composition of our securities portfolio at amortized cost and fair values at the dates indicated:


	June 30, 2023					December 31, 2022
	Amortized		Fair Value		FV as %	Amortized		Fair Value		FV as %
(dollars in thousands)	Cost		(FV)		of Total	Cost		(FV)		of Total
Securities Available for Sale:
U.S. government agencies	$	11,028	$	9,541	9%	$	11,044	$	9,462	8%
Residential mortgage-backed agencies		43,224		35,867	30%		45,052		37,401	30%
Commercial mortgage-backed agencies		36,897		29,134	24%		37,393		30,732	23%
Collateralized mortgage obligations		24,836		20,125	17%		25,828		21,044	17%
Obligations of state and political subdivisions		10,837		10,566	9%		10,848		10,492	8%
Corporate bonds		1,000		747	1%		1,000		887	1%
Collateralized debt obligations		18,674		14,105	12%		18,664		15,871	13%
Total available for sale	$	146,496	$	120,085	100%	$	149,829	$	125,889	100%
Securities Held to Maturity:
U.S. treasuries	$	37,332	$	36,257	18%	$	37,204	$	35,611	18%
U.S. government agencies		67,873		55,762	28%		67,734		54,473	27%
Residential mortgage-backed agencies		26,970		23,706	12%		28,624		25,122	12%
Commercial mortgage-backed agencies		21,494		16,306	8%		22,389		17,821	9%
Collateralized mortgage obligations		55,104		44,980	23%		57,085		47,084	23%
Obligations of state and political subdivisions		21,986		22,060	11%		22,623		22,969	11%
Total held to maturity	$	230,759	$	199,071	100%	$	235,659	$	203,080	100%

Total fair value of investment securities available for sale decreased by $5.8 million since December 31, 2022 due to principal paydowns of the portfolio in the first six months of 2023 and declines in the fair value of investment securities of $2.4 million. At June 30, 2023, the securities classified as available-for-sale included a net unrealized loss of $26.4 million, which represents the difference between the fair value and amortized cost of securities in the portfolio.

As discussed in Note 6 to the consolidated financial statements presented elsewhere in this report, the Corporation measures 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.

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Approximately $105.9 million of the available for sale portfolio was valued using Level 2 pricing and had net unrealized losses of $21.8 million at June 30, 2023. The remaining $14.1 million of the securities available for sale represents the entire collateralized debt obligation portfolio, which was valued using significant unobservable inputs (Level 3 assets). The $4.6 million in net unrealized losses associated with this portfolio relates to nine pooled trust preferred securities that comprise the collateralized debt obligation portfolio. Net unrealized losses of $1.6 million represent non-credit related impairment charges on seven of the securities, while $3.0 million of unrealized losses relates to two securities which have had no impairment-related charges.

Deposits

The following table presents the composition of our deposits at the dates indicated:


(dollars in thousands)	June 30, 2023			December 31, 2022

Non-interest-bearing demand deposits	$	466,628	29%	$	506,613	32%

Interest-bearing deposits:
Demand		393,234	25%		327,685	21%
Money Market		297,312	19%		365,192	23%
Savings deposits		215,649	14%		250,720	16%
Time deposits- retail		146,055	9%		120,523	8%
Time deposits- brokered		61,081	4%		—	0%
Total Deposits	$	1,579,959	100%	$	1,570,733	100%

Total deposits at June 30, 2023 increased by $9.2 million when compared to December 31, 2022. During the first six months of 2023, non-interest-bearing deposits decreased by $40.0 million primarily due 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, consumer and commercial spending and the competitive deposit market. Interest bearing demand deposits increased by $65.5 million and traditional savings and money market accounts decreased by $103.0 million, which is primarily related to consumer spending habits during 2023, businesses utilizing cash, and two large customers reducing deposits by approximately $39.5 million for regular business purposes. Total time deposits increased by $86.6 million. This increase in time deposits was primarily driven by management’s decision to acquire $61.1 million in brokered deposits during the first quarter of 2023 due to the heightened uncertainty in the deposit market associated with the volatile banking environment as well as increased interest rates on a promotional nine-month CD product offered in early 2023.


		June 30, 2023			December 31, 2022
(dollars in thousands)		Balance	Percent		Balance	Percent
Insured/collateralized deposits	$	1,350,060	85%	$	1,118,190	71%
Uninsured deposits		229,899	15%		452,543	29%
	$	1,579,959	100%	$	1,570,733	100%

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


		June 30, 2023			December 31, 2022
(dollars in thousands)		Balance	Percent		Balance	Percent
Retail deposits	$	798,737	51%	$	855,014	55%
Business deposits		781,222	49%		715,719	45%
	$	1,579,959	100%	$	1,570,733	100%

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Deposit outflows experienced in late 2022 and January 2023 were due to the competitive pricing landscape and inflationary spending. Changes in deposit levels were not directly related to the market disruptions during the first six months of 2023.

Borrowed Funds

The following table presents the composition of our borrowings at the dates indicated:


(in thousands)	June 30, 2023		December 31, 2022
Securities sold under agreements to repurchase	$	50,078	$	64,565
Total short-term borrowings		50,078		64,565
FHLB advances	$	80,000	$	—
Junior subordinated debt		30,929		30,929
Total long-term borrowings	$	110,929	$	30,929

Short term borrowings decreased $14.5 million since December 31, 2022, driven by the utilization of cash by municipalities in our Treasury Management product.

During the first quarter of 2023, management implemented the Contingency Funding plan and borrowed $80.0 million from FHLB in two advances with 12 and 18 month maturities.

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 regular meetings of a sub-committee of executive management, known as the Treasury Team, 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.

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, Pacific Coast Banker’s Bank, PNC Financial Services, Atlantic Community Bankers Bank and Community Bankers Bank).

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

Secured line of credit with the Fed Discount Window for use in borrowing funds up to 90 days, using municipal securities as collateral.

Brokered deposits, including CDs and 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.

Bank Term Funding Program – A Federal Reserve program collateralized by government agency securities, if needed.

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The following table presents sources of liquidity available to the Corporation as of June 30, 2023.


(dollars in thousands)		Total Availability		Amount Used		Net Availability
Internal Sources
Excess cash	$	66,969	$	-	$	66,969
Unpledged securities		56,338		-		56,338
External Sources
Federal Reserve (discount window)		9,735		-		9,735
Correspondent unsecured lines of credit		105,000		-		105,000
FHLB		217,493		82,500		134,993
Bank Term Funding Program*		87,263		-		87,263
	$	542,798	$	82,500	$	460,298

*Bank Term Funding Program has been established and eligible securities with a total par balance of $87.3 million have been pledged to the program as of June 30, 2023

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.

Due to the market disruption and uncertainties, management implemented the Liquidity Contingency Plan in the first quarter and believes that 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 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 June 30, 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.

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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 +/-100 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 paid 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.

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Based on the simulation analysis performed at June 30, 2023 and December 31, 2022, management estimated the following changes in net interest income, assuming the indicated rate changes:


(Dollars in thousands)	June 30, 2023		December 31, 2022
+400 basis points	$	2,901	$	1,112
+300 basis points	$	2,136	$	225
+200 basis points	$	1,405	$	173
+100 basis points	$	726	$	121
-100 basis points	$	(964)	$	(776)
-200 basis points	$	(2,697)	$	(3,165)
-300 basis points	$	(5,479)	$	(7,382)
-400 basis points	$	(8,956)	$	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.

Management believes that no material changes in our market risks, our procedures used to evaluate and mitigate those risks, or our actual or simulated sensitivity positions have occurred since December 31, 2022. Our NII simulation analysis as of December 31, 2022 is included in Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2022 under the heading “Market Risk and Interest Sensitivity.

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.

Capital Resources

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 above under the heading “Liquidity Management”.

In addition to operational requirements, the Bank is 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. Based on capital ratios at June 30, 2023, the Bank was considered to be well-capitalized.

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The following table presents the Bank’s capital ratios as of the dates indicated:


	June 30, 2023		December 31, 2022		Required for Capital Adequacy Purposes		Required to be Well Capitalized
Total Capital (to risk-weighted assets)	13.87	%	14.37	%	8.00	%	10.00	%
Tier 1 Capital (to risk-weighted assets)	12.64	%	13.29	%	6.00	%	8.00	%
Common Equity Tier 1 Capital (to risk-weighted assets)	12.64	%	13.29	%	4.50	%	6.50	%
Tier 1 Capital (to average assets)	9.78	%	10.01	%	4.00	%	5.00	%

Effective with the implementation of CECL, a $2.2 million, net of tax, adjustment was made to retained earnings. The adjustment did not have a material impact to our capital ratios.

Contractual Obligations, Commitments and Off-Balance Sheet Arrangements

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. Comparing June 30, 2023 to December 31, 2022, short-term borrowings decreased $14.5 million, driven by a the utilization of cash balances by municipalities related to the overnight investments product. Long-term borrowings increased by $80.0 million during the quarter due to management’s decision to obtain $80 million in FHLB advances during the first quarter of 2023.

Commitments

Loan commitments are made to accommodate the financial needs of our customers. Letters of credit commit us to make payments on behalf of customers when certain specified future events occur. 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 are not a party to any other off-balance sheet arrangements.

Commitments to extend credit in the form of consumer, commercial and business at the dates indicated were as follows:


(in thousands)	June 30, 2023		December 31, 2022
Residential Mortgage - home equity	$	72,726	$	70,845
Residential Mortgage - construction		21,241		25,499
Commercial		171,604		153,235
Consumer - personal credit lines		4,267		4,323
Standby letters of credit		6,893		14,325
Total	$	276,731	$	268,227

The increase of $8.5 million in commitments at June 30, 2023 when compared to December 31, 2022 was due to new business in construction commitments in the commercial portfolio as well as new home equity lines of credit.

Upon adoption of ASC 326 on January 1, 2023, the Corporation recorded an initial increase to the ACL for off-balance sheet exposures of $0.9 million. Credit loss expense for off-balance sheet credit exposures totaled $0.1 million for the six-month period ended June 30, 2023.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

The information required by this item is included in Item 2 of Part I of this report under the caption “Market Risk and Interest Sensitivity” and in Item 7 of Part II of First United Corporation’s Annual Report on Form 10-K for the year ended December 31, 2022 under the heading “Market Risk and Interest Sensitivity” both of which are incorporated in this Item 3 by reference.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 with the SEC, such as this Quarterly Report, is recorded, processed, summarized and reported within the periods specified in those rules and forms, and that such information is accumulated and communicated to our management, including First United Corporation’s principal executive officer (“PEO”) and its 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 is also 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, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

An evaluation of the effectiveness of these disclosure controls as of June 30, 2023 was carried out under the supervision and with the participation of management, including the PEO and the PFO. Based on that evaluation, management, including the PEO and the PFO, has concluded that our disclosure controls and procedures are, in fact, effective at the reasonable assurance level.

During the six months ended June 30, 2023, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Part II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

The risks and uncertainties to which our financial condition and operations are subject are discussed in detail in Item 1A of Part I of First United Corporation’s Annual Report on Form 10-K for the year ended December 31, 2022. Management does not believe that any material changes in our risk factors have occurred since they were last disclosed.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

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Item 6. Exhibits

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


Exhibit		Description
31.1		Certifications of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith)
31.2		Certifications of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith)
32		Certification of the Principal Executive Officer and the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act (furnished herewith)
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 Quarterly Report on Form 10Q for the quarter ended June 30, 2023 formatted in Inline XBRL, included within the Exhibit 101 attachments (filed herewith).

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SIGNATURES

Pursuant to the requirements 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: August 9, 2023	/s/ Carissa L. Rodeheaver
	Carissa L. Rodeheaver, CPA
	Chairman of the Board, President and Chief Executive Officer
	(Principal Executive Officer)


Date: August 9, 2023	/s/ Tonya K. Sturm
	Tonya K. Sturm, Senior Vice President,
	Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)