EDGAR 10-K Filing

Company CIK: 763907
Filing Year: 2021
Filename: 763907_10-K_2021_0001562762-21-000134.json

---

ITEM 1. BUSINESS
ITEM 1. BUSINESS
General
First United Corporation is a Maryland corporation chartered in 1985 and a bank holding company registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding Company Act of 1956, as amended. 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”), both Connecticut statutory business trusts. Until September 14, 2019 when it was canceled, the Corporation also served as the parent company to First United Statutory Trust III, a Delaware statutory business trust (“Trust III” and together with Trust I and Trust II, the “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.
At December 31, 2020, we had total assets of $1.7 billion, net loans of $1.1 billion, and deposits of $1.4 billion. Shareholders’ equity at December 31, 2020 was $131.0 million.
The Corporation maintains an Internet website at www.mybank.com on which it makes available, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the foregoing as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the SEC.
Banking Products and Services
The Bank operates 25 banking offices, one customer care center and 32 Automated Teller Machines (“ATMs”) in Allegany County, Frederick County, Garrett County, and Washington County in Maryland, and in Mineral County, Berkeley County, Monongalia County and Harrison County in West Virginia. The Bank is an independent community bank providing a complete range of retail and commercial banking services to businesses and individuals in its market areas. Services offered are essentially the same as those offered by the regional institutions that compete with the Bank and include checking, savings, money market deposit accounts, and certificates of deposit, business loans, personal loans, mortgage loans, lines of credit, and consumer-oriented retirement accounts including individual retirement accounts (“IRAs”) and employee benefit accounts. In addition, the Bank provides full brokerage services through a networking arrangement with Cetera Investment Services, LLC., a full-service broker-dealer. The Bank also provides safe deposit and night depository facilities, insurance products and trust services. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”).
Lending Activities
Our lending activities are conducted through the Bank. Since 2010, the Bank has not originated any new loans through the OakFirst Loan Centers and their sole activity is servicing existing loans.
The Bank’s commercial loans are primarily secured by real estate, commercial equipment, vehicles or other assets of the borrower. Repayment is often dependent on the successful business operations of the borrower and may be affected by adverse conditions in the local economy or real estate market. The financial condition and cash flow of commercial borrowers is therefore carefully analyzed during the loan approval process, and continues to be monitored throughout the duration of the loan by obtaining business financial statements, personal financial statements and income tax returns. The frequency of this ongoing analysis depends upon the size and complexity of the credit and collateral that secures the loan. It is also the Bank’s general policy to obtain personal guarantees from the principals of the commercial loan borrowers.
Commercial real estate (“CRE”) loans are primarily those secured by land for residential and commercial development, agricultural purpose properties, service industry buildings such as restaurants and motels, retail buildings and general purpose business space. The Bank attempts to mitigate the risks associated with these loans through low loan to value ratio standards, thorough financial analyses, and management’s knowledge of the local economy in which the Bank lends.
The risk of loss associated with CRE construction lending is controlled through conservative underwriting procedures such as loan to value ratios of 80% or less, obtaining additional collateral when prudent, analysis of cash flows, and closely monitoring construction projects to control disbursement of funds on loans.
The Bank’s residential mortgage portfolio is distributed between variable and fixed rate loans. Some loans are booked at fixed rates in order to meet the Bank’s requirements under the federal Community Reinvestment Act (the “CRA”) or to complement our asset liability mix. Other fixed rate residential mortgage loans are originated in a brokering capacity on behalf of other financial institutions,
for which the Bank receives a fee. As with any consumer loan, repayment is dependent on the borrower’s continuing financial stability, which can be adversely impacted by factors such as job loss, divorce, illness, or personal bankruptcy. Residential mortgage loans exceeding an internal loan-to-value ratio require private mortgage insurance. Title insurance protecting the Bank’s lien priority, as well as fire and casualty insurance, is also required. During 2020, the Bank was an active participant in selling qualifying residential mortgage loans to the secondary market outlet due to the low rate environment.
Home equity lines of credit, included within the residential mortgage portfolio, are secured by the borrower’s home and can be drawn on at the discretion of the borrower. These lines of credit are at variable interest rates.
The Bank also provides residential real estate construction loans to builders and individuals for single family dwellings. Residential construction loans are usually granted based upon “as completed” appraisals and are secured by the property under construction. Site inspections are performed to determine pre-specified stages of completion before loan proceeds are disbursed. These loans typically have maturities of six to twelve months and may have a fixed or variable rate. Permanent financing for individuals offered by the Bank includes fixed and variable rate loans with five, seven or ten year adjustable rate mortgages.
A variety of other consumer loans are also offered to customers, including indirect and direct auto loans, student loans, and other secured and unsecured lines of credit and term loans.
An allowance for loan losses (“ALL”) is maintained to provide for probable losses from our lending activities. A complete discussion of the factors considered in determination of the ALL is included in Item 7 of Part II of this report.
Deposit Activities
The Bank offers a full array of deposit products including checking, savings and money market accounts, regular and IRA certificates of deposit, Christmas Savings accounts, College Savings accounts, and Health Savings accounts. The Bank also offers the Certificate of Deposit Account Registry Service®, or CDARS®, program to municipalities, businesses, and consumers through which the Bank provides access to multi-million-dollar certificates of deposit and the Insured Cash Sweep®, or ICS®, program to municipalities, businesses, and consumers through which the Bank provides access to multi-million-dollar savings and demand deposits. Both programs are FDIC-insured. In addition, we offer our commercial customers packages which include Treasury Management, Cash Sweep and various checking opportunities.
Information about our income from and assets related to our banking business may be found in the Consolidated Statements of Financial Condition and the Consolidated Statements of Income and the related notes thereto included in Item 8 of Part II of this annual report.
Wealth Management
The Bank’s Trust Department offers a full range of trust services, including personal trust, investment agency accounts, charitable trusts, retirement accounts including IRA roll-overs, 401(k) accounts and defined benefit plans, estate administration and estate planning.
At December 31, 2020 and 2019, the total market value of assets under the supervision of the Bank’s Trust Department was approximately $1.0 billion and $902.2 million, respectively. Trust Department revenues for these years may be found in the Consolidated Statements of Income under the heading “Other operating income”, which is contained in Item 8 of Part II of this annual report.
COMPETITION
The banking business, in all of its phases, is highly competitive. Within our market areas, we compete with commercial banks, (including local banks and branches or affiliates of other larger banks), savings and loan associations and credit unions for loans and deposits, with consumer finance companies for loans, and with other financial institutions for various types of products and services, including trust services. There is also competition for commercial and retail banking business from banks and financial institutions located outside our market areas and on the internet.
The primary factors in competing for deposits are interest rates, personalized services, the quality and range of financial services, convenience of office locations and office hours. The primary factors in competing for loans are interest rates, loan origination fees, the quality and range of lending services and personalized services.
To compete with other financial services providers, we rely principally upon local promotional activities, personal relationships established by officers, directors and employees with customers, and specialized services tailored to meet customers’ needs. In those
instances in which we are unable to accommodate a customer’s needs, we attempt to arrange for those services to be provided by other financial services providers with which we have a relationship.
The following tables set forth deposit data for the Maryland and West Virginia Counties in which the Bank maintains offices as of June 30, 2020, the most recent date for which comparative information is available.
Offices
Deposits
Market
(in Market)
(in thousands)
Share
Allegany County, Maryland:
Truist Bank
$
287,485
36.53%
Manufacturers & Traders Trust Company
213,061
27.07%
First United Bank & Trust
202,627
25.75%
Standard Bank, PaSB
83,803
10.65%
Source: FDIC Deposit Market Share Report
Frederick County, Maryland:
PNC Bank NA
$
1,559,759
26.54%
Truist Bank
1,100,016
18.72%
Bank Of America NA
648,499
11.03%
Acnb Bank
440,779
7.50%
Manufacturers & Traders Trust Company
422,059
7.18%
Sandy Spring Bank
398,103
6.77%
Capital One NA
356,345
6.06%
Middletown Valley Bank
285,481
4.86%
Woodsboro Bank
270,601
4.60%
First United Bank & Trust
189,669
3.23%
Wells Fargo Bank NA
98,565
1.68%
Fulton bank National Association
65,598
1.12%
Wesbanco Bank Inc
38,354
0.65%
Woodforest National Bank
3,478
0.06%
Source: FDIC Deposit Market Share Report
Garrett County, Maryland:
First United Bank & Trust
$
459,282
64.39%
Manufacturers & Traders Trust Company
96,662
13.55%
Truist Bank
74,347
10.42%
Clear Mountain Bank
56,959
7.98%
Somerset Trust Company
19,328
2.71%
Miners & Merchants Bank
6,780
0.95%
Source: FDIC Deposit Market Share Report
Washington County, Maryland:
Truist Bank
$
644,387
23.27%
Fulton Bank National Association
569,122
20.55%
Manufacturers & Traders Trust Company
505,175
18.24%
Middletown Valley Bank
315,931
11.41%
PNC Bank NA
315,305
11.39%
First United Bank & Trust
127,757
4.61%
CNB Bank, Inc.
109,717
3.96%
United Bank
85,443
3.09%
Orrstown Bank
51,085
1.84%
Bank of Charles Town
24,053
0.87%
Ameriserv Financial Bank
14,227
0.51%
Jefferson Security Bank
7,232
0.26%
Source: FDIC Deposit Market Share Report
Berkeley County, West Virginia:
Truist Bank
$
407,365
25.17%
United Bank
388,466
24.00%
City National Bank of West Virginia
204,394
12.63%
Summit Community Bank
162,204
10.02%
First United Bank & Trust
143,044
8.84%
Jefferson Security Bank
110,635
6.84%
CNB Bank, Inc.
99,902
6.17%
Bank of Charles Town
99,439
6.14%
Woodforest National Bank
3,017
0.19%
Source: FDIC Deposit Market Share Report
Harrison County, West Virginia:
Truist Bank
$
390,109
22.49%
MVB Bank, Inc
277,988
16.03%
The Huntington National Bank
268,326
15.47%
WesBanco Bank, Inc.
254,907
14.69%
JP Morgan Chase Bank, NA
219,268
12.64%
Harrison County Bank
116,539
6.72%
City National Bank of West Virginia
57,002
3.29%
Premier Bank, Inc.
42,889
2.47%
West Union Bank
20,840
1.20%
Summit Community Bank, Inc
16,703
0.96%
Clear Mountain Bank
15,983
0.92%
BC Bank, Inc.
15,937
0.92%
United Bank
15,750
0.91%
Freedom Bank, Inc
15,149
0.87%
First United Bank & Trust
7,282
0.42%
Source: FDIC Deposit Market Share Report
Mineral County, West Virginia:
First United Bank & Trust
$
109,665
39.21%
Truist Bank
67,236
24.04%
Manufacturers & Traders Trust Company
57,378
20.51%
Grant County Bank
33,380
11.93%
FNB Bank, Inc.
12,059
4.31%
Source: FDIC Deposit Market Share Report
Monongalia County, West Virginia:
United Bank
$
1,151,176
34.38%
The Huntington National Bank
514,154
15.36%
Truist Bank
492,750
14.72%
MVB Bank, Inc.
379,112
11.33%
Clear Mountain Bank
292,413
8.74%
Wesbanco Bank, Inc.
194,234
5.80%
PNC Bank NA
138,153
4.13%
First United Bank & Trust
115,514
3.45%
First Exchange Bank
32,725
0.98%
Citizens Bank of Morgantown, Inc.
32,526
0.97%
City National Bank of West Virginia
3,520
0.11%
Summit Community Bank, Inc
1,036
0.03%
Source: FDIC Deposit Market Share Report
For further information about competition in our market areas, see the Risk Factor entitled “We operate in a competitive environment, and our inability to effectively compete could adversely and materially impact our financial condition and results of operations” in Item 1A of Part I of this annual report.
SUPERVISION AND REGULATION
The following is a summary of the material regulations and policies applicable to the Corporation and its subsidiaries and is not intended to be a comprehensive discussion. Changes in applicable laws and regulations may have a material effect on our business.
General
The Corporation is registered with the Federal Reserve as a bank holding company under the BHC Act and, as such, is subject to the supervision, examination and reporting requirements of the BHC Act and the regulations of the Federal Reserve. As a publicly-traded company whose common stock is registered under Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and listed on The NASDAQ Global Select Market, the Corporation is also subject to regulation and supervision by the SEC and The NASDAQ Stock Market, LLC (“NASDAQ”).
The Bank is a Maryland trust company subject to the banking laws of Maryland and to regulation by the Commissioner of Financial Regulation of Maryland (the “Maryland Commissioner”), who is required by statute to make at least one examination in each calendar year (or at 18-month intervals if the Maryland Commissioner determines that an examination is unnecessary in a particular calendar year). The Bank also has offices in West Virginia, and the operations of these offices are subject to West Virginia laws and to supervision and examination by the West Virginia Division of Banking. As a member of the FDIC, the Bank is also subject to certain provisions of federal laws and regulations regarding deposit insurance and activities of insured state-chartered banks, including those that require examination by the FDIC. In addition to the foregoing, there are a myriad of other federal and state laws and regulations that affect, or govern the business of banking, including consumer lending, deposit-taking, and trust operations.
All non-bank subsidiaries of the Corporation are subject to examination by the Federal Reserve, and, as affiliates of the Bank, are subject to examination by the FDIC and the Maryland Commissioner. In addition, OakFirst Loan Center, Inc. is subject to licensing and regulation by the West Virginia Division of Banking, and OakFirst Loan Center, LLC is subject to licensing and regulation by the Maryland Commissioner.
Regulation of Bank Holding Companies
The Corporation and its affiliates are subject to the provisions of Section 23A and Section 23B of the Federal Reserve Act. Section 23A limits the amount of loans or extensions of credit to, and investments in, the Corporation and its non-bank affiliates by the Bank. Section 23B requires that transactions between the Bank and the Corporation and its non-bank affiliates be on terms and under circumstances that are substantially the same as with non-affiliates.
Under Federal Reserve policy, the Corporation is expected to act as a source of strength to the Bank, and the Federal Reserve may charge the Corporation with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank when required. This support may be required at times when the bank holding company may not have the resources to provide the support. Under the prompt corrective action provisions, if a controlled bank is undercapitalized, then the regulators could require the bank holding company to guarantee the bank’s capital restoration plan. In addition, if the Federal Reserve believes that a bank holding company’s activities, assets or affiliates represent a significant risk to the financial safety, soundness or stability of a controlled bank, then the Federal Reserve could require the bank holding company to terminate the activities, liquidate the assets or divest the affiliates. The regulators may require these and other actions in support of controlled banks even if such actions are not in the best interests of the bank holding company or its stockholders. Because the Corporation is a bank holding company, it is viewed as a source of financial and managerial strength for any controlled depository institutions, like the Bank.
In addition, under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”), depository institutions insured by the FDIC can be held liable for any losses incurred by, or reasonably anticipated to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default. Accordingly, in the event that any insured subsidiary of the Corporation causes a loss to the FDIC, other insured subsidiaries of the Corporation could be required to compensate the FDIC by reimbursing it for the estimated amount of such loss. Such cross guaranty liabilities generally are superior in priority to obligations of a financial institution to its shareholders and obligations to other affiliates.
Federal Banking Regulation
Federal banking regulators, such as the Federal Reserve and the FDIC, may prohibit the institutions over which they have supervisory authority from engaging in activities or investments that the agencies believe are unsafe or unsound banking practices. Federal banking regulators have extensive enforcement authority over the institutions they regulate to prohibit or correct activities that violate law, regulation or a regulatory agreement or which are deemed to be unsafe or unsound practices. Enforcement actions may include the appointment of a conservator or receiver, the issuance of a cease and desist order, the termination of deposit insurance, the imposition of civil money penalties on the institution, its directors, officers, employees and institution-affiliated parties, the issuance of
directives to increase capital, the issuance of formal and informal agreements, the removal of or restrictions on directors, officers, employees and institution-affiliated parties, and the enforcement of any such mechanisms through restraining orders or other court actions.
The Bank is subject to certain restrictions on extensions of credit to executive officers, directors, and principal shareholders or any related interest of such persons, which generally require that such credit extensions be made on substantially the same terms as those available to persons who are not related to the Bank and not involve more than the normal risk of repayment. Other laws tie the maximum amount that may be loaned to any one customer and its related interests to capital levels.
As part of the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), each federal banking regulator adopted non-capital safety and soundness standards for institutions under its authority. These standards include internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation, fees and benefits. An institution that fails to meet those standards may be required by the agency to develop a plan acceptable to meet the standards. Failure to submit or implement such a plan may subject the institution to regulatory sanctions. We believe that the Bank meets substantially all standards that have been adopted. FDICIA also imposes capital standards on insured depository institutions.
The CRA requires the FDIC, in connection with its examination of financial institutions within its jurisdiction, to evaluate the record of those financial institutions in meeting the credit needs of their communities, including low and moderate income neighborhoods, consistent with principles of safe and sound banking practices. These factors are also considered by all regulatory agencies in evaluating mergers, acquisitions and applications to open a branch or facility. As of the date of its most recent examination report, the Bank had a CRA rating of “Satisfactory”.
The Bank is also subject to a variety of other laws and regulations with respect to the operation of its business, including, but not limited to, the TILA/RESPA Integrated Disclosure rule (“TRID”), Truth in Lending Act, the Real Estate Settlement Procedures Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the Electronic Funds Transfer Act, the Fair Housing Act, the Home Mortgage Disclosure Act, the Fair Debt Collection Practices Act, the Fair Credit Reporting Act, Expedited Funds Availability (Regulation CC), Reserve Requirements (Regulation D), Privacy of Consumer Information (Regulation P), Margin Stock Loans (Regulation U), the Right To Financial Privacy Act, the Flood Disaster Protection Act, the Homeowners Protection Act, the Servicemembers Civil Relief Act, the Telephone Consumer Protection Act, the CAN-SPAM Act, the Children’s Online Privacy Protection Act, Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) and Office of Foreign Assets Control (“OFAC”).
Capital Requirements
We require capital to fund loans, satisfy our obligations under the Bank’s letters of credit, meet the deposit withdrawal demands of the Bank’s customers, and satisfy our other monetary obligations. To the extent that deposits are not adequate to fund our capital requirements, we can rely on the funding sources identified below under the heading “Liquidity Management”. At December 31, 2020, the Bank had $130.0 million available through unsecured lines of credit with correspondent banks, $1.1 million available through a secured line of credit with the Fed Discount Window and approximately $134.4 million available through the Federal Home Loan Bank of Atlanta (“FHLB”). Management is not aware of any demands, commitments, events or uncertainties that are likely to materially affect our ability to meet our future capital requirements.
In addition to operational requirements, the Bank and the Corporation are subject to risk-based capital regulations, which were adopted and are monitored by federal banking regulators. These regulations are used to evaluate capital adequacy and require an analysis of an institution’s asset risk profile and off-balance sheet exposures, such as unused loan commitments and stand-by letters of credit.
Regulators may require higher capital ratios when warranted by the particular circumstances or risk profile of a given banking organization. In the current regulatory environment, banking organizations must stay well-capitalized in order to receive favorable regulatory treatment on acquisition and other expansion activities and favorable risk-based deposit insurance assessments. Our capital policy establishes guidelines meeting these regulatory requirements and takes into consideration current or anticipated risks as well as potential future growth opportunities.
In July 2019, the federal banking agencies adopted a final rule that simplifies compliance with certain aspects of the capital rules. A majority of the simplifications apply solely to banking organizations that are not subject to the advanced approaches capital rule. The rule simplified the application of regulatory capital treatment for mortgage servicing assets, certain deferred tax assets arising from temporary differences, investments in the capital of unconsolidated financial institutions, and capital issued by a consolidated subsidiary of a banking organization and held by third parties (minority interest). In addition, the rule revised the treatment of certain acquisition, development, or construction exposures.
At December 31, 2020, we were in compliance with the applicable requirements.
Additional information about our capital ratios is contained in “Consolidated Balance Sheet Review” section of Item 7 of Part II of this annual report under the heading “Capital Resources”.
Prompt Corrective Action
The Federal Deposit Insurance Act (“FDI Act”) requires, among other things, the federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. The FDI Act includes the following five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation. The relevant capital measures are the total capital ratio, the Tier 1 capital ratio and the leverage ratio.
A bank will be (i) “well capitalized” if the institution has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure, (ii) “adequately capitalized” if the institution has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 4.0% or greater, and a leverage ratio of 4.0% or greater and is not “well capitalized”, (iii) “undercapitalized” if the institution has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio of less than 4.0% or a leverage ratio of less than 4.0%, (iv) “significantly undercapitalized” if the institution has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 3.0% or a leverage ratio of less than 3.0%, and (v) “critically undercapitalized” if the institution’s tangible equity is equal to or less than 2.0% of average quarterly tangible assets. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.
Following the 2010 enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), the federal banking regulators implemented the Basel III regulatory framework on bank capital adequacy, stress testing, and market liquidity risk (the “Basel III Capital Rules”). The Basel III Capital Rules revised the prompt corrective action requirements by (i) introducing the Common Equity Tier 1 (“CET1”) ratio requirement at each level (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category (other than critically undercapitalized), with the minimum Tier 1 capital ratio for well-capitalized status being 8%; and (iii) eliminating the provision that permitted a bank with a composite supervisory rating of 1 but a leverage ratio of at least 3% to be deemed adequately capitalized.
The FDI Act generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be “undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit a capital restoration plan. The agencies may not accept such a plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. In addition, for a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with such capital restoration plan. The bank holding company must also provide appropriate assurances of performance. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to 5.0% of the depository institution’s total assets at the time it became undercapitalized and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator.
The appropriate federal banking agency may, under certain circumstances, reclassify a well-capitalized insured depository institution as adequately capitalized. The FDI Act provides that an institution may be reclassified if the appropriate federal banking agency determines (after notice and opportunity for hearing) that the institution is in an unsafe or unsound condition or deems the institution to be engaging in an unsafe or unsound practice.
The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the supervisory provisions as if the institution were in the next lower category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory information other than the capital levels of the institution.
At December 31, 2020, the Bank and the Corporation were “well capitalized” based on the aforementioned ratios.
Liquidity Requirements
Historically, the regulation and monitoring of bank liquidity has been addressed as a supervisory matter, without required formulaic measures. The Basel III Capital Rules require banks to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, going forward would be required by regulation. One test, referred to as the liquidity coverage ratio, is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario. The other test, referred to as the net stable funding ratio, is designed to promote more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon. These requirements will incent banking entities to increase their holdings of U.S. Treasury securities and other sovereign debt as a component of assets and increase the use of long-term debt as a funding source.
Deposit Insurance
The Bank is a member of the FDIC and pays an insurance premium to the FDIC based upon its assessable deposits on a quarterly basis. Deposits are insured up to applicable limits by the FDIC and such insurance is backed by the full faith and credit of the United States Government.
The deposit insurance limit set by law is currently $250,000. The coverage limit is per depositor, per insured depository institution for each account ownership category.
The Dodd-Frank Act set a new minimum Deposit Insurance Fund (“DIF”) Reserve Ratio at 1.35% of estimated insured deposits. The FDIC was required to attain this ratio by September 30, 2019. In connection with this change, the FDIC was required to redefine the deposit insurance assessment base for an insured depository institution. Prior to the change, an institution’s assessment base was historically its domestic deposits, with some adjustments. As redefined pursuant to the Dodd-Frank Act, an institution’s assessment base is now an amount equal to the institution’s average consolidated total assets during the assessment period minus average tangible equity. Institutions with $1.0 billion or more in assets at the end of a fiscal quarter, like the Bank, must report their average consolidated total assets on a daily basis and report their average tangible equity on an end-of-month balance basis.
On September 30, 2019, the DIF reserve ratio reached 1.36%. As a result, small banks will receive assessment credits for the portion of their assessments that contributed to the growth in the reserve ratio from 1.15% to 1.35%, to be applied when the reserve ratio is at least 1.38%. The Bank received assessment credits of $0.1 million and $0.3 million in 2020 and 2019, respectively.
The Federal Deposit Insurance Reform Act of 2005, which created the DIF, gave the FDIC greater latitude in setting the assessment rates for insured depository institutions which could be used to impose minimum assessments. The FDIC has the flexibility to adopt actual rates that are higher or lower than the total base assessment rates adopted without notice and comment, if certain conditions are met.
DIF-insured institutions pay a Financing Corporation (“FICO”) assessment in order to fund the interest on bonds issued in the 1980s in connection with the failures in the thrift industry.
The FDIC is authorized to conduct examinations of and require reporting by FDIC-insured institutions. It is also authorized to terminate a depository bank’s deposit insurance upon a finding by the FDIC that the bank’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has violated any applicable rule, regulation, order or condition enacted or imposed by the bank’s regulatory agency. The termination of deposit insurance for our bank subsidiary would have a material adverse effect on our earnings, operations and financial condition.
Bank Secrecy Act/Anti-Money Laundering
The Bank Secrecy Act (“BSA”), which is intended to require financial institutions to develop policies, procedures, and practices to prevent and deter money laundering, mandates that every national bank have a written, board-approved program that is reasonably designed to assure and monitor compliance with the BSA.
The program must, at a minimum: (i) provide for a system of internal controls to assure ongoing compliance; (ii) provide for independent testing for compliance; (iii) designate an individual responsible for coordinating and monitoring day-to-day compliance; and (iv) provide training for appropriate personnel. In addition, state-chartered banks are required to adopt a customer identification program as part of its BSA compliance program. State-chartered banks are also required to file Suspicious Activity Reports when they detect certain known or suspected violations of federal law or suspicious transactions related to a money laundering activity or a violation of the BSA.
In addition to complying with the BSA, the Bank is subject to the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA Patriot Act”). The USA Patriot Act is designed to deny terrorists and criminals the ability to obtain access to the United States’ financial system and has significant implications for depository institutions, brokers, dealers, and other businesses involved in the transfer of money. The USA Patriot Act mandates that financial service companies implement additional policies and procedures and take heightened measures designed to address any or all of the following matters: customer identification programs, money laundering, terrorist financing, identifying and reporting suspicious activities and currency transactions, currency crimes, and cooperation between financial institutions and law enforcement authorities.
Dodd-Frank Act
The Dodd-Frank Act was enacted in July 2010 and significantly restructured the financial regulatory regime in the United States. Although the Dodd-Frank Act’s provisions that have received the most public attention generally have been those applying to or more likely to affect larger institutions such as banks and bank holding companies with total consolidated assets of $50 billion or more, it contains numerous other provisions that affect all financial institutions, including the Bank. The Dodd-Frank Act established the Consumer Financial Protection Bureau (the “CFPB”), discussed below, and contains a wide variety of provisions (many of which are not yet effective) affecting the regulation of depository institutions, including fair lending, fair debt collection practices, mortgage loan origination and servicing obligations, bankruptcy, military service member protections, use of credit reports, privacy matters, and disclosure of credit terms and correction of billing errors. Local, state and national regulatory and enforcement agencies continue efforts to address perceived problems within the mortgage lending and credit card industries through broad or targeted legislative or regulatory initiatives aimed at lenders’ operations in consumer lending markets. There continues to be a significant amount of legislative and regulatory activity, nationally, locally and at the state level, designed to limit certain lending practices while mandating certain servicing procedures. Federal bankruptcy and state debtor relief and collection laws, as well as the Servicemembers Civil Relief Act affect the ability of banks, including the Bank, to collect outstanding balances.
Moreover, the Dodd-Frank Act permits states to adopt stricter consumer protection laws and states’ attorneys general may enforce consumer protection rules issued by the CFPB. Recently, U.S. financial regulatory agencies have increasingly used a general consumer protection statute to address unethical or otherwise bad business practices that may not necessarily fall directly under the purview of a specific banking or consumer finance law. Prior to the Dodd-Frank Act, there was little formal guidance to provide insight to the parameters for compliance with the “unfair or deceptive acts or practices” (“UDAP”) law. However, the UDAP provisions have been expanded under the Dodd-Frank Act to apply to “unfair, deceptive or abusive acts or practices”, which has been delegated to the CFPB for supervision.
The Dodd-Frank Act has increased, and will likely continue to increase, our regulatory compliance burdens and costs and may restrict the financial products and services that we offer to our customers in the future.
Mortgage Lending and Servicing
The Bank’s mortgage lending and servicing activities are subject to various laws and regulations that are enforced by the federal banking regulators and the CFPB, such as the Truth in Lending Act, the Real Estate Settlement Procedures Act, and various rules adopted thereunder, including those relating to consumer disclosures, appraisal requirements, mortgage originator compensation, prohibitions on mandatory arbitration provisions under certain circumstances, and the obligation to credit payments and provide payoff statements within certain time periods and provide certain notices prior to interest rate and payment adjustments.
The Bank is required to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms. Qualified mortgages that that are not “higher-priced” are afforded a safe harbor presumption of compliance with the ability to repay rules, while qualified mortgages that are “higher-priced” garner a rebuttable presumption of compliance with the ability to repay rules. In general, a “qualified mortgage” is a mortgage loan without negative amortization, interest-only payments, balloon payments, or a term exceeding 30 years, where the lender determines that the borrower has the ability to repay, and where the borrower’s points and fees do not exceed 3% of the total loan amount. “Higher-priced” mortgages must have escrow accounts for taxes and insurance and similar recurring expenses.
Consumer Lending - Military Lending Act
The Military Lending Act (the “MLA”), which was initially implemented in 2007, was amended and its coverage significantly expanded in 2015. The Department of Defense (the “DOD”) issued a final rule under the MLA that took effect on October 15, 2015, but financial institutions were not required to take action until October 3, 2016. The types of credit covered under the MLA were expanded to include virtually all consumer loan and credit card products (except for loans secured by residential real property and certain purchase-money motor vehicle/personal property secured transactions). Lenders must now provide specific written and oral disclosures concerning the protections of the MLA to active duty members of the military and dependents of active duty members of the military (“covered borrowers”). The rule imposes a 36% “Military Annual Percentage Rate” cap that includes costs associated with credit insurance premiums, fees for ancillary products, finance charges associated with the transactions, and application and participation
charges. In addition, loan terms cannot include (i) a mandatory arbitration provision, (ii) a waiver of consumer protection laws, (iii) mandatory allotments from military benefits, or (iv) a prepayment penalty. The revised rule also prohibits “roll-over” or refinances of the same loan unless the new loan provides more favorable terms for the covered borrower. Lenders may verify covered borrower status using a DOD database or information provided by credit bureaus. We believe that we are in compliance with the revised rule.
Cybersecurity
We rely on electronic communications and information systems to conduct our operations and store sensitive data. We employ an in-depth approach that leverages people, processes, and technology to manage and maintain cybersecurity controls. In addition, we employ a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Notwithstanding the strength of our defensive measures, the threat from cyber-attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures.
The federal banking regulators have adopted guidelines for establishing information security standards and cybersecurity programs for implementing safeguards under the supervision of a financial institution’s board of directors. These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial products and services. The federal banking regulators expect financial institutions to establish lines of defense and to ensure that their risk management processes address the risk posed by compromised customer credentials, and also expect financial institutions to maintain sufficient business continuity planning processes to ensure rapid recovery, resumption and maintenance of the institution's operations after a cyberattack. If we fail to meet the expectations set forth in this regulatory guidance, then we could be subject to various regulatory actions and we may be required to devote significant resources to any required remediation efforts.
Federal Securities Laws and NASDAQ Rules
The shares of the Corporation’s common stock, par value $.01 per share (the “Common Stock”), are registered with the SEC under Section 12(b) of the Exchange and listed on the NASDAQ Global Select Market. The Corporation is subject to information reporting requirements, proxy solicitation requirements, insider trading restrictions and other requirements of the Exchange Act, including the requirements imposed under the federal Sarbanes-Oxley Act of 2002, and rules adopted by NASDAQ. Among other things, loans to and other transactions with insiders are subject to restrictions and heightened disclosure, directors and certain committees of the Board must satisfy certain independence requirements, the Corporation must comply with certain enhanced corporate governance requirements, and various issuances of securities by the Corporation require shareholder approval.
Governmental Monetary and Credit Policies and Economic Controls
The earnings and growth of the banking industry and ultimately of the Bank are affected by the monetary and credit policies of governmental authorities, including the Federal Reserve. An important function of the Federal Reserve is to regulate the national supply of bank credit in order to control recessionary and inflationary pressures. Among the instruments of monetary policy used by the Federal Reserve to implement these objectives are open market operations in U.S. Government securities, changes in the federal funds rate, changes in the discount rate of member bank borrowings, and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth of bank loans, investments and deposits and may also affect interest rates charged on loans or paid on deposits. The monetary policies of the Federal Reserve authorities have had a significant effect on the operating results of commercial banks in the past and are expected to continue to have such an effect in the future. In view of changing conditions in the national economy and in the money markets, as well as the effect of actions by monetary and fiscal authorities, including the Federal Reserve, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or their effect on our businesses and earnings.
SEASONALITY
Management does not believe that our business activities are seasonal in nature. Deposit and loan demand may vary depending on local and national economic conditions, but management believes that any variation will not have a material impact on our planning or policy-making strategies.
EMPLOYEES
At December 31, 2020, we employed 319 individuals, of whom 280 were full-time employees.

---

ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
The significant risks and uncertainties related to us, our business and our securities of which we are aware are discussed below. Investors and shareholders should carefully consider these risks and uncertainties before making investment decisions with respect to the Corporation’s securities. Any of these factors could materially and adversely affect our business, financial condition, operating results and prospects and could negatively impact the market price of the Corporation’s securities. If any of these risks materialize, the holders of the Corporation’s securities could lose all or part of their investments in the Corporation. Additional risks and uncertainties that we do not yet know of, or that we currently think are immaterial, may also impair our business operations. Investors and shareholders should also consider the other information contained in this annual report, including our financial statements and the related notes, before making investment decisions with respect to the Corporation’s securities.
Risks Relating to the COVID-19 Global Pandemic
The COVID-19 pandemic has adversely impacted our business and financial results and that of many of our customers, and the ultimate impact will depend on future developments, which are highly uncertain, cannot be predicted, and are largely outside of our control, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.
The COVID-19 pandemic has adversely impacted our business and financial results and that of many of our customers, and the ultimate impact will depend on future developments, which are highly uncertain, cannot be predicted, and are largely outside of our control, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic. The COVID-19 pandemic has created extensive disruptions to the global and U.S. economies and to the lives of individuals throughout the world. Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal and monetary stimulus, and legislation designed to deliver financial aid and other relief. While the scope, duration, and full effects of COVID-19 are rapidly evolving and not fully known, the pandemic and the efforts to contain it have disrupted global economic activity, adversely affected the functioning of financial markets, impacted market interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. If these effects continue for a prolonged period or result in sustained economic stress or recession, many of the risk factors identified in this Annual Report on Form 10-K could be exacerbated and the effects of COVID-19 could have a material adverse impact on us in a number of ways as described in more detail below.
Credit Risk - Our risks of timely loan repayment and the value of collateral supporting the loans are affected by the strength of our borrowers’ businesses. Concern about the spread of COVID-19 has caused and is likely to continue to cause business shutdowns, limitations on commercial activity and financial transactions, labor shortages, supply chain interruptions, increased unemployment and commercial property vacancy rates, reduced profitability and ability for property owners to make mortgage payments, and overall economic and financial market instability, all of which may cause our customers to be unable to make scheduled loan payments.
Hotel and restaurant operators and others in the leisure, hospitality and travel industries, among other industries, have been particularly harmed by COVID-19. See the discussion contained in Item 7 of Part II of this Annual Report for information about the Company’s outstanding loans to borrowers in the hotel and restaurant industries. If the effects of COVID-19 result in widespread and sustained repayment shortfalls on loans in our portfolio, then we could incur significant delinquencies, foreclosures and credit losses, particularly if the available collateral is insufficient to cover our credit exposure. The future effects of COVID-19 on economic activity could negatively affect the collateral values associated with our existing loans, the ability to liquidate the real estate collateral securing our residential and commercial real estate loans, our ability to maintain loan origination volume and to obtain additional financing, the future demand for or profitability of our lending and services, and the financial condition and credit risk of our customers. Further, in the event of delinquencies, regulatory changes and policies designed to protect borrowers may slow or prevent us from making our business decisions or may result in a delay in our taking certain remediation actions, such as foreclosure. In addition, we have unfunded commitments to extend credit to customers. During a challenging economic environment, our customers depend more on our credit commitments and increased borrowings under these commitments could adversely impact our liquidity. Furthermore, in an effort to support our communities during the pandemic, we are participating in the Paycheck Protection Program (“PPP”) under the CARES Act whereby loans to small businesses are made and those loans are subject to the regulatory requirements that would require forbearance of loan payments for a specified time or that would limit our ability to pursue all available remedies in the event of a loan default. If the borrower under the PPP loan fails to qualify for loan forgiveness, we are at the heightened risk of holding these loans at unfavorable interest rates as compared to the loans to customers that we would have otherwise extended credit.
Strategic Risk - Our success may be affected by a variety of external factors that may affect the price or marketability of our products and services, changes in interest rates that may increase our funding costs, reduced demand for our financial products due to economic conditions and the various response of governmental and nongovernmental authorities. The COVID-19 pandemic has significantly increased economic and demand uncertainty and has led to disruption and volatility in the global capital markets. Furthermore, many of the governmental actions have been directed toward curtailing household and business activity to contain COVID-19. These actions have been rapidly expanding in scope and intensity. For example, in many of our markets, local governments have
acted to temporarily close or restrict the operations of most businesses. The future effects of COVID-19 on economic activity could negatively affect the future banking products we provide, including a decline in originating loans.
Operational Risk - Current and future restrictions on our workforce’s access to our facilities could limit our ability to meet customer servicing expectations and have a material adverse effect on our operations. We rely on business processes and branch activity that largely depend on people and technology, including access to information technology systems as well as information, applications, payment systems and other services provided by third parties. In response to COVID-19, we have modified our business practices with a portion of our employees working remotely from their homes to have our operations uninterrupted as much as possible. Further, technology in employees’ homes may not be as robust as in our offices and could cause the networks, information systems, applications, and other tools available to employees to be more limited or less reliable than in our offices. The continuation of these work-from-home measures also introduces additional operational risk, including increased cybersecurity risk from phishing, malware, and other cybersecurity attacks, all of which could expose us to risks of data or financial loss and could seriously disrupt our operations and the operations of any impacted customers.
Moreover, we rely on many third parties in our business operations, including the appraiser of the real property collateral, vendors that supply essential services such as loan servicers, providers of financial information, systems and analytical tools and providers of electronic payment and settlement systems, and local and federal government agencies, offices, and courthouses. In light of the developing measures responding to the pandemic, many of these entities may limit the availability and access of their services. If the third-party service providers continue to have limited capacities for a prolonged period or if additional limitations or potential disruptions in these services materialize, it may negatively affect our operations.
Interest Rate Risk/Market Value Risk - Our net interest income, lending and investment activities, deposits and profitability could be negatively affected by volatility in interest rates caused by uncertainties stemming from COVID-19. In March 2020, the Federal Reserve lowered the target range for the federal funds rate to a range from 0% to 0.25%, citing concerns about the impact of COVID-19 on financial markets and market stress in the energy sector. A prolonged period of extremely volatile and unstable market conditions could increase our funding costs and negatively affect market risk mitigation strategies. Higher income volatility from changes in interest rates and spreads to benchmark indices could cause a loss of future net interest income and a decrease in prevailing fair market values of our investment securities and other assets, including mortgage servicing rights and SBA loan servicing rights. Fluctuations in interest rates will impact both the level of income and expense recorded on many of our assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on our net income, operating results, or financial condition.
Because there have been no comparable recent global pandemics that resulted in similar global impact, we do not yet know the full extent of COVID-19’s effects on our business, operations, or the global economy as a whole. Any future development will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the effectiveness of our work-from-home arrangements, third party providers’ ability to support our operations, and any actions taken by governmental authorities and other third parties in response to the pandemic. The uncertain future development of this crisis could materially and adversely affect our business, operations, operating results, financial condition, liquidity or capital levels.
The outbreak of other pandemics in the future could have similar or worse impacts on our financial condition and/ or results of operations.
Risks Relating to First United Corporation and its Affiliates
First United Corporation’s future success depends on the successful growth of its subsidiaries.
The Corporation’s primary business activity for the foreseeable future will be to act as the holding company of the Bank and its other direct and indirect subsidiaries. Therefore, the Corporation’s future profitability will depend on the success and growth of these subsidiaries.
The Bank’s funding sources may prove insufficient to replace deposits and support our future growth.
The Bank relies on customer deposits, advances from the FHLB, lines of credit at other financial institutions and brokered funds to fund our operations. Although the Bank has historically been able to replace maturing deposits and advances if desired, no assurance can be given that the Bank would be able to replace such funds in the future if our financial condition or the financial condition of the FHLB or market conditions were to change. Our financial flexibility will be severely constrained and/or our cost of funds will increase if we are unable to maintain our access to funding or if financing necessary to accommodate future growth is not available at favorable interest rates. Finally, if we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In that case, our profitability would be adversely affected.
Interest rates and other economic conditions will impact our results of operations.
Our net income depends primarily upon our net interest income. Net interest income is the difference between interest income earned on loans, investments and other interest-earning assets and the interest expense incurred on deposits and borrowed funds. The level of net interest income is primarily a function of the average balance of our interest-earning assets, the average balance of our interest-bearing liabilities, and the spread between the yield on such assets and the cost of such liabilities. These factors are influenced by both the pricing and mix of our interest-earning assets and our interest-bearing liabilities which, in turn, are impacted by such external factors as the local economy, competition for loans and deposits, the monetary policy of the Federal Open Market Committee of the Federal Reserve Board of Governors, and market interest rates.
Different types of assets and liabilities may react differently, and at different times, to changes in market interest rates. We expect that we will periodically experience gaps in the interest rate sensitivities of our assets and liabilities. That means either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. When interest-bearing liabilities mature or re-price more quickly than interest-earning assets, an increase in market rates of interest could reduce our net interest income. Likewise, when interest-earning assets mature or re-price more quickly than interest-bearing liabilities, falling interest rates could reduce our net interest income. We are unable to predict changes in market interest rates, which are affected by many factors beyond our control, including inflation, deflation, recession, unemployment, money supply, domestic and international events and changes in the United States and other financial markets.
We also attempt to manage risk from changes in market interest rates, in part, by controlling the mix of interest rate sensitive assets and interest rate sensitive liabilities. However, interest rate risk management techniques are not exact. A rapid increase or decrease in interest rates could adversely affect our results of operations and financial performance.
Changes to LIBOR may adversely impact the value of, and the return on, our loans, investment securities and derivatives which are indexed to LIBOR.
We have certain FHLB advances, brokered deposits, loans and investment securities indexed to LIBOR to calculate the loan interest rate. On July 27, 2017, the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR to the LIBOR administrator after 2021. The announcement also indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Consequently, at this time, it is not possible to predict whether and to what extent banks will continue to provide LIBOR submissions to the LIBOR administrator or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable benchmark for certain loans and liabilities including our subordinated notes, what rate or rates may become accepted alternatives to LIBOR or the effect of any such changes in views or alternatives on the values of the loans and liabilities, whose interest rates are tied to LIBOR. Uncertainty as to the nature of such potential changes, alternative reference rates, the elimination or replacement of LIBOR, or other reforms may adversely affect the value of, and the return on our loans, and our investment securities.
The majority of our business is concentrated in Maryland and West Virginia, much of which involves real estate lending, so a decline in the real estate and credit markets could materially and adversely impact our financial condition and results of operations.
Most of the Bank’s loans are made to borrowers located in Western Maryland and Northeastern West Virginia, and many of these loans, including construction and land development loans, are secured by real estate. At December 31, 2020, approximately 10%, or $117.0 million, of our total loans were real estate acquisition, construction and development loans that were secured by real estate. Accordingly, a decline in local economic conditions would likely have an adverse impact on our financial condition and results of operations, and the impact on us would likely be greater than the impact felt by larger financial institutions whose loan portfolios are geographically diverse. We cannot guarantee that any risk management practices we implement to address our geographic and loan concentrations will be effective to prevent losses relating to our loan portfolio.
The Bank’s concentrations of commercial real estate loans could subject it to increased regulatory scrutiny and directives, which could force us to preserve or raise capital and/or limit future commercial lending activities.
The federal banking regulators believe that institutions that have particularly high concentrations of Commercial Real Estate (“CRE”) loans within their lending portfolios face a heightened risk of financial difficulties in the event of adverse changes in the economy and CRE markets. Accordingly, through published guidance, these regulators have directed institutions whose concentrations exceed certain percentages of capital to implement heightened risk management practices appropriate to their concentration risk. The guidance provides that banking regulators may require such institutions to reduce their concentrations and/or maintain higher capital ratios than institutions with lower concentrations in CRE. At December 31, 2020, our CRE concentrations were below the heightened risk management thresholds set forth in this guidance.
The Bank may experience loan losses in excess of its allowance for loan losses, which would reduce our earnings.
The risk of credit losses on loans varies with, among other things, general economic conditions, the type of loans being made, the creditworthiness of the borrowers over the term of the loans and, in the case of collateralized loans, the value and marketability of the collateral for the loans. Management of the Bank maintains an ALL based upon, among other things, historical experience, an evaluation of economic conditions and regular reviews of delinquencies and loan portfolio quality. Based upon such factors, management makes various assumptions and judgments about the ultimate collectability of the loan portfolio and provides the ALL based upon a percentage of the outstanding balances and for specific loans when their ultimate collectability is considered questionable. If management’s assumptions and judgments prove to be incorrect and the ALL is inadequate to absorb future losses, or if the bank regulatory authorities require us to increase the ALL as a part of its examination process, our earnings and capital could be significantly and adversely affected. Although management continually monitors our loan portfolio and makes determinations with respect to the ALL, future adjustments may be necessary if economic conditions differ substantially from the assumptions used or adverse developments arise with respect to our non-performing or performing loans. Material additions to the ALL could result in a material decrease in our net income and capital; and could have a material adverse effect on our financial condition.
A new accounting standard will likely require us to increase our allowance for loan losses and may have a material adverse effect on our financial condition and results of operations.
The Financial Accounting Standards Board (“FASB”) has adopted a new accounting standard that was originally effective for the Corporation and the Bank beginning with our first full fiscal year after December 15, 2019. In November 2019, the FASB approved a delay of the required implementation date of ASU No. 2016-13 for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities, including the Corporation, resulting in a required implementation date for the Corporation of January 1, 2023. This standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for loan losses. This standard will change the current method of providing allowances for loan losses that are probable, which would likely require us to increase our ALL, and to greatly increase the types of data we would need to collect and review to determine the appropriate level of the ALL. Any increase in our ALL or expenses incurred to determine the appropriate level of the ALL may have a material adverse effect on our financial condition and results of operations.
The Bank’s lending activities subject the Bank to the risk of environmental liabilities.
A significant portion of the Bank’s loan portfolio is secured by real property. During the ordinary course of business, the Bank may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, the Bank may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require the Bank to incur substantial expenses and may materially reduce the affected property’s value or limit the Bank’s ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase the Bank’s exposure to environmental liability. Although the Bank has policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations.
The market value of our investments could decline.
At December 31, 2020, investment securities in our investment portfolio having a cost basis of $230.5 million and a market value of $226.9 million were classified as available-for-sale pursuant to FASB Accounting Standards Codification (“ASC”) Topic 320, Investments - Debt and Equity Securities, relating to accounting for investments. Topic 320 requires that unrealized gains and losses in the estimated value of the available-for-sale portfolio be “marked to market” and reflected as a separate item in shareholders’ equity (net of tax) as accumulated other comprehensive loss. There can be no assurance that future market performance of our investment portfolio will enable us to realize income from sales of securities. Shareholders’ equity will continue to reflect the unrealized gains and losses (net of tax) of these investments. Moreover, there can be no assurance that the market value of our investment portfolio will not decline, causing a corresponding decline in shareholders’ equity.
Management believes that several factors could affect the market value of our investment portfolio. These include, but are not limited to, changes in interest rates or expectations of changes, the degree of volatility in the securities markets, inflation rates or expectations of inflation and the slope of the interest rate yield curve (the yield curve refers to the differences between shorter-term and longer-term interest rates; a positively sloped yield curve means shorter-term rates are lower than longer-term rates). Also, the passage of time will affect the market values of our investment securities, in that the closer they are to maturing, the closer the market price should be to par value. These and other factors may impact specific categories of the portfolio differently, and management cannot predict the effect these factors may have on any specific category.
Impairment of investment securities, goodwill, or deferred tax assets could require charges to earnings, which could result in a negative impact on our results of operations.
In assessing whether the impairment of investment securities is other-than-temporary, management considers the length of time and extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability to retain our investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value in the near term. See the discussion under the heading “Estimates and Critical Accounting Policies - Other-Than-Temporary Impairment of Investment Securities” in Item 7 of Part II of this annual report for further information.
Under current accounting standards, goodwill is not amortized but, instead, is subject to impairment tests on at least an annual basis or more frequently if an event occurs or circumstances change that reduce the fair value of a reporting unit below its carrying amount. A decline in the price of the shares of Common Stock or occurrence of a triggering event following any of our quarterly earnings releases and prior to the filing of the periodic report for that period could, under certain circumstances, cause us to perform a goodwill impairment test and result in an impairment charge being recorded for that period which was not reflected in such earnings release. In the event that we conclude that all or a portion of our goodwill may be impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital. At December 31, 2020, we had recorded goodwill of $11.0 million, representing approximately 8.4% of shareholders’ equity. See the discussion under the heading “Estimates and Critical Accounting Policies - Goodwill” in Item 7 of Part II of this annual report for further information.
At December 31, 2020, our net deferred tax assets were valued at $8.0 million. Included in that total is $2.7 million of state net operating loss carryforwards (“NOLs”) associated with separate company tax filings of the Corporation, which we do not expect to use and, thus, we have established a $2.7 million valuation allowance. A deferred tax asset is reduced by a valuation allowance if, based on the weight of the evidence available, both negative and positive, including the recent trend of quarterly earnings, management believes that it is more likely than not that some portion or all of the total deferred tax asset will not be realized. Moreover, our ability to utilize our net operating loss carryforwards to offset future taxable income may be significantly limited if we experience an “ownership change,” as determined under Section 382 of the Code. If an ownership change were to occur, the limitations imposed by Section 382 of the Code could result in a portion of our net operating loss carryforwards expiring unused, thereby impairing their value. Section 382’s provisions are complex, and we cannot predict any circumstances surrounding the future ownership of the Common Stock. Accordingly, we cannot provide any assurance that we will not experience an ownership change in the future.
The impact of each of these impairment matters could have a material adverse effect on our business, results of operations, and financial condition.
We operate in a competitive environment, and our inability to effectively compete could adversely and materially impact our financial condition and results of operations.
We operate in a competitive environment, competing for loans, deposits, and customers with commercial banks, savings associations and other financial entities. Competition for deposits comes primarily from other commercial banks, savings associations, credit unions, money market and mutual funds and other investment alternatives. Competition for loans comes primarily from other commercial banks, savings associations, mortgage banking firms, credit unions and other financial intermediaries. Competition for other products, such as securities products, comes from other banks, securities and brokerage companies, and other non-bank financial service providers in our market area. Many of these competitors are much larger in terms of total assets and capitalization, have greater access to capital markets, and/or offer a broader range of financial services than those that we offer. In addition, banks with a larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are thereby able to serve the needs of larger customers.
In addition, changes to the banking laws over the last several years have facilitated interstate branching, merger and expanded activities by banks and holding companies. For example, the federal Gramm-Leach-Bliley Act (the “GLB Act”) revised the BHC Act and repealed the affiliation provisions of the Glass-Steagall Act of 1933, which, taken together, limited the securities and other non-banking activities of any company that controls an FDIC insured financial institution. As a result, the ability of financial institutions to branch across state lines and the ability of these institutions to engage in previously-prohibited activities are now accepted elements of competition in the banking industry. These changes may bring us into competition with more and a wider array of institutions, which may reduce our ability to attract or retain customers. Management cannot predict the extent to which we will face such additional competition or the degree to which such competition will impact our financial conditions or results of operations.
The banking industry is heavily regulated; significant regulatory changes could adversely affect our operations.
Our operations will be impacted by current and future legislation and by the policies established from time to time by various federal and state regulatory authorities. The Corporation is subject to supervision by the Federal Reserve. The Bank is subject to supervision and periodic examination by the Maryland Commissioner of Financial Regulation, the West Virginia Division of Banking, and the FDIC. Banking regulations, designed primarily for the safety of depositors, may limit a financial institution’s growth and the
return to its investors by restricting such activities as the payment of dividends, mergers with or acquisitions by other institutions, investments, loans and interest rates, interest rates paid on deposits, expansion of branch offices, and the offering of securities or trust services. The Corporation and the Bank are also subject to capitalization guidelines established by federal law and could be subject to enforcement actions to the extent that either is found by regulatory examiners to be undercapitalized. It is not possible to predict what changes, if any, will be made to existing federal and state legislation and regulations or the effect that such changes may have on our future business and earnings prospects. Management also cannot predict the nature or the extent of the effect on our business and earnings of future fiscal or monetary policies, economic controls, or new federal or state legislation. Further, the cost of compliance with regulatory requirements may adversely affect our ability to operate profitably.
The Consumer Financial Protection Bureau may continue to reshape the consumer financial laws through rulemaking and enforcement of the prohibitions against unfair, deceptive and abusive business practices. Compliance with any such change may impact our business operations.
The CFPB has broad rulemaking authority to administer and carry out the provisions of the Dodd-Frank Act with respect to financial institutions that offer covered financial products and services to consumers. The CFPB has also been directed to adopt rules identifying practices or acts that are unfair, deceptive or abusive in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. The concept of what may be considered to be an “abusive” practice is new under the law. We have been required to dedicate significant personnel resources to address the compliance burdens imposed by the CFBP’s adoption of various rules, and the adoption of additional rules in the future would likely require us to dedicate even more resources.
Bank regulators and other regulations, including the Basel III Capital Rules, may require higher capital levels, impacting our ability to pay dividends or repurchase our stock.
The capital standards to which we are subject, including the standards created by the Basel III Capital Rules, may materially limit our ability to use our capital resources and/or could require us to raise additional capital by issuing additional shares of Common Stock or other equity securities. The issuance of additional equity securities could dilute existing stockholders.
A material weakness or significant deficiency in our disclosure or internal controls could have an adverse effect on us.
The Corporation is required by the Sarbanes-Oxley Act of 2002 to establish and maintain disclosure controls and procedures and internal control over financial reporting. These control systems are intended to provide reasonable assurance that material information relating to the Corporation is made known to our management and reported as required by the Exchange Act, to provide reasonable assurance regarding the reliability and preparation of our financial statements, and to provide reasonable assurance that fraud and other unauthorized uses of our assets are detected and prevented. We may not be able to maintain controls and procedures that are effective at the reasonable assurance level. If that were to happen, our ability to provide timely and accurate information about the Corporation, including financial information, to investors could be compromised and our results of operations could be harmed. Moreover, if the Corporation or its independent registered public accounting firm were to identify a material weakness or significant deficiency in any of those control systems, our reputation could be harmed and investors could lose confidence in us, which could cause the market price of the Corporation’s stock to decline and/or limit the trading market for the shares of the Common Stock.
We may not be able to keep pace with developments in technology.
We use various technologies in conducting our businesses, including telecommunication, data processing, computers, automation, internet-based banking, and debit cards. Technology changes rapidly. Our ability to compete successfully with other financial institutions may depend on whether we can exploit technological changes. We may not be able to exploit technological changes, and any investment we do make may not make us more profitable.
Our operational or communications systems or infrastructure may fail or may be the subject of a breach or cyber-attack that, if successful, could adversely affect our business or disrupt business continuity.
Our business depends heavily on the use of computer systems, the Internet and other means of electronic communication and recordkeeping to process, record, and monitor client transactions and to communicate with clients and other institutions on a continuous basis. As client, industry, public, and regulatory expectations regarding operational and information security have increased, our operational systems and infrastructure continue to be safeguarded and monitored for potential failures, disruptions, and breakdowns, whether as a result of events beyond our control or otherwise.
Our business, financial, accounting, data processing, or other operating systems and facilities may stop operating properly or become disabled or damaged as a result of a number of factors, including events that are wholly or partially beyond our control. For example, there could be sudden increases in client transaction volume; electrical or telecommunications outages; natural disasters such as earthquakes, tornadoes, floods, and hurricanes; disease pandemics; events arising from local or larger scale political or social matters,
including terrorist acts; occurrences of employee error, fraud, theft, or malfeasance; disruptions caused by technology implementation, including hardware deployment and software updates; and, as described below, cyber-attacks.
Although we have business continuity plans and other safeguards in place, our operations and communications may be adversely affected by significant and widespread disruption to our systems and infrastructure that support our businesses, clients, and teammates. While we continue to evolve and modify our business continuity plans, there can be no assurance in an escalating threat environment that they will be effective in avoiding disruption and business impacts. Our insurance may not be adequate to compensate us for all resulting losses, and the cost to obtain adequate coverage may increase for us or the industry.
Security risks for financial institutions such as ours have dramatically increased in recent years in part because of the proliferation of new technologies, the use of the internet and telecommunications technologies to conduct financial transactions, and the increased sophistication, resources, and activities of hackers, terrorists, activists, industrial spies, insider bad actors, organized crime, and other external parties, including nation state actors. In addition, to access our products and services, clients may use devices and/or software that are beyond our control environment, which may provide additional avenues for attackers to gain access to confidential information. Although we have information security procedures and controls in place, our technologies, systems, networks, and clients' devices and software may become the target of cyber-attacks, information security breaches, business email compromise, or information theft that could result in the unauthorized release, gathering, monitoring, misuse, loss, change, or destruction of our or our clients' or teammates' confidential, proprietary, or other information (including personal identifying information of individuals), or otherwise disrupt our or our clients' or our third parties' business operations. U.S. financial institutions and financial service companies have reported breaches in the security of their websites or other systems, including attempts to shut down access to their networks and/or systems in an attempt to extract compensation from them to regain control. Financial institutions, including the Bank, have experienced distributed denial-of-service attacks, a sophisticated and targeted attack intended to disable or degrade internet service or to sabotage systems.
We and others in our industry are regularly the subject of attempts by attackers to gain unauthorized access to our networks, systems, and data, or to obtain, change, or destroy confidential data (including personal identifying information of individuals) through a variety of means, including computer viruses, malware, business email compromise, and phishing. These attacks may result in unauthorized individuals obtaining access to our confidential information or that of our clients or teammates, or otherwise accessing, compromising, damaging, or disrupting our systems or infrastructure.
We are continuously developing and enhancing our controls, processes, and practices designed to protect our systems, computers, software, data, and networks from attack, damage, or unauthorized access. This continued development and enhancement will require us to expend additional resources, including resources to investigate and remediate any information security vulnerabilities that may be detected. Despite our ongoing investments in security resources, talent, and business practices, we are unable to assure that any security measures will be effective.
If our systems and infrastructure were to be breached, compromised, damaged, or disrupted, or if we were to experience a loss of our confidential information or that of our clients or teammates, we could be subject to serious negative consequences, including disruption of our operations, damage to our reputation, a loss of trust in us on the part of our clients, vendors or other counterparties, client or teammate attrition, reimbursement or other costs, increased compliance costs, significant litigation exposure and legal liability, or regulatory fines, penalties or intervention. Any of these could materially and adversely affect our results of operations, our financial condition, and/or our share price.
A disruption, breach, or failure in the operational systems or infrastructure of our third party vendors or other service providers, including as a result of cyber-attacks, could adversely affect our business.
Third parties perform significant operational services on our behalf. These third parties with whom we do business or that facilitate our business activities, including exchanges, clearing houses, central clearing counterparties, financial intermediaries, or vendors that provide services or security solutions for our operations, could also be sources of operational and information security risk to us, including from breakdowns or failures of their own systems or capacity constraints. In particular, operating our business requires us to provide access to client, teammate, and other sensitive Company information to our contractors, consultants, and other third parties and authorized entities. Controls and oversight mechanisms are in place that are designed to limit access to this information and protect it from unauthorized disclosure, theft, and disruption. However, control systems and policies pertaining to system access are subject to errors in design, oversight failure, software failure, human error, intentional subversion, or other compromise resulting in theft, error, loss, or inappropriate use of information or systems to commit fraud, cause embarrassment to us or our executives or to gain competitive advantage. In addition, regulators expect financial institutions to be responsible for all aspects of their performance, including aspects which they delegate to third parties. If a disruption, breach, or failure in the system or infrastructure of any third party with whom we do business occurred, then our business may be materially and adversely affected in a manner similar to if our own systems or infrastructure had been compromised. As has been the case in other major system events in the U.S., our systems and infrastructure may also be attacked, compromised, or damaged as a result of, or as the intended target of, any disruption, breach, or failure in the systems or infrastructure of any third party with whom we do business.
First United Corporation will likely incur significant expenses and faces the possibility of damages in connection with recent litigation.
As discussed below in Item 3 of Part I of this report, the Corporation, its directors, and two former directors have been sued by Driver Opportunity Fund I LP (the “Driver Shareholder”). This litigation has, and will likely continue to be, time consuming and has involved, and will likely continue to involve, significant defense and other costs. We cannot predict what expenses that we might incur in connection with this litigation. This litigation, if decided adversely to us, could result in significant monetary damages and reputational harm and require us to incur significant expenses related to holding a new meeting of shareholders, if the court were to order such a meeting as part of the relief granted. Subject to certain conditions imposed by Maryland law, our bylaws require us to indemnify and advance expenses to each of the current and former directors who are parties to this litigation. Further, our insurance policies might not cover all expenses and/or claims that have been or might be brought against us and the individual defendants, and insurance coverage might not continue to be available to us at a reasonable cost. As a result, we are exposed to the possibility of substantial uninsured liabilities in connection with this litigation, including pursuant to our indemnification obligations, which could materially and adversely affect our business, prospects, results of operations and financial condition.
We may be subject to claims and the costs of defensive actions, and such claims and costs could materially and adversely impact our financial condition and results of operations.
Our customers may sue us for losses due to alleged breaches of fiduciary duties, errors and omissions of employees, officers and agents, incomplete documentation, our failure to comply with applicable laws and regulations, or many other reasons. Also, our employees may knowingly or unknowingly violate laws and regulations. Management may not be aware of any violations until after their occurrence. This lack of knowledge may not insulate us from liability. Claims and legal actions will result in legal expenses and could subject us to liabilities that may reduce our profitability and hurt our financial condition.
The loss of key personnel could disrupt our operations and result in reduced earnings.
Our growth and profitability will depend upon our ability to attract and retain skilled managerial, marketing and technical personnel. Competition for qualified personnel in the financial services industry is intense, and there can be no assurance that we will be successful in attracting and retaining such personnel. Our current executive officers provide valuable services based on their many years of experience and in-depth knowledge of the banking industry and the market areas we serve. Due to the intense competition for financial professionals, these key personnel would be difficult to replace and an unexpected loss of their services could result in a disruption to the continuity of operations and a possible reduction in earnings.
We are a community banking organization and our ability to maintain our reputation is critical to the success of our business.
We are a community banking organization, and our reputation is one of the most valuable components of our business. A key component of our business strategy is to rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our current market and contiguous areas. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. If our reputation is negatively affected by the actions of our employees, by our inability to conduct our operations in a manner that is appealing to current or prospective customers, or otherwise, our business and, therefore, our operating results may be materially adversely affected.
We could be adversely affected by risks associated with future acquisitions and expansions.
Although our core growth strategy is focused around organic growth, we may from time to time consider acquisition and expansion opportunities involving a bank or other entity operating in the financial services industry. We cannot predict if or when we will engage in such a strategic transaction, or the nature or terms of any such transaction. To the extent that we grow through an acquisition, we cannot assure investors that we will be able to adequately and profitably manage that growth or that an acquired business will be integrated into our existing businesses as efficiently or as timely as we may anticipate. Acquiring another business would generally involve risks commonly associated with acquisitions, including:
increased capital needs;
increased and new regulatory and compliance requirements;
implementation or remediation of controls, procedures and policies with respect to the acquired business;
diversion of management time and focus from operation of our then-existing business to acquisition-integration challenges;
coordination of product, sales, marketing and program and systems management functions;
transition of the acquired business’s users and customers onto our systems;
retention of employees from the acquired business;
integration of employees from the acquired business into our organization;
integration of the acquired business’s accounting, information management, human resources and other administrative systems and operations with ours;
potential liability for activities of the acquired business prior to the acquisition, including violations of law, commercial disputes and tax and other known and unknown liabilities;
potential increased litigation or other claims in connection with the acquired business, including claims brought by regulators, terminated employees, customers, former stockholders, vendors, or other third parties; and
potential goodwill impairment.
Our failure to execute our acquisition strategy could adversely affect our business, results of operations, financial condition and future prospects risks of unknown or contingent liabilities.
Risks Relating to First United Corporation’s Securities
The shares of Common Stock are not insured.
The shares of Common Stock are not deposits and are not insured against loss by the FDIC or any other governmental or private agency.
The shares of Common Stock are not heavily traded.
Shares of the Common Stock are listed on the NASDAQ Global Select Market, but are not heavily traded. Securities that are not heavily traded can be more volatile than stock trading in an active public market. Factors such as our financial results, the introduction of new products and services by us or our competitors, various factors affecting the banking industry generally, and investor speculation as to our future plans and strategies could have a significant impact on the market price and trading volume of the shares of Common Stock. Likewise, events that are unrelated to the Corporation but that affect the equity markets generally, such as international health crises, wars, political instability and similar factors, could also have a significant impact on the market price and trading volume of the shares of Common Stock. Management cannot predict the extent to which an active public market for shares of Common Stock will develop or be sustained in the future. Accordingly, shareholders may not be able to sell their shares at the volumes, prices, or times that they desire.
Significant sales of shares of Common Stock, or the perception that significant sales may occur in the future, could adversely affect the market price of shares of Common Stock.
The Common Stock is currently included in the Russell 3,000 Index maintained by Financial Times Stock Exchange Group Russell, which tracks the performance of the 3,000 largest U.S.-traded equity securities. As of the date of this annual report, the Corporation believes it likely that the Common Stock will be eliminated from the Russell 3,000 Index when it is reconstituted in or about June 2021 and that, as a result, investors that invest in Russell 3,000 Index stocks could sell approximately 632,000 shares of Common Stock following such reconstitution.
The sale of a substantial number of shares of the Common Stock could adversely affect the market price of such shares. The availability of shares for future sale could adversely affect the prevailing market price of shares of Common Stock and could cause the market price of such shares to remain low for a substantial amount of time. In addition, the Corporation may grant equity awards under its equity compensation plans from time to time in effect, including fully-vested shares of Common Stock. It is possible that if a significant percentage of such available shares were attempted to be sold within a short period of time, the market for the shares would be adversely affected. Management cannot predict whether the market for shares of Common Stock could absorb a large number of attempted sales in a short period of time, regardless of the price at which they might be offered. Even if a substantial number of sales do not occur within a short period of time, the mere existence of this “market overhang” could have a negative impact on the market for the common stock and our ability to raise capital in the future.
The Corporation’s ability to pay dividends on the common stock is subject to the terms of the outstanding TPS Debentures, which prohibit the Corporation from paying dividends during an interest deferral period.
In March 2004, the Corporation issued approximately $30.9 million, in the aggregate, of junior subordinated debentures (“TPS Debentures”) to the Trusts in connection with the Trusts’ sales to third party investors of $30.0 million, in the aggregate, in mandatorily redeemable preferred capital securities. The terms of the TPS Debentures require the Corporation to make quarterly payments of interest to the Trusts, as the holders of the TPS Debentures, although the Corporation has the right to defer payments of interest for up to 20 consecutive quarterly periods. An election to defer interest payments does not constitute an event of default under the terms of the TPS Debentures. The terms of the TPS Debentures prohibit the Corporation from declaring or paying any dividends or making other distributions on, or from repurchasing, redeeming or otherwise acquiring, any shares of its capital securities, including the common
stock, if the Corporation elects to defer quarterly interest payments under the TPS Debentures. In addition, a deferral election will require the Trusts to likewise defer the payment of quarterly dividends on their related trust preferred securities.
Applicable banking and Maryland laws impose additional restrictions on the ability of the Corporation and the Bank to pay dividends and make other distributions on their capital securities, and, in any event, the payment of dividends is at the discretion of the boards of directors of the Corporation and the Bank.
In the past, the Corporation has funded dividends on its capital securities using cash received from the Bank, and this will likely be the case for the foreseeable future. No assurance can be given that the Bank will be able to pay dividends to the Corporation for these purposes at times and/or in amounts requested by the Corporation. Both federal and state laws impose restrictions on the ability of the Bank to pay dividends. Under Maryland law, a state-chartered commercial bank may pay dividends only out of undivided profits or, with the prior approval of the Maryland Commissioner, from surplus in excess of 100% of required capital stock. If, however, the surplus of a Maryland bank is less than 100% of its required capital stock, cash dividends may not be paid in excess of 90% of net earnings. In addition to these specific restrictions, bank regulatory agencies have the ability to prohibit proposed dividends by a financial institution which would otherwise be permitted under applicable regulations if the regulatory body determines that such distribution would constitute an unsafe or unsound practice. Banks that are considered “troubled institution” are prohibited by federal law from paying dividends altogether. Notwithstanding the foregoing, shareholders must understand that the declaration and payment of dividends and the amounts thereof are at the discretion of the Corporation’s Board of Directors. Thus, even at times when the Corporation is not prohibited from paying cash dividends on its capital securities, neither the payment of such dividends nor the amounts thereof can be guaranteed.
The Corporation’s Articles of Incorporation and Bylaws and Maryland law may discourage a corporate takeover.
The Corporation’s Amended and Restated Articles of Incorporation (the “Charter”) and its Amended and Restated Bylaws, as amended (the “Bylaws”), contain certain provisions designed to enhance the ability of the Corporation’s Board of Directors to deal with attempts to acquire control of the Corporation. First, the Board of Directors is classified into three classes. Directors of each class serve for staggered three-year periods, and no director may be removed except for cause, and then only by the affirmative vote of either a majority of the entire Board of Directors or a majority of the outstanding voting stock. Second, the board has the authority to classify and reclassify unissued shares of stock of any class or series of stock by setting, fixing, eliminating, or altering in any one or more respects the preferences, rights, voting powers, restrictions and qualifications of, dividends on, and redemption, conversion, exchange, and other rights of, such securities. The board could use this authority, along with its authority to authorize the issuance of securities of any class or series, to issue shares having terms favorable to management or to a person or persons affiliated with or otherwise friendly to management. In addition, the Bylaws require any shareholder who desires to nominate a director to abide by strict notice requirements.
Maryland laws include provisions that could discourage a sale or takeover of the Corporation. The Maryland Business Combination Act generally prohibits, subject to certain limited exceptions, corporations from being involved in any “business combination” (defined as a variety of transactions, including a merger, consolidation, share exchange, asset transfer or issuance or reclassification of equity securities) with any “interested shareholder” for a period of five years following the most recent date on which the interested shareholder became an interested shareholder. An interested shareholder is defined generally as a person who is the beneficial owner of 10% or more of the voting power of the outstanding voting stock of the corporation after the date on which the corporation had 100 or more beneficial owners of its stock or who is an affiliate or associate of the corporation and was the beneficial owner, directly or indirectly, of 10% percent or more of the voting power of the then outstanding stock of the corporation at any time within the two-year period immediately prior to the date in question and after the date on which the corporation had 100 or more beneficial owners of its stock. The Maryland Control Share Acquisition Act applies to acquisitions of “control shares”, which, subject to certain exceptions, are shares the acquisition of which entitle the holder, directly or indirectly, to exercise or direct the exercise of the voting power of shares of stock of the corporation in the election of directors within any of the following ranges of voting power: one-tenth or more, but less than one-third of all voting power; one-third or more, but less than a majority of all voting power or a majority or more of all voting power. Control shares have limited voting rights. Maryland banking laws provide that the Maryland Commissioner must approve certain acquisitions of the common stock of the Corporation and/or the Bank, and these laws impose penalties on persons who effect such acquisitions without approval, including a five year voting prohibition.
Although these provisions do not preclude a sale or takeover, they may have the effect of discouraging, delaying or deferring a sale, tender offer, or takeover attempt that a shareholder might consider in his or her best interest, including those attempts that might result in a premium over the market price for the common stock. Such provisions will also render the removal of the Board of Directors and of management more difficult and, therefore, may serve to perpetuate current management. These provisions could potentially adversely affect the market prices of the Corporation’s securities.
Risks Relating to Proxy Contests
We are subject to risks associated with proxy contests and other actions of activist shareholders.
In connection with the 2020 Annual Meeting of Shareholders (the “2020 Meeting”), the Driver Shareholder nominated (conditionally accepted by the Corporation) three candidates for election to the Corporation’s Board of Directors at the 2020 Meeting and engaged in a proxy contest with the Corporation’s Board of Directors. The Corporation incurred costs of approximately $3.3 million in connection with this proxy contest. On January 8, 2021, the Driver Shareholder notified the Corporation that it intends to nominate one director for election at the 2021 Annual Meeting of Shareholders (the “2021 Meeting”) and to present seven proposals for shareholder approval at the 2021 Meeting. The Driver Shareholder and the Corporation filed preliminary proxy statements with the SEC in respect of the 2021 Meeting on February 2, 2021 and March 2, 2021, respectively.
A proxy contest or related activities on the part of the Driver Shareholder or another shareholder could adversely affect our business for a number of reasons, including, without limitation, the following:
Responding to proxy contests and other actions by activist stockholders can be costly and time-consuming, disrupting our operations and diverting the attention of management and our employees;
Perceived uncertainties as to our future direction may result in the loss of potential business opportunities and may make it more difficult to attract and retain qualified personnel, business partners, customers and others important to our success, any of which could negatively affect our business and our results of operations and financial condition; and
If nominees advanced by activist shareholders are elected or appointed to our Board of Directors with a specific agenda, it may adversely affect our ability to effectively and timely implement our strategic plans or to realize long-term value from our assets, and this could in turn have an adverse effect on our business and on our results of operations and financial condition.
Proxy contests may cause our stock price to experience periods of volatility. Further, if a proxy contest results in a change in control of our Board of Directors, such an event could subject us to risks relating to certain third parties’ rights under our existing contractual obligations, which could adversely affect our business.

---

ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

---

ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
The headquarters of the Corporation and the Bank occupies approximately 29,000 square feet at 19 South Second Street, Oakland, Maryland, and a 30,000 square feet operations center located at 12892 Garrett Highway, Oakland Maryland. These premises are owned by the Corporation. The Bank owns 19 of its banking offices and leases six. Total rent expense on the leased offices and properties was $0.4 million in 2020.

---

ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
On September 4, 2020, the Driver Shareholder filed a lawsuit against the Corporation, all of its then-current directors, and former directors Robert W. Kurtz and Elaine L. McDonald (the individuals being collectively referred to as the “Director Defendants”) in the United States District Court for the District of Maryland (the “District Court”) and styled Driver Opportunity Partners I LP v. First United Corp., et al., No. 1:20-cv-2575 RDB (the “Driver Litigation”). The Driver Shareholder’s complaint follows a lawsuit filed by the Corporation in May 2020 against the Driver Shareholder and affiliated persons seeking a declaration that the Driver Shareholder’s acquisition of approximately 5.1% of the Corporation’s outstanding common stock during 2019 violated Section 3-314 of the Financial Institutions Article of the Annotated Code of Maryland (“FI 3-314”), rendering those shares ineligible to be voted for five years, including at the 2020 Meeting. In connection with the 2020 Meeting, Driver ran a proxy contest seeking to replace three of the Corporation’s directors with nominees of its own. The declaratory relief action, now pending in the same court, is captioned First United Corp. v. Driver Opportunity Partners I LP, et al., No. 1:20-cv-2592-RDB, although, on January 6, 2021, the District Court certified to the Maryland Court of Appeals the question of whether the Corporation has standing to seek declaratory relief under FI 3-314 and stayed the proceedings in that case pending a decision by the Maryland Court of Appeals.
For its complaint, the Driver Shareholder alleges that certain acts and omissions of the Corporation and/or the Director Defendants in connection with the 2020 Meeting and/or in response to Driver’s proxy contest constituted a wide range of torts, including breaches of fiduciary duty, abuses of process, malicious prosecution, defamation, tortious interference, unfair competition, and unjust enrichment. The Driver Shareholder seeks unspecified compensatory and punitive damages and asks the District Court to vacate the results of director election at the 2020 Meeting and order a new meeting of shareholders for the purpose of electing directors.
On January 11, 2021, the District Court issued an order dismissing six of the Driver Shareholder’s nine asserted claims: (i) breach of fiduciary duty; (ii) abuse of process (litigation); (iii) abuse of process (regulatory); (iv) malicious prosecution; (v) unfair competition; and (vi) unjust enrichment. Subsequently, on January 25, 2021, the Driver Shareholder filed a motion asking the District Court to reconsider its dismissal of the breach of duty claim, and filed a separate motion for leave to amend the Driver Shareholder’s complaint to assert claims for breach of fiduciary duty and for violation of Section 14(a) of the Exchange Act and SEC Rule 14a-9 focused on proxy materials related to the 2020 Meeting. On February 8, 2021, the Corporation and the Director Defendants filed papers opposing these motions. The Driver Shareholder filed reply papers on the motions on February 22, 2021, and briefing is now closed. The District Court has not yet decided either motion.
The Corporation and the Director Defendants believe that the Driver Shareholder’s claims lack merit and are vigorously defending the Driver Litigation. The Corporation maintains insurance coverages that it believes will cover portions of the legal expenses associated with the Driver Litigation and any damages that might be awarded to the Driver Shareholder. The Corporation has certain obligations both to indemnify and to advance defense expenses to each of the Director Defendants to the fullest extent permissible under Maryland law, and the Corporation intends to honor those obligations. It is not possible at this time for the Corporation to assess the likelihood of success of any of its and the Defendant Directors’ defenses or, thus, the outcome of the Driver Shareholder, or the amount of legal fees that it and the Director Defendants will incur in defending the Driver Litigation.

---

ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
‎
PART II

---

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Shares of the Corporation’s common stock are listed on the NASDAQ Global Select Market under the symbol “FUNC”. As of February 28, 2021, the issued and outstanding shares of Common Stock were held by 1,240 shareholders of record.
The ability of the Corporation to declare dividends is limited by federal banking laws and Maryland corporation laws. Subject to these and the terms of its other securities, including the TPS Debentures, the payment of dividends on the shares of common stock and the amounts thereof are at the discretion of the Corporation’s board of directors. In November 2010, the Corporation’s board of directors suspended the declaration and payment of cash dividends. This suspension was lifted in 2018. Cash dividends are typically declared on a quarterly basis. When paid, dividends to shareholders are dependent on the ability of the Corporation’s subsidiaries, especially the Bank, to declare dividends to the Corporation. Like the Corporation, the Bank’s ability to declare and pay dividends is subject to limitations imposed by federal and Maryland banking and Maryland corporation laws. A complete discussion of these and other dividend restrictions is contained in Item 1A of Part I of this annual report under the heading “Risks Relating to First United Corporation’s Securities” and in Note 23 to the Consolidated Financial Statements, both of which are incorporated herein by reference. Accordingly, there can be no assurance that dividends will be declared on the shares of common stock in any future fiscal quarter.
The Corporation’s Board of Directors periodically evaluates the Corporation’s dividend policy, both internally and in consultation with the Federal Reserve.
Issuer Repurchases
The following table provides information about shares of common stock purchased by or on behalf of First United Corporation and its affiliated purchases (as defined in Rule 10b-18 promulgated under the Exchange Act) during the three-month period ended December 31, 2020:
Number of securities to be issued upon exercise of outstanding options, warrants, and rights
Weighted-average exercise price of outstanding options, warrants, and rights
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Plan Category
(a)
(b)
(c)
Equity compensation plans approved by security holders
-
N/A
248,059
(1)
Equity compensation plans not approved by security holders
-
N/A
N/A
Total
-
N/A
248,059
Equity Compensation Plan Information
Pursuant to the SEC’s Regulation S-K Compliance and Disclosure Interpretation 106.01, the information required by this Item pursuant to Item 201(d) of Regulation S-K relating to securities authorized for issuance under the Corporation’s equity compensation plans is located in Item 12 of Part III of this annual report and is incorporated herein by reference.
‎

---

ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data for each of the last five calendar years and is qualified in its entirety by the detailed information and financial statements, including notes thereto, included elsewhere or incorporated by reference in this annual report.
(Dollars in thousands, except for share data)
Balance Sheet Data
Total Assets
$
1,733,414
$
1,442,027
$
1,383,760
$
1,335,867
$
1,317,675
Net Loans
1,149,596
1,037,145
996,103
882,117
881,670
Investment Securities
295,148
225,284
231,651
240,102
237,169
Deposits
1,422,366
1,142,031
1,067,527
1,039,390
1,014,229
Long-term Borrowings
100,929
100,929
100,929
120,929
131,737
Shareholders’ Equity
131,047
125,940
117,066
108,390
113,698
Operating Data
Interest Income
$
58,201
$
57,920
$
52,294
$
46,949
$
45,863
Interest Expense
9,655
11,529
8,112
7,371
8,223
Net Interest Income
48,546
46,391
44,182
39,578
37,640
Provision for Loan Losses
5,401
1,320
2,111
2,534
3,122
Other Operating Income
15,789
16,449
15,041
14,311
14,127
Net Gains
2,788
Other Operating Expense
43,934
45,389
43,808
39,170
39,107
Income Before Taxes
17,788
16,465
13,431
12,214
10,064
Income Tax expense (1)
3,947
3,336
2,764
6,945
2,783
Net Income
$
13,841
$
13,129
$
10,667
$
5,269
$
7,281
Accumulated preferred stock dividends and
‎ discount accretion
-
-
-
(1,215)
(2,025)
Net income available to common shareholders
$
13,841
$
13,129
$
10,667
$
4,054
$
5,256
Per Share Data
Basic net income per common share
$
1.98
$
1.85
$
1.51
$
0.58
$
0.84
Diluted net income per common share
1.97
1.85
1.51
0.58
0.84
Dividends Paid
0.52
0.40
0.27
-
-
Book Value
18.74
17.71
16.52
15.34
14.95
Significant Ratios
Return on Average Assets
0.86%
0.93%
0.81%
0.40%
0.55%
Return on Average Equity
10.89%
10.44%
9.39%
4.52%
6.38%
Average Equity to Average Assets
7.88%
8.86%
8.66%
8.82%
8.62%
Dividend Payout Ratio
26.26%
21.63%
17.88%
0.00%
0.00%
Total Risk-based Capital Ratio
16.08%
16.29%
15.91%
15.98%
16.71%
Tier I Capital to Risk Weighted Assets
14.83%
15.17%
14.87%
14.97%
14.76%
Tier I Capital to Average Assets
10.36%
11.77%
11.47%
11.00%
10.95%
Common Equity Tier I to Risk Weighted Assets
12.61%
12.79%
12.45%
12.54%
10.74%
(1)2017 includes $3,226 from tax reform impact
‎

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and notes thereto for the years ended December 31, 2020 and 2019, which are included in Item 8 of Part II of this annual report.
Overview
First United Corporation is a bank holding company that, through the Bank and its non-bank subsidiaries, provides an array of financial products and services primarily to customers in four Western Maryland counties and four Northeastern West Virginia counties. Its principal operating subsidiary is the Bank, which consists of a community banking network of 25 branch offices located throughout its market areas. Our primary sources of revenue are interest income earned from our loan and investment securities portfolios and fees earned from financial services provided to customers.
Consolidated net income was $13.8 million for the year ended December 31, 2020 compared to $13.1 million for the year ended December 31, 2019. Basic and diluted net income per share for the year of 2020 were $1.98 and $1.97, respectively, compared to basic and diluted net income per share of $1.85 for the same period of 2019, a 7.0% increase. Subsequent to the issuance of a press release on February 19, 2021 that described the Corporation’s financial results for the 12 and three month periods ended December 31, 2020, management determined that approximately $0.6 million of previously deferred costs associated with consulting for automated services should be expensed during the fourth quarter of 2020. This determination negatively impacted net income for 2020 by approximately $0.4 million. The increase in earnings when comparing 2020 to 2019 was primarily due to an increase in net interest income of $2.2 million, an increase in other operating income, including gains, of $1.8 million, and a decrease in other operating expenses of $1.5 million partially offset by an increase in the provision for loan losses of $4.1 million. The increase in provision expense for 2020 was driven by an increase in the qualitative factors reflecting the uncertainty of the economic environment related to the COVID-19 pandemic and its impact on our borrowers . Of the $5.4 million net provision expense for the year, $5.9 million was related to COVID-19 qualitative factor adjustments and $0.8 million was related to loan growth and the change in loan mix. Provision expense was partially offset by the release of a specific allocation of $1.3 million based on a new appraisal, as a non-accrual loan moved to the OREO portfolio. Other operating income, including net gains, increased $1.8 million for the year ended December 31, 2020 when compared to the year ended December 31, 2019. This increase was due primarily to gains on the sale of mortgages to the secondary market as well as gains on sales of investment securities. Trust and brokerage income were strong despite market volatility early in 2020. These increases were partially offset by reduced service charge income, primarily NSF income, due to reduced consumer and business overdraft activity. Bank owned life insurance (“BOLI”) income decreased due to the receipt of death claim benefits in 2019. The net interest margin, on a fully-taxable equivalent (“FTE”) basis, declined for the year ended December 31, 2020 to 3.34% compared to 3.68% for the same period of 2019.
The provision for loan losses was $5.4 million for the year ended December 31, 2020, compared to $1.3 million for the year ended December 31, 2019. The increase in provision expense for 2020 was driven by an increase in the qualitative factors reflecting the uncertainty of the economic environment related to the COVID-19 pandemic and its impact on our borrowers. Of the $5.4 million net provision expense for the year, $5.9 million was related to COVID-19 qualitative factor adjustments and $0.8 million was related to loan growth and the change in loan mix. Provision expense was partially offset by the release of a specific allocation of $1.3 million based on a new appraisal, as a non-accrual loan moved to the other real estate owned (“OREO”) portfolio.
Other operating income, including gains, increased $1.8 million for the year ended December 31, 2020 when compared with the same period in 2019. The increase was primarily attributable to the $2.5 million increase in net gains, due primarily to the increase in mortgage origination in 2020 and the sale of those loans to the secondary market. Additionally, as prepayment speeds on investments held for sale were elevated due to the low-rate environment and the investments were prepaying at par, we made the decision to capture gains through the sale of these investments. The increased gains were offset by a $1.0 million decline in BOLI income due to the receipt of $1.1 million in death benefits in the third quarter of 2019. Service charge income, primarily NSF income, decreased as the consumer and business overdraft activity decreased in the year of 2020 due to reduced consumer spending and increased cash balances resulting from borrowers’ receipt of government stimulus payments and loans under the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”). Trust and brokerage income increased $0.4 million year-over-year although it was negatively affected by market volatility early in the year as trustee fees are directly related to the value of assets under management. Debit card income increased $0.2 million for the year ended December 31, 2020 when compared with the same period of 2019 despite reduced consumer spending. Debit card income continued to increase as we grew our deposit relationships and our customers increased use of our electronic services.
Other operating expenses decreased $1.5 million for the year ended December 31, 2020 when compared with the same period of 2019. Salaries and benefits decreased $3.6 million, primarily due to the $2.5 million salary expense offset related to loan originations, primarily PPP loans, as well as the reduced headcount resulting from the voluntary separation program implemented in the fourth quarter of 2019 and reduced life and health insurance costs. These reductions offset the annual merit increases awarded to our associates in April 2020, Financial First Responder bonuses paid and increased incentives for mortgage production. FDIC premiums increased
slightly due to credits received on quarterly assessments in 2019. Equipment, occupancy and technology expenses remained stable when compared to 2019, as we began to realize cost savings from our core processor related to a new contract negotiated in 2020. Professional services increased $2.7 million primarily due to increased legal and professional expenses related to the 2020 proxy contest and related litigation. Investor relations expenses increased $1.0 million, also related to the 2020 proxy contest. OREO expenses decreased $1.5 million when compared to 2019, as we experienced lower valuation allowance write-downs related to updated appraisals. Increased marketing, consulting, miscellaneous expenses, dues and licenses, fraud expenses, miscellaneous loan fees and Visa processing fees were offset by reductions in schools and seminars, contributions, personnel related expenses, printed and office supplies, travel and lodging, mileage, contract labor, business related meals and other employee benefits expenses, most of which were related to limited operations as a result of the pandemic and management’s continued focus on cost savings and efficiencies. Other operating expenses recorded for 2020 include the above-mentioned $0.6 million of expenses associated with consulting for automated services that were previously deferred but that management determined, subsequent to February 19, 2021, should be expensed during the fourth quarter of 2020.
Outstanding loans increased to $1.2 billion at December 31, 2020, compared to $1.1 billion at December 31, 2019. The $117.4 million of growth was primarily attributable to the participation in the PPP loan program and core commercial loan growth partially offset by a decline in our mortgage loan portfolio. CRE loans increased by $33.7 million due to expansion of several new customer relationships as well as an increase in small business loans. Acquisition and development (“A&D”) loans declined by $1.0 million as amortization and payoffs offset new production. Commercial and industrial (“C&I”) loans increased by $144.4 million, including $114.0 million of PPP loans which remained on the balance sheet at December 31, 2020. The growth in the commercial portfolios was offset by a decline in residential mortgage loans of $59.3 million, as refinancing activity continued during the fourth quarter of 2020. Given the current low interest rate environment, customers have preferred longer-term fixed-rate loans. Management has elected to utilize the secondary market rather than hold mortgage loans in the portfolio at the longer-term fixed rates. The consumer loan portfolio declined slightly by $0.4 million during 2020.
Net interest income, on a non-GAAP, FTE basis, increased $2.2 million (4.7%) during the year ended December 31, 2020 when compared with the year ended December 31, 2019, driven by a $0.3 million (0.6%) increase in interest income and a $1.9 million (16.3%) decrease in interest expense. The net interest margin for the year ended December 31, 2020 was 3.34%, compared to 3.68% for the year ended December 31, 2019. The impact of average balances of PPP loans of approximately $137.0 million, offset by the $3.0 million of interest and fees related to these loans, had a negative impact on the margin of approximately 13 basis points. The margin was also negatively affected by the 2.25% drop in the Fed Funds rate since August 2019, which resulted in new loan production and existing loans repricing at lower rates. These factors resulted in a decrease of approximately 14 basis points in average loan yield when compared with the year ended December 31, 2019.
Comparing the year ended December 31, 2020 with the year ended December 31, 2019, interest income remained stable. The increase in interest and fees on loans of $2.0 million was partially offset by the reduction in investment income of $1.0 million. While the average balance of the investment portfolio remained consistent, bonds, at higher yielding rates, were called and replaced with lower yielding investments resulting in a decrease in average yield on the investment portfolio of 44 basis points. Excess cash balances attributable to deposit growth were invested at the lower Fed Funds rate, which also negatively affected interest income for the year ended December 31, 2020. Due to the uncertainties related to the COVID-19 pandemic and the volatile economic environment, the Bank maintained higher levels of liquidity throughout 2020 when compared to 2019. The increase in interest and fees on loans was due primarily to an increase in average balances of $144.5 million, primarily driven by the PPP loans but partially offset by the declining yield. The rate earned on the loan portfolio decreased by 46 basis points as a result of the significant decline in the rate environment over the past year and the high volume of PPP loans booked at the low 1.00% interest rate as noted above.
Total deposits at December 31, 2020 increased by $280.3 million when compared with deposits at December 31, 2019. During 2020, non-interest-bearing deposits increased by $125.8 million. This growth was driven by our retail and commercial account growth as well as deposits from PPP loans. Traditional savings accounts increased by $37.1 million, as we continued to see significant growth in our Prime Saver product. Total demand deposits increased by $42.0 million and total money market accounts increased by $101.1 million, due primarily to growth in our variable rate Value Money Market account. Time deposits less than $100,000 decreased by $7.5 million and time deposits greater than $100,000 decreased by $18.2 million. The decline in time deposits greater than $100,000 was due to a local municipality utilizing a maturing certificate of deposit for cash needs during this unprecedented economic environment as well as our repayment of the full outstanding balance of $10.0 million in a brokered CD that matured in May 2020.
The decrease in interest expense, despite an increase in average interest bearing liabilities of $79.7 million, was a direct result of a reduction in the cost of deposits of 21 basis points, a 24 basis point decrease in our short-term borrowings and a 34 basis point decrease in long-term borrowings, primarily driven by maturity of an interest rate swap. In addition, during the fourth quarter of 2020, management restructured three long-term FHLB advances that resulted in a reduced weighted rate on the $70.0 million portfolio of 80 basis points. A portion of this interest expense savings was captured in the fourth quarter of 2020 with the full impact expected in 2021. We proactively monitored the rate environment and reduced rates on our deposit portfolio throughout 2020. The average balance on our interest-bearing money market accounts increased $60.1 million, while the rate on these accounts decreased by 43 basis points. Average growth of $101.4 million in our non-interest-bearing accounts benefited our overall cost of deposits. Deposit growth was
attributable to PPP loan funding and organic deposit growth in low cost core deposits with existing customers as well as new relationship customers during 2020.
Estimates and Critical Accounting Policies
This discussion and analysis of our financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. (See Note 1 to the Consolidated Financial Statements.) On an on-going basis, management evaluates estimates and bases those estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the Consolidated Financial Statements.
Allowance for Loan Losses
One of our most important accounting policies is that related to the monitoring of the loan portfolio. A variety of estimates impact the carrying value of the loan portfolio and resulting interest income, including the calculation of the ALL, the valuation of underlying collateral, and the timing of loan charge-offs. The ALL is established and maintained at a level that management believes is adequate to cover losses resulting from the inability of borrowers to make required payments on loans. Estimates for loan losses are arrived at by analyzing risks associated with specific loans and the loan portfolio, current and historical trends in delinquencies and charge-offs, and changes in the size and composition of the loan portfolio. The analysis also requires consideration of the economic climate and direction, changes in lending rates, political conditions, legislation impacting the banking industry and economic conditions specific to Western Maryland and Northeastern West Virginia. Because the calculation of the ALL relies on management’s estimates and judgments relating to inherently uncertain events, actual results may differ from management’s estimates.
The ALL is also discussed below in Item 7 under the heading “Allowance for Loan Losses” and in Note 8 to the Consolidated Financial Statements.
Goodwill
ASC Topic 350, Intangibles - Goodwill and Other 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 its fair value. A goodwill impairment loss is recognized for the amount that the carrying amount of a reporting unit, including goodwill, exceeds its 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 more likely than not that the fair value of a reporting unit is less than its carrying amount, then the entity shall perform a quantitative goodwill impairment test. However, 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.
The emergence of COVID-19 as a global pandemic in beginning in March 2020, resulted in significant deterioration in general economic conditions and caused a deterioration in the environment in which the Corporation operates. This uncertainty resulted in a significant decrease in the market prices for the stock of institutions in the financial services industry, including the Corporation. 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. As such, quantitative analyses of the fair value of the Corporation were performed by a third party for each of the first three quarters of 2020 and no impairment was recognized.
During the fourth quarter of 2020, the economy began to see improvements with stimulus funding, decreasing unemployment rates within our market areas, the distributions of COVID-19 vaccines and the significant improvement in our stock price since September 2020. Based on these positive circumstances, Management performed a qualitative assessment on the impairment of goodwill at December 31, 2020.
Having considered each of the qualitative factors and the negative and positive evidence of the totality of events and circumstances qualitatively, management has determined that it is not more likely than not that the fair value of our reporting unit is less
than its carrying amount and a quantitative goodwill impairment test is unnecessary. As such, management concludes there is no goodwill impairment at December 31, 2020.
Accounting for Income Taxes
We account for income taxes in accordance with ASC Topic 740, “Income Taxes”. Under this guidance, deferred taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.
We regularly review the carrying amount of our net deferred tax assets to determine if the establishment of a valuation allowance is necessary. If based on the available evidence, it is more likely than not that all or a portion of our net deferred tax assets will not be realized in future periods, then a deferred tax valuation allowance must be established. Consideration is given to various positive and negative factors that could affect the realization of the deferred tax assets. In evaluating this available evidence, management considers, among other things, historical performance, expectations of future earnings, the ability to carry back losses to recoup taxes previously paid, length of statutory carry forward periods, experience with utilization of operating loss and tax credit carry forwards not expiring, tax planning strategies and timing of reversals of temporary differences. Significant judgment is required in assessing future earnings trends and the timing of reversals of temporary differences. Our evaluation is based on current tax laws as well as management’s expectations of future performance.
Management expects that the Corporation’s adherence to the required accounting guidance may result in increased volatility in quarterly and annual effective income tax rates because of changes in judgment or measurement including changes in actual and forecasted income before taxes, tax laws and regulations, and tax planning strategies.
Additional information about income taxes is set forth below under the heading, “CONSOLIDATED STATEMENT OF INCOME REVIEW - Applicable Income Taxes” and in Note 18 to Consolidated Financial Statements presented in Item 8 of Part II of this annual report.
Other-Than-Temporary Impairment of Investment Securities
Management systematically evaluates the securities in our investment portfolio for impairment on a quarterly basis. Based upon the application of accounting guidance for subsequent measurement in ASC Topic 320 (Section 320-10-35), management assesses whether (i) we have the intent to sell a security being evaluated and (ii) it is more likely than not that we will be required to sell the security prior to its anticipated recovery. If neither applies, then declines in the fair values of securities below their cost that are considered other-than-temporary declines are split into two components. The first is the loss attributable to declining credit quality. Credit losses are recognized in earnings as realized losses in the period in which the impairment determination is made. The second component consists of all other losses, which are recognized in other comprehensive loss. In estimating other-than-temporary impairment (“OTTI”) losses, management considers (a) the length of time and the extent to which the fair value has been less than cost, (b) adverse conditions specifically related to the security, an industry, or a geographic area, (c) the historic and implied volatility of the fair value of the security, (d) changes in the rating of the security by a rating agency, (e) recoveries or additional declines in fair value subsequent to the balance sheet date, (f) failure of the issuer of the security to make scheduled interest or principal payments, and (g) the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future. Management also monitors cash flow projections for securities that are considered beneficial interests under the guidance of ASC Subtopic 325-40, Investments - Other - Beneficial Interests in Securitized Financial Assets, (ASC Section 325-40-35). This process is described more fully in the section of the Consolidated Balance Sheet Review entitled “Investment Securities”.
Fair Value of Investments
We have determined the fair value of our investment securities in accordance with the requirements 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. We measure the fair market values of our investments based on the fair value hierarchy established in Topic 820. The determination of fair value of investments and other assets is discussed further in Note 25 to the Consolidated Financial Statements.
Pension Plan Assumptions
Our pension plan costs are calculated using actuarial concepts, as discussed within the requirements of ASC Topic 715, Compensation - Retirement Benefits. Pension expense and the determination of our projected pension liability are based upon two critical assumptions: the discount rate and the expected return on plan assets. We evaluate each of these critical assumptions annually. Other assumptions impact the determination of pension expense and the projected liability including the primary employee
demographics, such as retirement patterns, employee turnover, mortality rates, and estimated employer compensation increases. These factors, along with the critical assumptions, are carefully reviewed by management each year in consultation with our pension plan consultants and actuaries. Further information about our pension plan assumptions, the plan’s funded status, and other plan information is included in Note 20 to the Consolidated Financial Statements.
Other than as discussed above, management does not believe that any material changes in our critical accounting policies have occurred since December 31, 2020.
Response to COVID-19
Early in 2020, we established a set of COVID-19 protocols, focused on protecting the health, safety, and financial well-being of our associates and customers. We sustained frequent ongoing communication with associates and customers, enhanced the use of electronic and digital banking services and upheld consistently high standards for fraud and internal controls all while delivering our full array of financial services to our customers. In addition, we made significant efforts to relieve pandemic related financial pressures for customers:
oWaived certificate of deposit early withdrawal penalties and NSF overdraft fees
oTemporarily waived positive pay/Treasury Management fees for new customer signup, aiding in fraud prevention efforts
oModified and deferred loans for eligible consumer and commercial loan customers experiencing hardships; total of 562 modifications for 2020 totaling $230.6 million; 40 active loan modifications totaling approximately $18.2 million, or 1.7% of the loan portfolio remaining as of February 28, 2021
oSuspended repossession and foreclosure activity
oCommunicated frequently with associates and borrowers, keeping them apprised of changing regulations regarding PPP loan application processes and forgiveness procedures
o Processed approximately 1,174 PPP loan applications totaling $148.9 million
oProcessed approximately 348, or $34.5 million, in PPP loan forgiveness requests
oAdjusted community office lobby access based upon COVID-19 related spikes within each of our market areas.
oProvided remote work and flexible work hours for 90% of associates to protect their health and allow for care of children or other family members
oWeekly Be Informed! virtual calls and COVID-19 update email for our First United team
oPaid Financial First Responder bonuses to associates
Paycheck Protection Program
The CARES Act established the PPP, which provided small businesses with resources to maintain payroll, hire back employees who may have been laid off, and to cover applicable overhead expenses. We acted expeditiously to prepare our associates so they could guide our customers on the proper procedures necessary to enable them to take advantage of this program. We developed a PPP specific information site within our website that provided detailed information, links and materials for eligible customers to access. Internally, we reallocated resources to review, process and data enter customer applications, working tirelessly over extended hours to provide access to as many local business owners as possible. These loans are 100% guaranteed by the SBA, have up to a two or five year maturity, provide for the earlier of when the Bank received forgiveness payment from the SBA or 10 months after the end of the covered payroll period, and have an interest rate of 1%. These loans may be forgiven, in whole or in part, by the SBA if the borrower meets certain conditions, including by using at least 60% of the loan proceeds for payroll costs. The SBA also established processing fees from 1% to 5%, depending on the loan amount. Of the $3.7 million of deferred loan fees, we recognized approximately $2.0 million in 2020.
In April 2020, the Bank established eligibility to participate in the Paycheck Protection Program Liquidity Facility (“PPPLF”) which was established by Congress and administered by the Federal Reserve Bank. This facility uses the SBA guaranteed PPP loans as collateral, offering 100% collateral coverage with no recourse to the Bank. The Bank’s board of directors and management team believe that it is prudent to maintain our existing liquidity facilities available for our contingency funding plan given the current economic conditions. The majority of the PPP loan disbursements have been to internal, non-interest-bearing accounts awaiting use by borrowers. As a result, we did not access the PPPLF during 2020, but are prepared to utilize the fund if and when management determines the timing is appropriate.
During the second quarter of 2020, the Bank was approved to participate in the Main Street Lending Program established by the Federal Reserve. This program supports lending to small and medium-sized businesses and non-profit organizations that were in sound financial condition before the onset of the COVID-19 pandemic.
During the third quarter of 2020, the Bank implemented PPP loan forgiveness processes to assist our borrowers with applications. Communication with the associates and borrowers was a focus as we helped them through this process. As of December 31, 2020, we have processed loan forgiveness applications for approximately $34.5 million of PPP loans.
In January 2021, President Trump signed the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act into law. This act provides an extension of stimulus package benefits and unemployment through March 14, 2021 as well as funding for additional PPP loans. As of March 11, 2021, we have processed 561 PPP2 loan applications totaling $56.4 million.
Liquidity Sources
Management has reviewed its Liquidity Contingency Funding Plan in preparation of funding needs as it relates to the COVID-19 pandemic. As of December 31, 2020, the Corporation had approximately $130.0 million in unsecured lines of credit with its correspondent banks, $1.1 million with the Federal Reserve Discount Window, and approximately $134.4 million of secured borrowings with the FHLB. Additionally, the Corporation has access to the brokered certificates of deposit market.
As noted above, the Corporation is eligible to access the PPPLF when it is deemed appropriate.
Capital
The Corporation’s and the Bank’s capital ratios are strong, and both institutions are considered to be well-capitalized by applicable regulatory measures
Adoption of New Accounting Standards and Effects of New Accounting Pronouncements
Note 1 to the Consolidated Financial Statements discusses new accounting pronouncements that, when adopted, could affect our future consolidated financial statements.
CONSOLIDATED STATEMENT OF INCOME REVIEW
Net Interest Income
Net interest income is our largest source of operating revenue. Net interest income is the difference between the interest that we earn on our interest-earning assets and the interest expense we incur on our interest-bearing liabilities. For analytical and discussion purposes, net interest income is adjusted to a 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.
The table below summarizes net interest income for 2020 and 2019.
GAAP
Non-GAAP - FTE
(Dollars in thousands)
Interest income
$
58,201
$
57,920
$
59,118
$
58,788
Interest expense
9,655
11,529
9,655
11,529
Net interest income
$
48,546
$
46,391
$
49,463
$
47,259
Net interest margin %
3.28%
3.61%
3.34%
3.68%
Net interest income, on a non-GAAP, FTE basis, increased $2.2 million (4.7%) during the year ended December 31, 2020 when compared with the year ended December 31, 2019, driven by a $0.3 million (0.6%) increase in interest income and a $1.9 million (16.3%) decrease in interest expense. The net interest margin for the year ended December 31, 2020 was 3.34%, compared to 3.68% for the year ended December 31, 2019. The impact of average balances of PPP loans of approximately $137.0 million, offset by the $3.0 million of interest and fees related to these loans, had a negative impact on the margin of approximately 13 basis points. The margin was also negatively affected by the 2.25% drop in the Fed Funds rate since August 2019, which resulted in new loan production and existing loans repricing at lower rates. These factors resulted in a decrease of approximately 14 basis points in average loan yield when compared with the year ended December 31, 2019.
Comparing the year ended December 31, 2020 to the year ended December 31, 2019, interest income remained stable. The increase in interest and fees on loans of $2.0 million was partially offset by the reduction in investment income of $1.0 million. While the average balance of the investment portfolio remained consistent, bonds, at higher yielding rates, were called and replaced with lower yielding investments resulting in a decrease in average yield on the investment portfolio of 44 basis points. Excess cash balances attributable to deposit growth were invested at the lower Fed Funds rate which also negatively affected interest income for the year
ended December 31, 2020. In late December, approximately $70.0 million of excess cash was deployed into the investment portfolio at an average yield of 1% that will provide additional interest income in 2021. Due to the uncertainties related to the COVID-19 pandemic and the volatile economic environment, the Bank maintained higher levels of liquidity in 2020 than in 2019. The increase in interest and fees on loans was due primarily to an increase in average balances of $144.5 million, primarily driven by the PPP loans but partially offset by the declining yield. The rate earned on the loan portfolio decreased by 46 basis points as a result of the significant decline in the rate environment over the past year and the high volume of PPP loans booked at the low 1.00% interest rate as noted above.
The decrease in interest expense, despite an increase in average interest bearing liabilities of $79.7 million, was a direct result of a reduction in the cost of deposits of 21 basis points, a 24 basis point decrease in our short-term borrowings and a 34 basis point decrease in long-term borrowings, primarily driven by maturity of an interest rate swap. In addition, during the fourth quarter of 2020, management restructured three long-term FHLB advances that resulted in a reduced weighted rate on the $70.0 million portfolio of 80 basis points. A portion of this interest expense savings was captured in the fourth quarter of 2020 with the full impact expected in 2021. We proactively monitored the rate environment and reduced rates on our deposit portfolio throughout 2020. The average balance on our interest-bearing money market accounts increased $60.1 million, while the rate on these accounts decreased by 43 basis points. Average growth of $101.4 million in our non-interest-bearing accounts benefited our overall cost of deposits. Deposit growth was attributable to PPP loan funding and organic deposit growth in low cost core deposits with existing customers as well as new relationship customers during 2020.
As shown below, the composition of total interest income between 2020 and 2019 remained relatively stable.
% of Total Interest Income
Interest and fees on loans
90%
87%
Interest on investment securities
9%
12%
Other
1%
1%
‎
The following table sets forth the average balances, net interest income and expense, and average yields and rates for our interest-earning assets and interest-bearing liabilities for 2020, 2019 and 2018.
Distribution of Assets, Liabilities and Shareholders’ Equity
Interest Rates and Interest Differential - Tax Equivalent Basis
For the Years Ended December 31
(Dollars in thousands)
Average
‎Balance
Interest
Average
‎Yield/
‎Rate
Average
‎Balance
Interest
Average
‎Yield/
‎Rate
Average
‎Balance
Interest
Average
‎Yield/
‎Rate
Assets
Loans
$
1,147,870
$
52,215
4.55%
$
1,003,379
$
50,254
5.01%
$
946,376
$
45,119
4.77%
Investment Securities:
Taxable
204,243
4,526
2.22
205,209
5,648
2.75
215,944
5,820
2.7
Non taxable
26,275
1,941
7.39
25,512
1,846
7.24
17,838
1,699
9.52
Total
230,518
6,467
2.81
230,721
7,494
3.25
233,782
7,519
3.22
Federal funds sold
96,417
0.22
45,152
1.61
16,594
0.93
Interest-bearing deposits with
‎ other banks
0.99
1,279
1.79
2,024
0.84
Other interest earning assets
4,455
4.76
4,487
6.48
5,037
5.56
Total earning assets
1,480,165
59,118
3.99%
1,285,018
58,788
4.57%
1,203,813
53,090
4.41%
Allowance for loan losses
(15,362)
(11,961)
(10,428)
Non-earning assets
148,818
145,870
118,517
Total Assets
$
1,613,621
$
1,418,927
$
1,311,902
Liabilities and
‎ Shareholders’ Equity
Interest-bearing demand deposits
$
182,767
$
0.40%
$
160,776
$
0.37%
$
170,642
$
0.11%
Interest-bearing money markets
313,852
1,443
0.46
253,737
2,254
0.89
211,969
0.44
Savings deposits
176,524
0.09
160,751
0.19
160,968
0.12
Time deposits:
Less than $100k
111,408
1,712
1.54
107,215
1,486
1.39
104,289
1,054
1.01
$100k or more
127,397
2,311
1.81
153,727
3,158
2.05
123,170
1,876
1.52
Short-term borrowings
46,519
0.20
42,579
0.44
61,774
0.85
Long-term borrowings
100,929
3,205
3.18
100,929
3,550
3.52
106,217
3,341
3.15
Total interest-bearing
‎ liabilities
1,059,396
9,655
0.91%
979,714
11,529
1.18%
939,029
8,112
0.86%
Non-interest-bearing deposits
372,392
270,945
239,838
Other liabilities
54,732
42,496
19,376
Shareholders’ Equity
127,101
125,774
113,659
Total Liabilities and
‎ Shareholders’ Equity
$
1,613,621
$
1,418,929
$
1,311,902
Net interest income and spread
$
49,463
3.08%
$
47,259
3.40%
$
44,978
3.55%
Net interest margin
3.34%
3.68%
3.74%
Notes:
(1)The above table reflects the average rates earned or paid stated on a FTE basis assuming a tax rate of 21% for 2020 and 2019, and 35% for 2018. Non-GAAP interest income on a fully taxable equivalent basis for the years ended December 31, 2020, 2019 and 2018 were $917, $868, and $796, respectively.
(2)The average balances of non-accrual loans for the years ended December 31, 2020, 2019 and 2018, which were reported in the average loan balances for these years, were $9,945, $11,455, and $5,023, respectively.
(3)Net interest margin is calculated as net interest income divided by average earning assets.
(4)The average yields on investments are based on amortized cost.
‎
The following table sets forth an analysis of volume and rate changes in interest income and interest expense of our average interest-earning assets and average interest-bearing liabilities for 2020, 2019 and 2018. This table distinguishes between the changes related to average outstanding balances (changes in volume created by holding the interest rate constant) and the changes related to average interest rates (changes in interest income or expense attributed to average rates created by holding the outstanding balance constant).
Interest Variance Analysis (1)
2020 Compared to 2019
2019 Compared to 2018
(In thousands and tax equivalent basis)
Volume
Rate
Net
Volume
Rate
Net
Interest Income:
Loans
$
7,239
$
(5,278)
$
1,961
$
2,718
$
2,417
$
5,135
Taxable Investments
(27)
(1,095)
(1,122)
(289)
(172)
Non-taxable Investments
(584)
Federal funds sold
(1,337)
(512)
Interest-bearing deposits
(7)
(7)
(14)
(6)
Other interest earning assets
(2)
(76)
(78)
(31)
Total interest income
8,083
(7,753)
3,388
2,310
5,698
Interest Expense:
Interest-bearing demand deposits
(10)
Interest-bearing money markets
(1,346)
(811)
1,132
1,317
Savings deposits
(163)
(133)
-
Time deposits less than $100k
Time deposits $100k or more
(540)
(307)
(847)
1,282
Short-term borrowings
(111)
(94)
(163)
(174)
(337)
Long-term borrowings
-
(345)
(345)
(166)
Total interest expense
(2,055)
(1,874)
3,076
3,417
Net interest income
$
7,902
$
(5,698)
$
2,204
$
3,047
$
(766)
$
2,281
Note:
(1)The change in interest income/expense due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
Provision for Loan Losses
The provision for loan losses was $5.4 million for the year ended December 31, 2020 and $1.3 million for the year ended December 31, 2019. Net charge-offs of $1.5 million were recorded for 2020, compared to net recoveries of $0.2 million for 2019. The increase in provision expense for 2020 was driven by an increase in the qualitative factors reflecting the uncertainty of the economic environment related to the COVID-19 pandemic and its impact on our borrowers. Of the $5.4 million net provision expense for the year, $5.9 million was related to COVID-19 qualitative factor adjustments and $0.8 million was related to loan growth and the change in loan mix. Provision expense was partially offset by the release of a specific allocation of $1.3 million based on a new appraisal, as a non-accrual loan moved to the OREO portfolio. Management believes that the ALL reflects a level commensurate with the risk inherent in our loan portfolio.
‎
Other Operating Income
The following table shows the major components of other operating income for the past two years, exclusive of net gains, and the percentage changes during these years:
(Dollars in thousands)
% Change
Service charges on deposit accounts
$
1,929
$
2,192
-12.00%
Other service charge income
-10.27%
Debit card income
2,902
2,706
7.24%
Trust department income
7,446
7,148
4.17%
Bank owned life insurance (BOLI) income
1,253
2,257
-44.48%
Brokerage commissions
1,004
9.25%
Other income
24.11%
Total other operating income
$
15,789
$
16,449
-4.01%
Other operating income, exclusive of gains, decreased $0.7 million during the year ended December 31, 2020 when compared to the same period of 2019. The decrease was primarily a result of the decrease in BOLI income relating to the $1.1 million BOLI death benefit proceeds received during the third quarter 2019. Service charge income, primarily NSF income, decreased as the consumer and business overdraft activity decreased in the year of 2020 due to reduced consumer spending and increased cash balances resulting from the receipt of government stimulus payments and PPP funding. Trust and brokerage income increased $0.4 million year-over-year although it was negatively affected by market volatility early in the year as trustee fees are directly related to the value of assets under management. Debit card income increased $0.2 million for the year ended December 31, 2020 when compared with the same period of 2019 despite reduced consumer spending. Debit card income continues to increase as we grow our deposit relationships and our customers increase use of our electronic services.
Net gains of $2.8 million and $0.3 million were reported through other income for the years ended December 31, 2020 and 2019, respectively. The $2.5 million increase in gains was attributable to the increased sales of mortgage loans to Fannie Mae as well as gains on sales in the investment portfolio.
Other Operating Expense
The following table compares the major components of other operating expense for 2020 and 2019:
(Dollars in thousands)
% Change
Salaries and employee benefits
$
21,079
$
24,641
-14.46%
Other expenses
3,929
4,414
-10.99%
FDIC premiums
50.86%
Equipment
3,904
3,807
2.55%
Occupancy
2,860
2,884
-0.83%
Data processing
3,981
4,004
-0.57%
Marketing
37.08%
Professional services
4,204
1,480
184.05%
Investor relations
1,277
349.65%
Other real estate owned expense
1,542
-99.29%
Contract labor
-1.99%
Telephony expense
0.93%
Total other operating expense
$
43,934
$
45,389
-3.21%
Other operating expenses decreased $1.5 million for the year ended December 31, 2020 when compared to the same period of 2019. Salaries and benefits decreased $3.6 million, primarily due to the $2.5 million salary expense offset related to loan originations, primarily PPP loans, as well as the reduced headcount resulting from the voluntary separation program implemented in the fourth quarter of 2019 and reduced life and health insurance costs. These reductions offset the annual merit increases awarded to our associates in April 2020, our payment of Financial First Responder bonuses, and increased incentives for mortgage production. FDIC premiums increased slightly due to credits received on quarterly assessments in 2019. Equipment, occupancy and technology expenses remained stable when compared with 2019 as we began to realize cost savings from our core processor related to a new contract negotiated in 2020. Professional services increased $2.7 million primarily due to increased legal and professional expenses related to the 2020 proxy contest and related litigation. Investor relations expenses increased $1.0 million, also related to the 2020 proxy contest. OREO expenses decreased $1.5 million as compared with 2019 as we experienced lower valuation allowance write-downs related to updated appraisals.
Increased marketing, consulting, miscellaneous expenses, dues and licenses, fraud expenses, miscellaneous loan fees and Visa processing fees, were offset by reductions in schools and seminars, contributions, personnel related expenses, printed and office supplies, travel and lodging, mileage, contract labor, business related meals and other employee benefits expenses, most of which were related to limited operations as a result of the pandemic and management’s continued focus on cost savings and efficiencies. Other operating expenses recorded for 2020 include $0.6 million of expenses associated with consulting for automated services that were previously deferred but that management determined, subsequent to February 19, 2021, should be expensed during the fourth quarter of 2020.
Applicable Income Taxes
We recognized a tax expense of $3.9 million in 2020, compared to a tax expense of $3.3 million in 2019. See the discussion under “Income Taxes” in Note 18 to the Consolidated Financial Statements presented elsewhere in this annual report for a detailed analysis of our deferred tax assets and liabilities. Our effective tax rate was 22.2% in 2020 and 20.3% in 2019. The increase in the effective tax rate was primarily due to the reduced tax exempt income, particularly related to the $1.1 million of BOLI death benefit proceeds received in 2019.
At December 31, 2020, the Corporation had Maryland Net Operating Losses (“NOLs”) of $40.4 million for which a deferred tax asset of $2.7 million has been recorded. There has been and continues to be a full valuation allowance on these NOLs based on management’s belief that it is more likely than not that these NOLs will not be realized prior to the expiration of their carry-forward periods because the Corporation will not generate sufficient taxable income in the future to fully utilize the NOLs. The valuation allowance was $2.7 million at December 31, 2020 and $2.6 million at December 31, 2019.
We have concluded that no valuation allowance is deemed necessary for our remaining federal and state deferred tax assets at December 31, 2020, as it is more likely than not that they will be realized based on the expected reversal of deferred tax liabilities, the generation of future income sufficient to realize the deferred tax assets as they reverse, and the ability to implement tax planning strategies to prevent the expiration of any carry-forward periods.
CONSOLIDATED BALANCE SHEET REVIEW
Overview
Total assets at December 31, 2020 increased by $291.4 million to $1.7 billion from December 31, 2019. During 2020, cash and interest-bearing deposits in other banks increased by $99.5 million, the investment portfolio increased by $69.9 million and gross loans increased by $117.4 million but were offset by an increase in unearned fees of $1.0 million and an increase to the ALL of $4.0 million. The increase in cash was due to continued deposit growth, consisting of both core deposit growth and deposits related to the PPP loans, cash flow from calls on the investment portfolio, commercial loan payoffs as well as continued refinances of balances in our mortgage portfolio. The increase in the securities portfolio resulted from a strategic decision to purchase approximately $70.0 million of new investments in December 2020 as an alternative to holding low yielding cash balances. These investments will provide additional earnings in 2021 of approximately $0.7 million. OREO balances increased due to the movement of one large commercial participation loan from non-accrual loans to OREO after the foreclosure sale of the property early in the fourth quarter of 2020. This addition was partially offset by the sale of properties during the fourth quarter of 2020. Accrued interest receivable and other assets increased $3.6 million during 2020. Total liabilities increased by $286.3 million when compared with liabilities at December 31, 2019. This increase was primarily attributable to the strong deposit growth of $280.3 million, inclusive of the remaining deposit balances related to the PPP loans at December 31, 2020. Deposit growth of $182.9 million, excluding the PPP deposits, during the year of 2020 was due to increased relationship balances as we continued to grow core relationships and customers favored insured products given the volatile economic environment. Our Treasury Management overnight investment sweep remained constant. Accrued interest payable and other liabilities increased $5.8 million. This increase was primarily related to $2.1 million of assets in 2019 in reserve for taxes moving to a liability in 2020. Total shareholders’ equity increased by $5.1 million during 2020, primarily due to the increase in earnings attributable to year-to-date net income, partially offset by common stock dividends of $3.6 million and the decline in surplus of $2.8 million related to stock repurchases during the first quarter of 2020 and the increase of $2.9 million in accumulated other comprehensive loss.
‎
As indicated below, the total interest-earning asset mix remained constant at December 31, 2020 as compared to December 31, 2019. The mix for each year is illustrated below:
Year End Percentage
‎of Total Assets
Cash and cash equivalents
9%
3%
Net loans
66%
72%
Investments
17%
16%
The year-end total liability mix has remained consistent during the two-year period as illustrated below.
Year End Percentage
‎of Total Liabilities
Total deposits
90%
87%
Total borrowings
9%
11%
Loan Portfolio
The Bank is actively engaged in originating loans to customers primarily in Allegany County, Frederick County, Garrett County, and Washington County in Maryland, and in Berkeley County, Mineral County, Monongalia County, and Harrison County in West Virginia; and the surrounding regions of West Virginia and Pennsylvania. We have policies and procedures designed to mitigate credit risk and to maintain the quality of our loan portfolio. These policies include underwriting standards for new credits as well as continuous monitoring and reporting policies for asset quality and the adequacy of the ALL. These policies, coupled with ongoing training efforts, have provided effective checks and balances for the risk associated with the lending process. Lending authority is based on the type of the loan, and the experience of the lending officer.
Commercial loans are collateralized primarily by real estate and, to a lesser extent, equipment and vehicles. Unsecured commercial loans represent an insignificant portion of total commercial loans. Residential mortgage loans are collateralized by the related property. Generally, a residential mortgage loan exceeding a specified internal loan-to-value ratio requires private mortgage insurance. Installment loans are typically collateralized, with loan-to-value ratios which are established based on the financial condition of the borrower. We also have made unsecured consumer loans to qualified borrowers meeting our underwriting standards. Additional information about our loans and underwriting policies can be found in Item 1 of Part I of this annual report under the heading “Banking Products and Services”.
The following table sets forth the composition of our loan portfolio. Historically, our policy has been to make the majority of our loan commitments in our market areas. We had no foreign loans in our portfolio as of December 31 for any of the years presented.
Summary of Loan Portfolio
The following table presents the composition of our loan portfolio as of December 31 for the past five years:
(In millions)
Commercial real estate
$
369.2
$
335.5
$
306.9
$
283.2
$
298.0
Acquisition and development
117.0
117.9
118.4
110.5
104.3
Commercial and industrial
266.7
122.3
111.4
76.7
72.3
Residential mortgage
379.2
438.5
436.9
398.6
393.4
Consumer
35.7
36.2
34.1
23.5
23.9
Total Loans
$
1,167.8
$
1,050.4
$
1,007.7
$
892.5
$
891.9
Outstanding loans increased to $1.2 billion at December 31, 2020, compared to $1.1 billion at December 31, 2019. The $117.4 million of growth was primarily attributable to the participation in the PPP loan program and core commercial loan growth partially offset by a decline in our mortgage loan portfolio. CRE loans increased by $33.7 million due to expansion of several new customer relationships as well as an increase in small business loans. A&D loans declined by $0.9 million as amortization and payoffs offset new production. C&I loans increased by $144.4 million, including $114.0 million of PPP loans which remained on the balance sheet at December 31, 2020. The growth in the commercial portfolios was offset by a decline in residential mortgage loans of $59.3 million, as we saw robust refinancing activity during 2020. Given the current low interest rate environment, customers preferred
longer-term fixed-rate loans. Management elected to utilize the secondary market rather than hold mortgage loans in the portfolio at the longer-term fixed rates. The consumer loan portfolio declined slightly by $0.5 million during 2020.
Commercial loan production for 2020 was approximately $190.1 million, including PPP loan originations. Commercial construction funding continued to ramp up during the fourth quarter as projects are entering their larger draw periods, which should result in increased outstanding balances in 2021. At 2020 year-end, unfunded, committed commercial construction loans equaled $41.0 million. Commercial amortization and payoffs were approximately $85.2 million through December 31, 2020, including approximately $34.5 million of PPP loan forgiveness. Consumer mortgage loan production continued at a record pace, with the production of approximately $144.6 million for 2020. The production and pipeline mix of in-house, portfolio loans and investor loans remained robust at December 31, 2020, with those loans totaling $24.6 million, consisting of $12.0 million in portfolio loans and $12.6 million in investor loans.
The following table sets forth the maturities, based upon contractual dates, for selected loan categories as of December 31, 2020:
Maturities of Loan Portfolio at December 31, 2020
(In thousands)
Maturing
‎Within
‎One Year
Maturing After
‎One Year
‎But Within
‎Five Years
Maturing
‎After
‎Five Years
Total
Commercial Real Estate
$
21,986
$
200,922
$
146,268
$
369,176
Acquisition and Development
67,516
28,589
20,856
116,961
Commercial and Industrial *
35,939
192,199
38,607
266,745
Residential Mortgage
4,803
21,228
353,139
379,170
Consumer
3,627
18,001
14,132
35,760
Total Loans
$
133,871
$
460,939
$
573,002
$
1,167,812
Classified by Sensitivity to Change in Interest Rates
Fixed-Interest Rate Loans
68,355
406,069
175,146
649,570
Adjustable-Interest Rate Loans
65,516
54,870
397,856
518,242
Total Loans
$
133,871
$
460,939
$
573,002
$
1,167,812
* Commercial and Industrial includes $114.0 million of PPP balances at December 31, 2020
Management monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a required payment is past due. A loan is considered to be past due when a scheduled payment has not been received for 30 days past its contractual due date. For all loan segments, the accrual of interest is discontinued when principal or interest is delinquent for 90 days or more unless the loan is well-secured and in the process of collection. All non-accrual loans are considered to be impaired. Interest payments received on non-accrual loans are applied as a reduction of the loan principal balance. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. Our policy for recognizing interest income on impaired loans does not differ from our overall policy for interest recognition.
‎
The following sets forth the amounts of non-accrual, past-due and restructured loans for the past five years:
Risk Elements of Loan Portfolio
At December 31,
(In thousands)
Non-accrual loans:
Commercial real estate
$
$
$
2,141
$
4,453
$
12,211
Acquisition and development
8,058
Commercial and industrial
-
-
-
Residential mortgage
2,048
2,077
2,624
2,046
1,690
Consumer
-
Total non-accrual loans
$
3,339
$
10,849
$
4,922
$
7,118
$
13,946
Accruing Loans Past Due 90 days or more:
Acquisition and development
-
Commercial and industrial
-
-
-
Residential mortgage
Consumer
Total accruing loans past due 90 days or more
$
$
$
$
$
Total non-accrual and past due 90 days or more
$
4,063
$
11,574
$
5,352
$
7,713
$
14,366
Restructured Loans (TDRs):
Performing
$
3,657
$
3,842
$
4,633
$
5,121
$
7,336
Non-accrual (included above)
1,987
Total TDRs
$
3,958
$
4,166
$
4,864
$
5,955
$
9,323
Other Real Estate Owned
$
9,386
$
4,127
$
6,598
$
10,141
$
10,910
Impaired loans without a valuation allowance
$
6,060
$
5,974
$
9,231
$
12,317
$
23,131
Impaired loans with a valuation allowance
1,399
9,200
1,344
2,634
Total impaired loans
$
7,459
$
15,174
$
10,575
$
14,951
$
24,000
Valuation allowance related to impaired loans
$
$
2,173
$
$
$
Non-Accrual Loans as a % of Applicable Portfolio
Commercial real estate
0.2%
0.2%
0.7%
1.6%
4.1%
Acquisition and development
0.3%
6.8%
0.1%
0.2%
0.1%
Commercial and industrial
0.0%
0.0%
0.0%
0.5%
0.0%
Residential mortgage
0.5%
0.5%
0.6%
0.5%
0.4%
Consumer
0.1%
0.0%
0.0%
0.1%
0.0%
We would have recognized $0.5 million in interest income for the year ended December 31, 2020 had our non-accrual loans been current and performing in accordance with their terms. During 2020, we recognized, on a cash basis, $0.1 million of interest income on non-accrual loans that paid off.
Performing loans considered to be impaired (including performing troubled debt restructurings, or TDRs), as defined and identified by management, amounted to $4.1 million at December 31, 2020 and $4.6 million at December 31, 2019. Loans are identified as impaired when, based on current information and events, management determines that we will be unable to collect all amounts due according to contractual terms. These loans consist primarily of A&D loans and CRE loans. The fair values are generally determined based upon independent third-party appraisals of the collateral or discounted cash flows based upon the expected proceeds. Specific allocations have been made where management believes there is insufficient collateral to repay the loan balance if liquidated and there is no secondary source of repayment available. The decrease in valuation allowance related to impaired loans is due to the movement of the A&D loan to OREO, as previously discussed.
The level of performing impaired loans (other than performing TDRs) increased by $0.4 million during the year ended December 31, 2020.
A troubled debt restructuring is the restructuring of a loan in which one or more concessions are granted to a borrower who is experiencing financial difficulties. A loan will be classified as a TDR if the Bank restructures the loan’s terms (i.e., interest rate, payment amount, amortization period and/or maturity date) after determining that the borrower is experiencing financial difficulties. A modified loan is considered to be a TDR when the Bank has determined that the borrower is experiencing financial difficulties. The Bank evaluates the probability that the borrower will be in payment default on any of its debt in the foreseeable future without modification. To make this determination, the Bank performs a global financial review of the borrower and loan guarantors to assess their current ability to meet their financial obligations. The following table presents the details of TDRs by loan class at December 31, 2020 and December 31, 2019:
December 31, 2020
December 31, 2019
(Dollars in thousands)
Number of
‎Contracts
Recorded
‎Investment
Number of
‎Contracts
Recorded
‎Investment
Performing
Commercial real estate
Non owner-occupied
$
$
All other CRE
2,208
2,265
Acquisition and development
1-4 family residential construction
All other A&D
Commercial and industrial
-
-
Residential mortgage
Residential mortgage - term
Residential mortgage - home equity
-
-
Consumer
-
-
Total performing
$
3,657
$
3,842
Non-accrual
Commercial real estate
Non owner-occupied
$
-
$
-
All other CRE
-
-
Acquisition and development
1-4 family residential construction
-
-
All other A&D
-
-
Commercial and industrial
-
-
Residential mortgage
Residential mortgage - term
Residential mortgage - home equity
-
-
Consumer
-
-
Total non-accrual
Total TDRs
$
3,958
$
4,166
The level of TDRs decreased by $0.2 million during the year ended December 31, 2020. There were no new loans added to TDRs and nine loans already in performing TDRs were re-modified. During the year ended December 31, 2020, one loan totaling $32 thousand paid off. Net principal payments totaling $0.2 million were received during the same time period.
At December 31, 2020, there were no additional funds committed to be advanced in connection with TDRs. Interest income not recognized due to rate modifications of TDRs was $28 thousand and interest income recognized on all TDRs was $0.2 million in 2020.
Section 4013 of the CARES Act allows financial institutions to suspend application of certain current TDR accounting guidance under ASC Subtopic 310-40 for loan modifications related to the COVID-19 pandemic made between March 1, 2020 and the date that is 60 days after the end of the COVID-19 national emergency, provided that certain criteria are met. This relief can be applied to loan modifications for borrowers that were not more than 30 days past due as of December 31, 2019 and to loan modifications that defer or delay the payment of principal or interest, or that change the interest rate on the loan. In April 2020, federal and state banking regulators issued the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus to provide further interpretation of when a borrower is experiencing financial difficulty, specifically indicating that if the modification is either short-term (i.e., six months or less) or mandated by a federal or state government in response to the COVID-19 pandemic, the borrower is not experiencing financial difficulty as determined under ASC Subtopic 310-40. In response to the COVID-19 pandemic, the Bank developed a set of guidelines to provide relief to qualified commercial, mortgage and consumer loans customers,
including the deferment of certain loan payments on these loans of up to 180 days. Initial deferrals of 90 days were granted to qualified customers with the option to request a second deferral for an additional 90 days. During 2020, 562 loans totaling $230.6 million were granted deferrals for interest or principal and interest payments. At December 31, 2020, 40 loans totaling $18.2 million remain in modification status. See Note 2 to the Consolidated Financial Statements presented elsewhere in this annual report for additional information regarding these modified loans.
The Bank has not characterized any of these modified loans as TDRs because they met the criteria established pursuant to Section 4013 of the CARES Act and the guidance issued thereunder, nor has the Bank designated them as past due or nonaccrual. The Bank continues to prudently work with borrowers who have been negatively impacted by the COVID-19 pandemic while managing credit risks and recognizing an appropriate ALL.
Allowance for Loan Losses
The ALL is maintained to absorb losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.
The ALL is also based on estimates, and actual losses will vary from current estimates. These estimates are reviewed quarterly, and as adjustments, either positive or negative, become necessary, a corresponding increase or decrease is made in the ALL. The methodology used to determine the adequacy of the ALL is consistent with prior years. An estimate for probable losses related to unfunded lending commitments, such as letters of credit and binding but unfunded loan commitments is also prepared. This estimate is computed in a manner similar to the methodology described above, adjusted for the probability of actually funding the commitment.
The ALL was $16.5 million at December 31, 2020 compared to $12.5 million at December 31, 2019, an increase of 31.5% that resulted primarily from adjustments to qualitative factors associated with the negative trend in the economic outlook and uncertainties in credit quality directly related to COVID-19. Net charge-offs of $1.5 million were recorded for 2020, compared to net recoveries of $0.2 million for 2019. The ratio of the ALL to loans outstanding, including PPP loan balances, was 1.41% at December 31, 2020 compared to 1.19% at December 31, 2019 and 1.36% at September 30, 2020. The ALL to loans outstanding, excluding PPP loan balances of $114.0 million, was 1.55% at December 31, 2020.
The ratio of net charge-offs to average loans for the year ended December 31, 2020 was an annualized 0.13%, compared to net recoveries to average loans of 0.02% for the year ended December 31, 2019. Details of the ratio, by loan type are shown below. The increase in net charge offs in the A&D portfolio is related to the $1.1 million charge off of a formerly allocated specific allowance on an adversely classified non-accrual participation loan during the third quarter of 2020. This loan was subsequently purchased by the lending group at foreclosure and moved to the OREO portfolio. The project is now being aggressively marketed. Our special assets team continues to effectively collect on charged-off loans, resulting in ongoing overall low charge-off ratios.
Accruing loans past due 30 days or more decreased to 0.20%, including PPP loans, or 0.22% excluding PPP loans, compared to 0.67% at December 31, 2019. Non-accrual loans totaled $3.3 million at December 31, 2020 compared to $10.8 million at December 31, 2019. The decrease in non-accrual balances at December 31, 2020 was primarily due to the movement of the $8.0 million A&D participation loan to OREO as described previously. In February 2021, a parcel was sold within the development which reduced the OREO balance by $2.2 million.
Management believes that the ALL at December 31, 2020 is adequate to provide for probable losses inherent in our loan portfolio. Amounts that will be recorded for the provision for loan losses in future periods will depend upon trends in the loan balances, including the composition of the loan portfolio, changes in loan quality and loss experience trends, potential recoveries on previously charged-off loans and changes in other qualitative factors. Management also applies interest rate risk, collateral value and debt service sensitivity analyses to the CRE loan portfolio and obtains new appraisals on specific loans under defined parameters to assist in the determination of the periodic provision for loan losses.
The following table presents the activity in the ALL by major loan category for the past five years.
Analysis of Activity in the Allowance for Loan Losses
For the Years Ended December 31,
(In thousands)
Balance, January 1
$
12,537
$
11,047
$
9,972
$
9,918
$
11,922
Charge-offs:
Commercial real estate
-
(41)
(1,298)
(4,605)
(5,301)
Acquisition and development
(1,172)
(29)
(170)
(133)
(248)
Commercial and industrial
(232)
(126)
(32)
(37)
(558)
Residential mortgage
(217)
(200)
(368)
(361)
(737)
Consumer
(341)
(320)
(422)
(336)
(333)
Total charge-offs
(1,962)
(716)
(2,290)
(5,472)
(7,177)
Recoveries:
Commercial real estate
Acquisition and development
1,303
Commercial and industrial
1,683
Residential mortgage
Consumer
Total recoveries
1,254
2,992
2,051
Net credit (losses)/recoveries
(1,452)
(1,036)
(2,480)
(5,126)
Provision for loan losses
5,401
1,320
2,111
2,534
3,122
Balance at end of period
$
16,486
$
12,537
$
11,047
$
9,972
$
9,918
Allowance for loan losses to total loans
‎(as %)
1.41%
1.19%
1.10%
1.12%
1.11%
Net (charge-offs)/recoveries to average total loans during the period (as %)
-0.13%
0.02%
-0.11%
-0.28%
-0.57%
The following presents management’s allocation of the ALL by major loan category in comparison to that loan category’s percentage of total loans. Changes in the allocation over time reflect changes in the composition of the loan portfolio risk profile and refinements to the methodology of determining the ALL. Specific allocations in any particular category may be reallocated in the future as needed to reflect current conditions. Accordingly, the entire ALL is considered available to absorb losses in any category.
Allocation of the Allowance for Loan Losses
For the Years Ended December 31,
(In thousands)
% of
‎Total
‎Loans
% of
‎Total
‎Loans
% of
‎Total
‎Loans
% of
‎Total
‎Loans
% of
‎Total
‎Loans
Commercial real estate
$
5,543
32%
$
2,882
32%
$
2,780
31%
$
3,699
32%
$
3,913
33%
Acquisition and development
2,339
10%
3,674
11%
1,721
12%
1,257
12%
12%
Commercial and industrial
2,584
23%
1,341
12%
1,187
11%
8%
8%
Residential mortgage
5,150
32%
3,828
42%
4,544
43%
3,444
45%
3,588
44%
Consumer
3%
3%
3%
3%
3%
Unallocated
0%
0%
0%
0%
0%
Total
$
16,486
100%
$
12,537
100%
$
11,047
100%
$
9,972
100%
$
9,918
100%
Investment Securities
The following table sets forth the composition of our securities portfolio by major category as of the indicated dates:
At December 31,
(In thousands)
Amortized
‎Cost
Fair
‎Value
‎(FV)
FV As
‎% of
‎Total
Amortized
‎Cost
Fair
‎Value
‎(FV)
FV As
‎% of
‎Total
Amortized
‎Cost
Fair
‎Value
‎(FV)
FV As
‎% of
‎Total
Securities Available-for-Sale:
U.S. government agencies
$
75,856
$
76,433
34%
$
39,987
$
39,894
30%
$
30,000
$
29,026
21%
Residential mortgage-backed agencies
22,999
22,899
10%
4,917
4,900
4%
-
-
0%
Commercial mortgage-backed agencies
32,549
33,042
14%
27,634
27,764
21%
39,013
37,752
27%
Collateralized mortgage obligations
70,372
70,637
31%
29,903
29,923
23%
36,669
35,704
26%
Obligations of states and political
‎ subdivisions
10,144
10,614
5%
14,124
14,470
11%
20,083
19,882
15%
Collateralized debt obligations
18,544
13,260
6%
18,443
14,354
11%
18,358
15,277
11%
Total available for sale
$
230,464
$
226,885
100%
$
135,008
$
131,305
100%
$
144,123
$
137,641
100%
Securities Held to Maturity:
U.S. government agencies
$
-
$
-
0%
$
16,164
$
16,823
17%
$
16,017
$
16,137
17%
Residential mortgage-backed agencies
34,597
35,732
46%
42,939
43,253
43%
46,491
45,210
48%
Commercial mortgage-backed agencies
11,716
12,303
16%
15,521
15,865
16%
15,821
15,828
17%
Collateralized mortgage obligations
1,348
1,406
2%
3,140
3,143
3%
3,761
3,605
4%
Obligations of states and political
‎ subdivisions
20,602
28,171
36%
16,215
21,572
21%
11,920
12,980
14%
Total held to maturity
$
68,263
$
77,612
100%
$
93,979
$
100,656
100%
$
94,010
$
93,760
100%
Total fair value of investment securities available-for-sale at December 31, 2020 increased by $95.6 million when compared to December 31, 2019. At December 31, 2020, the securities classified as available-for-sale included a net unrealized loss of $3.6 million, compared to a net unrealized loss of $3.7 million at December 31, 2019. These unrealized losses represent the difference between the fair value and amortized cost of securities in the portfolio. On June 1, 2014, management reclassified an amortized cost basis of $107.6 million of available-for-sale securities to held to maturity. The unrealized loss of approximately $4.0 million, at the date of transfer, will continue to be reported in a separate component of shareholders’ equity as accumulated other comprehensive income and will be amortized over the remaining life of the securities as an adjustment of yield in a manner consistent with the amortization of any premium or discount.
As discussed in Note 25 to the Consolidated Financial Statements, we measure fair market values based on the fair value hierarchy established in ASC Topic 820, Fair Value Measurements and Disclosures. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Level 3 prices or valuation techniques require inputs that are both significant to the valuation assumptions and are not readily observable in the market (i.e. supported with little or no market activity). These Level 3 instruments are valued based on both observable and unobservable inputs derived from the best available data, some of which is internally developed, and considers risk premiums that a market participant would require.
Approximately $213.6 million of the available-for-sale portfolio was valued using Level 2 pricing and had net unrealized gains of $1.7 million at December 31, 2020. The remaining $13.3 million of the securities available-for-sale represents the entire CDO portfolio, which was valued using significant unobservable inputs, or Level 3 pricing. The $5.3 million in net unrealized losses associated with the collateralized debt obligation (“CDO”) portfolio relates to nine pooled trust preferred securities. Unrealized losses of $3.8 million represent non-credit related OTTI charges on seven of the securities, while $1.5 million of unrealized losses relates to two securities which have no credit related OTTI. The unrealized losses on these securities are primarily attributable to continued depression in the marketability and liquidity associated with CDOs.
‎
The following table provides a summary of the trust preferred securities in the CDO portfolio and the credit status of the securities as of December 31, 2020.
Investment Description
First United Level 3 Investments
Security Credit Status
Deal
Class
Amortized
‎Cost
Fair
‎Market
‎Value
Unrealized
‎Gain/(Loss)
Lowest
‎Credit
‎Rating
Original
‎Collateral
Deferrals/
‎Defaults
‎as % of
‎Original
‎Collateral
Performing
‎Collateral
Collateral
‎Support
Collateral
‎Support
‎ as % of
‎Performing
‎Collateral
Number of
‎Performing
‎ Issuers/
‎Total
‎Issuers
Preferred Term Security XVIII*
C
1,894
1,185
(709)
C
676,565
14.83%
268,437
19,131
7.13%
40 / 56
Preferred Term Security XVIII
C
2,717
1,777
(940)
C
676,565
14.83%
268,437
19,131
7.13%
40 / 56
Preferred Term Security XIX*
C
1,844
1,450
(394)
C
700,535
5.14%
468,962
34,435
7.34%
50 / 55
Preferred Term Security XIX*
C
1,101
(231)
C
700,535
5.14%
468,962
34,435
7.34%
50 / 55
Preferred Term Security XIX*
C
2,547
2,030
(517)
C
700,535
5.14%
468,962
34,435
7.34%
50 / 55
Preferred Term Security XIX*
C
1,102
(232)
C
700,535
5.14%
468,962
34,435
7.34%
50 / 55
Preferred Term Security XXII*
C-1
1,583
1,148
(435)
C
1,386,600
10.31%
664,548
65,893
9.92%
59 / 73
Preferred Term Security XXII*
C-1
3,958
2,869
(1,089)
C
1,386,600
10.31%
664,548
65,893
9.92%
59 / 73
Preferred Term Security XXIII
C-1
1,798
1,061
(737)
C
1,467,000
14.52%
682,365
70,186
10.29%
71 / 85
Total Level 3 Securities Available for Sale
18,544
13,260
(5,284)
* Security has been deemed other-than-temporarily impaired and loss has been recognized in accordance with ASC Section 320-10-35.
The terms of the debentures underlying trust preferred securities allow the issuer of the debentures to defer interest payments for up to 20 quarters, and, in such case, the terms of the related trust preferred securities require their issuers to contemporaneously defer dividend payments. The issuers of the trust preferred securities in our investment portfolio have defaulted and/or deferred payments, ranging from 5.14% to 14.83% of the total collateral balances underlying the securities. The securities were designed to include structural features that provide investors with credit enhancement or support to provide default protection by subordinated tranches. These features include over-collateralization of the notes or subordination, excess interest or spread which will redirect funds in situations where collateral is insufficient, and a specified order of principal payments. There are securities in our portfolio that are under-collateralized, which does represent additional stress on our tranche. However, in these cases, the terms of the securities require excess interest to be redirected from subordinate tranches as credit support, which provides additional support to our investment.
Management systematically evaluates securities for impairment on a quarterly basis. Based upon application of ASC Topic 320 (Section 320-10-35), management must assess whether (i) the Corporation has the intent to sell the security and (ii) it is more likely than not that the Corporation will be required to sell the security prior to its anticipated recovery. If neither applies, then declines in the fair value of securities below their cost that are considered other-than-temporary declines are split into two components. The first is the loss attributable to declining credit quality. Credit losses are recognized in earnings as realized losses in the period in which the impairment determination is made. The second component consists of all other losses. The other losses are recognized in other comprehensive income. In estimating OTTI charges, management considers (a) the length of time and the extent to which the fair value has been less than cost, (b) adverse conditions specifically related to the security, an industry, or a geographic area, (c) the historic and implied volatility of the security, (d) changes in the rating of a security by a rating agency, (e) recoveries or additional declines in fair value subsequent to the balance sheet date, (f) failure of the issuer of the security to make scheduled interest payments, and (g) the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future. Due to the duration and the significant market value decline in the pooled trust preferred securities held in our portfolio, we performed more extensive testing on these securities for purposes of evaluating whether or not an OTTI has occurred.
The market for these securities as of December 31, 2020 is not active and markets for similar securities are also not active. The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which these securities trade and then by a significant decrease in the volume of trades relative to historical levels. The new issue market is also inactive, as no new CDOs have been issued since 2007. There are currently very few market participants who are willing to effect transactions in these securities. The market values for these securities are very depressed relative to historical levels. Therefore, in the current market, a low market price for a particular bond may only provide evidence of stress in the credit markets in general rather than being an indicator of credit problems with a particular issue. Given the conditions in the current debt markets and the absence of observable transactions in the secondary and new issue markets, management has determined that (i) the few observable transactions and market quotations that are available are not reliable for the purpose of obtaining fair value at December 31, 2020, (ii) an income valuation approach technique (i.e. present value) that maximizes the use of relevant unobservable inputs and minimizes the use of observable inputs will be equally or more representative of fair value than a market approach, and (c) the CDO segment is appropriately classified within Level 3 of the valuation hierarchy because management determined that significant adjustments were required to determine fair value at the measurement date.
Management relies on an independent third party to prepare both the evaluations of OTTI and the fair value determinations for the CDO portfolio. Management does not believe that there were any material differences in the OTTI evaluations and pricing between December 31, 2020 and December 31, 2019.
The approach used by the third party to determine fair value involved several steps, which included detailed credit and structural evaluation of each piece of collateral in each bond, projection of default, recovery and prepayment/amortization probabilities for each piece of collateral in the bond, and discounted cash flow modeling. The discount rate methodology used by the third party combines a baseline current market yield for comparable corporate and structured credit products with adjustments based on evaluations of the differences found in structure and risks associated with actual and projected credit performance of each CDO being valued. Currently, the only active and liquid trading market that exists is for stand-alone trust preferred securities, with a limited market for highly-rated CDO securities that are more senior in the capital structure than the securities in the CDO portfolio. Therefore, adjustments to the baseline discount rate are also made to reflect the additional leverage found in structured instruments.
Based upon a review of credit quality and the cash flow tests performed by the independent third party, management determined that no additional credit-related OTTI was required during 2020.
The following table sets forth the contractual or estimated maturities of the components of our securities portfolio as of December 31, 2020 and the weighted average yields on a tax-equivalent basis.
Investment Security Maturities, Yields, and Fair Values at December 31, 2020
(In thousands)
Within
‎1 Year
1 Year
‎To 5 Years
5 Years
‎To 10 Years
Over
‎10 Years
Total
‎Fair Value
Securities Available-for-Sale:
U.S. government agencies
$
-
$
-
$
25,448
$
50,985
$
76,433
Residential mortgage-backed agencies
-
-
-
22,899
22,899
Commercial mortgage-backed agencies
7,381
24,866
-
33,042
Collateralized mortgage obligations
8,666
52,156
-
9,815
70,637
Obligations of states and
‎ political subdivisions
-
4,535
5,817
10,614
Collateralized debt obligations
-
-
-
13,260
13,260
Total available for sale
$
9,461
$
64,072
$
50,576
$
102,776
$
226,885
Percentage of total
4.17%
28.24%
22.29%
45.30%
100.00%
Weighted average yield
0.45%
1.35%
1.65%
1.07%
1.25%
Held to Maturity:
Residential mortgage-backed agencies
$
4,436
$
14,057
$
3,298
$
13,941
$
35,732
Commercial mortgage-backed agencies
-
12,303
$
-
-
12,303
Collateralized mortgage obligations
1,406
-
-
-
1,406
Obligations of states and
‎ political subdivisions
-
-
-
28,171
28,171
Total held to maturity
$
5,842
$
26,360
$
3,298
$
42,112
$
77,612
Percentage of total
7.53%
33.96%
4.25%
54.26%
100.00%
Weighted average yield
-0.62%
2.28%
3.22%
3.31%
2.66%
The weighted average yield was calculated using historical cost balances and does not give effect to changes in fair value. The negative weighted average yield was due to increased paydowns on mortgage-backed securities which impacted their factors and three month conditional prepayment rate. At December 31, 2020, one Tax Increment Funding bond totaling $18.4 million exceeded 10% of shareholders’ equity.
‎
Deposits
The following table sets forth the actual and average deposit balances by major category for 2020, 2019 and 2018:
Deposit Balances
(In thousands)
Actual
‎Balance
Average
‎Balance
Average
‎Yield
Actual
‎Balance
Average
‎Balance
Average Yield
Actual
‎Balance
Average
‎Balance
Average
‎Yield
Non-interest-bearing
‎ demand deposits
$
420,427
$
372,392
0.00%
$
294,649
$
270,945
0.00%
$
262,250
$
239,838
0.00%
Interest-bearing deposits:
Demand
201,571
182,767
0.40%
159,567
160,776
0.37%
163,334
170,642
0.11%
Money Market:
Retail
376,096
313,852
0.46%
275,007
253,737
0.89%
234,038
211,969
0.44%
Savings deposits
196,046
176,524
0.09%
158,918
160,751
0.19%
156,236
160,968
0.12%
Time deposits less
‎ than $100K:
Retail
88,728
111,408
1.54%
96,198
107,215
1.39%
99,088
104,289
1.01%
Time deposits $100K
‎ or more:
Retail
139,498
123,708
1.78%
147,692
130,700
2.05%
127,581
120,019
1.52%
Brokered
-
3,689
2.80%
10,000
23,027
2.68%
25,000
3,151
1.88%
Total Deposits
$
1,422,366
$
1,284,340
$
1,142,031
$
1,107,151
$
1,067,527
$
1,010,876
Total deposits at December 31, 2020 increased by $280.3 million when compared with deposits at December 31, 2019. During 2020, non-interest-bearing deposits increased by $125.8 million. This growth was driven by our retail and commercial account growth as well as deposits from PPP loans. Traditional savings accounts increased by $37.1 million, as we continued to see significant growth in our Prime Saver product. Total demand deposits increased by $42.0 million and total money market accounts increased by $101.1 million, due primarily to growth in our variable rate Value Money Market account. Time deposits less than $100,000 decreased by $7.5 million and time deposits greater than $100,000 decreased by $18.2 million. The decline in time deposits greater than $100,000 was due to a local municipality utilizing a maturing certificate of deposit for cash needs during this unprecedented economic environment as well as our repayment of the full outstanding balance of $10.0 million in a brokered CD that matured in May 2020.
‎
The following table sets forth the maturities of time deposits of $100,000 or more:
Maturity of Time Deposits of $100,000 or More
(In thousands)
December 31, 2020
Maturities
3 Months or Less
$
15,138
3-6 Months
81,685
6-12 Months
40,587
Over 1 Year
2,088
Total
$
139,498
Borrowed Funds
The following shows the composition of our borrowings at December 31:
(In thousands)
Overnight borrowings, weighted average interest rate of 2.70%
‎ at December 31, 2018
$
-
$
-
$
40,000
Securities sold under agreements to repurchase
49,160
48,728
37,707
Total short-term borrowings
$
49,160
$
48,728
$
77,707
Long-term FHLB advances
$
70,000
$
70,000
$
70,000
Junior subordinated debentures
30,929
30,929
30,929
Total long-term borrowings
$
100,929
$
100,929
$
100,929
Total borrowings
$
150,089
$
149,657
$
178,636
Average balance (from Table 1)
$
147,448
$
143,508
$
167,991
The following is a summary of short-term borrowings at December 31 with original maturities of less than one year:
(Dollars in thousands)
Overnight borrowings, weighted average interest rate of 2.70%
‎ at December 31, 2018
$
-
$
-
$
40,000
Securities sold under agreements to repurchase:
Outstanding at end of year
$
49,160
$
48,728
$
37,707
Weighted average interest rate at year end
0.19%
0.23%
0.24%
Maximum amount outstanding as of any month end
$
55,290
$
50,345
$
55,648
Average amount outstanding
46,519
39,778
44,045
Approximate weighted average rate during the year
0.20%
0.28%
0.20%
Total borrowings increased slightly by $0.4 million, or 0.29%, in 2020 when compared to 2019 due to increased balances in our existing accounts in our Treasury Management product.
Management will continue to closely monitor interest rates within the context of its overall asset-liability management process. See the discussion under the heading “Interest Rate Sensitivity” in this Item 7 for further information on this topic.
At December 31, 2020, we had additional borrowing capacity with the FHLB totaling $134.4 million, an additional $130.0 million of unused lines of credit with various financial institutions, $1.1 million of an unused secured line of credit with the Federal Reserve Bank and approximately $142.3 million available through wholesale money market funds. See Note 13 to the Consolidated Financial Statements presented elsewhere in this annual report for further details about our borrowings and additional borrowing capacity, which is incorporated herein by reference.
Off-Balance Sheet Arrangements
In the normal course of business, to meet the financing needs of its customers, the Bank is a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit, lines of credit, and standby letters of credit. Our exposure to credit loss in the event of nonperformance by the other party to these financial instruments is represented by the contractual amount of the instruments. The credit risks inherent in loan commitments and letters of credit are essentially the same as those involved in extending loans to customers, and these arrangements are subject to our normal credit policies. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. We generally require collateral or other security to support the financial instruments with credit risk. The amount of collateral or other security is determined based on management’s credit evaluation of the counterparty. We evaluate each customer’s creditworthiness on a case-by-case basis.
Loan commitments and letters of credit totaled $201.4 million and $17.7 million, respectively, at December 31, 2020. Management does not believe that any of the foregoing arrangements have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. We are not a party to any other off-balance sheet arrangements. See Note 24 to the Consolidated Financial Statements presented elsewhere in this annual report for additional information on these arrangements.
Capital Resources
We require capital to fund loans, satisfy our obligations under the Bank’s letters of credit, meet the deposit withdraw demands of the Bank’s customers, and satisfy our other monetary obligations. To the extent that deposits are not adequate to fund our capital requirements, we can rely on the funding sources identified below under the heading “Liquidity Management”. At December 31, 2020, the Bank had $130.0 million available through unsecured lines of credit with correspondent banks, $1.1 million available through a secured line of credit with the Fed Discount Window and approximately $134.4 million available through the FHLB. Management is not aware of any demands, commitments, events or uncertainties that are likely to materially affect our ability to meet our future capital requirements.
In addition to operational requirements, the Bank and the Corporation are subject to risk-based capital regulations, which were adopted and are monitored by federal banking regulators. These regulations are used to evaluate capital adequacy and require an analysis of an institution’s asset risk profile and off-balance sheet exposures, such as unused loan commitments and stand-by letters of credit. Detailed information about these capital regulations and their requirements is set forth in the “Supervision and Regulation” section of Item 1 of Part I of this annual report under the heading “Capital Requirements”.
At December 31, 2020, the Corporation’s total risk-based capital ratio was 16.08% and the Bank’s total risk-based capital ratio was 15.50%, both of which were well above the regulatory minimum of 8%. The total risk-based capital ratios of the Corporation and the Bank at December 31, 2019 were 16.29% and 15.60%, respectively. The decreases for the Corporation and the Bank in 2020 were due to increased earnings offset by the dividend funding and the stock repurchase of approximately $2.8 million.
At December 31, 2020, the most recent notification from the regulators categorizes the Corporation and the Bank as “well capitalized” under the regulatory framework for prompt corrective action. See Note 5 to the Consolidated Financial Statements presented elsewhere in this annual report for additional information regarding regulatory capital ratios.
Liquidity Management
Liquidity is a financial institution’s capability to meet customer demands for deposit withdrawals while funding all credit-worthy loans. The factors that determine the institution’s liquidity are:
Reliability and stability of core deposits;
Cash flow structure and pledging status of investments; and
Potential for unexpected loan demand.
We actively manage our liquidity position through meetings of a sub-committee of executive management, which looks forward 12 months at 30-day intervals. The measurement is based upon the projection of funds sold or purchased position, along with ratios and trends developed to measure dependence on purchased funds and core growth. Monthly reviews by management and quarterly reviews by the Asset and Liability Committee under prescribed policies and procedures are designed to ensure that we will maintain adequate levels of available funds.
It is our policy to manage our affairs so that liquidity needs are fully satisfied through normal Bank operations. That is, the Bank will manage its liquidity to minimize the need to make unplanned sales of assets or to borrow funds under emergency conditions. The Bank will use funding sources where the interest cost is relatively insensitive to market changes in the short run (periods of one year or less) to satisfy operating cash needs. The remaining normal funding will come from interest-sensitive liabilities, either deposits or borrowed funds. When the marginal cost of needed wholesale funding is lower than the cost of raising this funding in the retail markets, the Corporation may supplement retail funding with external funding sources such as:
Unsecured Fed Funds lines of credit with upstream correspondent banks (M&T Bank, Atlantic Community Bankers Bank, Community Bankers Bank, PNC Financial Services (“PNC”), Pacific Coast Banker’s Bank and Zions Bancorp).
Secured advances with the FHLB of Atlanta, which are collateralized by eligible one to four family residential mortgage loans, home equity lines of credit, commercial real estate loans. Cash and various securities may also be pledged as collateral.
Secured line of credit with the 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.
Secured Federal Reserve Bank PPPLF - an eligible line of credit secured by PPP loans.
Management 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 December 31, 2020, we were asset sensitive.
Our interest rate risk management goals are:
Ensure that the Board of Directors and senior management will provide effective oversight and ensure that risks are adequately identified, measured, monitored and controlled;
Enable dynamic measurement and management of interest rate risk;
Select strategies that optimize our ability to meet our long-range financial goals while maintaining interest rate risk within policy limits established by the Board of Directors;
Use both income and market value oriented techniques to select strategies that optimize the relationship between risk and return; and
Establish interest rate risk exposure limits for fluctuation in net interest income (“NII”), net income and economic value of equity.
In order to manage interest sensitivity risk, management formulates guidelines regarding asset generation and pricing, funding sources and pricing, and off-balance sheet commitments. These guidelines are based on management’s outlook regarding future interest rate movements, the state of the regional and national economy, and other financial and business risk factors. Management uses computer simulations to measure the effect on net interest income of various interest rate scenarios. Key assumptions used in the computer simulations include cash flows and maturities of interest rate sensitive assets and liabilities, changes in asset volumes and pricing, and management’s capital plans. This modeling reflects interest rate changes and the related impact on net interest income over specified periods.
We evaluate the effect of a change in interest rates of +/-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 earned on assets and the cost of deposits and borrowed funds. Unlike traditional Gap modeling, NII modeling takes into account the different degree to which installments in the same repricing period will adjust to a change in interest rates. It also allows the use of different assumptions in a falling versus a rising rate environment. The period considered by the NII modeling is the next eight quarters.
NPV / EVE modeling focuses on the change in the market value of equity. NPV / EVE is defined as the market value of assets less the market value of liabilities plus/minus the market value of any off-balance sheet positions. By effectively looking at the present
value of all future cash flows on or off the balance sheet, NPV / EVE modeling takes a longer-term view of interest rate risk. This complements the shorter-term view of the NII modeling.
Measures of NII at risk produced by simulation analysis are indicators of an institution’s short-term performance in alternative rate environments. These measures are typically based upon a relatively brief period, usually one year. They do not necessarily indicate the long-term prospects or economic value of the institution.
Based on the simulation analysis performed at December 31, 2020 and 2019, management estimated the following changes in net interest income, assuming the indicated rate changes:
(Dollars in thousands)
+400 basis points
$
5,124
$
1,500
+300 basis points
$
4,067
$
1,381
+200 basis points
$
2,897
$
1,075
+100 basis points
$
1,527
$
-100 basis points
$
(2,174)
$
(2,477)
This estimate is based on assumptions that may be affected by unforeseeable changes in the general interest rate environment and any number of unforeseeable factors. Rates on different assets and liabilities within a single maturity category adjust to changes in interest rates to varying degrees and over varying periods of time. The relationships between lending rates and rates paid on purchased funds are not constant over time. Management can respond to current or anticipated market conditions by lengthening or shortening the Bank’s sensitivity through loan repricings or changing its funding mix. The rate of growth in interest-free sources of funds will influence the level of interest-sensitive funding sources. In addition, the absolute level of interest rates will affect the volume of earning assets and funding sources. As a result of these limitations, the interest-sensitive gap is only one factor to be considered in estimating the net interest margin.
Impact of Inflation - Our assets and liabilities are primarily monetary in nature, and as such, future changes in prices do not affect the obligations to pay or receive fixed and determinable amounts of money. During inflationary periods, monetary assets lose value in terms of purchasing power and monetary liabilities have corresponding purchasing power gains. The concept of purchasing power is not an adequate indicator of the impact of inflation on financial institutions because it does not incorporate changes in our earnings.
‎

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this item is incorporated herein by reference to Item 7 of Part II of this annual report under the heading “Market Risk and Interest Sensitivity”.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Report of Independent Registered Public Accounting Firm
Consolidated Statement of Financial Condition at December 31, 2020 and 2019
Consolidated Statement of Income for the years ended December 31, 2020 and 2019
Consolidated Statement of Comprehensive Income for the years ended December 31, 2020 and 2019
Consolidated Statement of Changes in Shareholders’ Equity for the years ended December 31, 2020 and 2019
Consolidated Statement of Cash Flows for the years ended December 31, 2020 and 2019
Notes to Consolidated Financial Statements for the years ended December 31, 2020 and 2019
‎
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
First United Corporation and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of First United Corporation and Subsidiaries (Corporation) as of December 31, 2020 and 2019, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the years then ended, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Corporation as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on the Corporation's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Corporation is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Corporation's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Loan Losses - General Component Qualitative Factors
As discussed in Notes 1 and 8 to the consolidated financial statements, the allowance for loan losses is established through a provision for loan losses and represents an amount, which, in management’s judgment, will be adequate to absorb losses in the loan portfolio. The Corporation’s allowance for loan losses was $16.5 million at December 31, 2020 and consists of specific and general components of $57 thousand and $16.4 million, respectively. Management develops the general component based on historical loan loss experience adjusted for qualitative factors not reflected in the historical loss experience. Historical loss ratios are measured on a rolling twelve-quarter basis for consumer loans and eight quarters for commercial loans. The qualitative factors used by the Corporation include factors such as national and local economic conditions, levels of and trends in delinquency rates and nonaccrual loans, trends in volumes and terms of loans, changes in lending policies, lending personnel, and collateral, as well as concentrations in loan types, industry, and geography. The adjustments for qualitative factors require a significant amount of judgment by management and involve a high degree of estimation uncertainty.
We identified the qualitative factor component of the allowance for loan losses as a critical audit matter as auditing the underlying qualitative factors required significant auditor judgment as amounts determined by management rely on analysis that is highly subjective and includes significant estimation uncertainty.
Our audit procedures related to the qualitative factor component of the allowance for loan losses included the following, among others:
Obtaining an understanding of the relevant controls related to the allowance for loan losses and testing such controls for design and operating effectiveness, including controls related to management’s establishment, review, and approval of the qualitative factors, and the completeness and accuracy of data used in determining qualitative factors.
Evaluation of the appropriateness of management’s methodology for estimating the allowance for loan losses.
Testing of the completeness and accuracy of data used by management in determining qualitative factor adjustments by agreeing them to internal and external source data.
Testing of management’s conclusions regarding the appropriateness of the qualitative factor adjustments and agreement of any changes therein to the allowance for loan losses calculation.
Goodwill Impairment Evaluation
The Corporation has recorded goodwill of $11 million. As discussed in Notes 1 and 15 to the consolidated financial statements, goodwill is not amortized but is tested for impairment at least annually. Impairment exists when the fair value of the reporting unit is less than its carrying amount. Due to volatility in its stock price and economic conditions resulting from the COVID-19 pandemic, the Corporation engaged a third-party valuation specialist to perform a quantitative test of goodwill impairment at September 30, 2020 using a discounted cash flow analysis (income approach) and estimates of selected market information (market approach). Each approach was weighted 50%. The determination of the fair value of the Corporation requires management to make significant estimates and assumptions including, among other things, the selection of appropriate discount rates, the identification of relevant market comparables and the development of cash flow projections. At December 31, 2020, its annual impairment testing date, the Corporation performed a qualitative review to determine if changes since September 30, 2020 resulted in a conclusion that it was more likely than not that fair value was less than carrying value. The Corporation concluded fair value continued to be in excess of carrying value at December 31, 2020.
We identified the goodwill impairment assessment as a critical audit matter due to the degree of auditor judgment in performing procedures over the key assumptions noted above.
Our audit procedures performed to address this critical matter included the following, among others:
Obtaining an understanding of internal controls relevant to the goodwill impairment assessment and testing such controls for design and operating effectiveness, including controls related to management’s establishment, review, and approval of the assumptions, including those used by the third-party valuation specialist, and the completeness and accuracy of data used.
Evaluation of the methodologies used in management’s analysis, including the weightings assigned to each approach and testing the completeness and accuracy of data used in management’s calculations.
Evaluation of management’s ability to forecast cash flows by comparing actual results to historical annual budgets.
Involvement of an employed valuation specialist to (1) evaluate the key assumptions and inputs used by the management’s third-party valuation specialist, including discount rate, terminal growth rate, control premium, and market comparable entities; and (2) test the overall reasonableness of fair value and conclusion of no impairment by calculating an independent expectation as of December 31, 2020.
/s/ Baker Tilly US, LLP
We have served as the Corporation’s auditor since 2006.
Baker Tilly US, LLP (formerly known as Baker Tilly Virchow Krause, LLP)
Pittsburgh, Pennsylvania
March 25, 2021
‎
First United Corporation and Subsidiaries
Consolidated Statement of Financial Condition
(In thousands, except per share amounts)
December 31,
Assets
Cash and due from banks
$
146,673
$
48,512
Interest bearing deposits in banks
2,759
1,467
Cash and cash equivalents
149,432
49,979
Investment securities - available-for-sale (at fair value)
226,885
131,305
Investment securities - held to maturity (fair value of $77,612 at December 31, 2020
‎and $100,656 at December 31, 2019)
68,263
93,979
Restricted investment in bank stock, at cost
4,468
4,415
Loans held for sale (at fair value)
3,546
1,749
Loans
1,167,812
1,050,369
Unearned fees
(1,730)
(687)
Allowance for loan losses
(16,486)
(12,537)
Net loans
1,149,596
1,037,145
Premises and equipment, net
36,863
38,710
Goodwill
11,004
11,004
Bank owned life insurance
43,974
43,449
Deferred tax assets
7,972
7,441
Other real estate owned
9,386
4,127
Operating lease asset
2,408
2,661
Accrued interest receivable and other assets
19,617
16,063
Total Assets
$
1,733,414
$
1,442,027
Liabilities and Shareholders’ Equity
Liabilities:
Non-interest bearing deposits
$
420,427
$
294,649
Interest bearing deposits
1,001,939
847,382
Total deposits
1,422,366
1,142,031
Short-term borrowings
49,160
48,728
Long-term borrowings
100,929
100,929
Operating lease liability
2,958
3,239
Accrued interest payable and other liabilities
26,044
20,235
Dividends payable
Total Liabilities
1,602,367
1,316,087
Shareholders’ Equity:
Common Stock - par value $0.01 per share;
‎ Authorized 25,000,000 shares; issued and outstanding 6,992,911 shares at
‎ December 31, 2020 and 7,110,022 shares at December 31, 2019
Surplus
30,149
32,359
Retained earnings
129,691
119,481
Accumulated other comprehensive loss
(28,863)
(25,971)
Total Shareholders’ Equity
131,047
125,940
Total Liabilities and Shareholders’ Equity
$
1,733,414
$
1,442,027
See notes to consolidated financial statements
‎
First United Corporation and Subsidiaries
Consolidated Statement of Income
(In thousands, except per share data)
Year Ended
December 31,
Interest income
Interest and fees on loans
$
52,155
$
50,201
Interest on investment securities
Taxable
4,526
5,648
Exempt from federal income tax
1,084
1,031
Total investment income
5,610
6,679
Other
1,040
Total interest income
58,201
57,920
Interest expense
Interest on deposits
6,356
7,791
Interest on short-term borrowings
Interest on long-term borrowings
3,205
3,550
Total interest expense
9,655
11,529
Net interest income
48,546
46,391
Provision for loan losses
5,401
1,320
Net interest income after provision for loan losses
43,145
45,071
Other operating income
Net gains
2,788
Service charges on deposit accounts
1,929
2,192
Other service charges
Trust department
7,446
7,148
Debit card income
2,902
2,706
Bank owned life insurance
1,253
2,257
Brokerage commissions
1,004
Other
Total other income
15,789
16,449
Total other operating income
18,577
16,783
Other operating expenses
Salaries and employee benefits
21,079
24,641
FDIC premiums
Equipment
3,904
3,807
Occupancy
2,860
2,884
Data processing
3,981
4,004
Marketing
Professional services
4,204
1,480
Contract labor
Telephony expense
Other real estate owned expenses
1,542
Investor relations
1,277
Other
3,929
4,414
Total other operating expenses
43,934
45,389
Income before income tax expense
17,788
16,465
Provision for income tax expense
3,947
3,336
Net Income
$
13,841
$
13,129
Basic net income per share
$
1.98
$
1.85
Diluted net income per share
1.97
1.85
Weighted average number of basic shares outstanding
7,004
7,101
Weighted average number of diluted shares outstanding
7,013
7,101
Dividends declared per common share
$
0.52
$
0.44
See notes to consolidated financial statements
‎
First United Corporation and Subsidiaries
Consolidated Statement of Comprehensive Income
(In thousands)
Year Ended
December 31,
Comprehensive Income
Net Income
$
13,841
$
13,129
Other comprehensive (loss)/income, net of tax and reclassification adjustments:
Net unrealized losses on investments with OTTI
(735)
(643)
Net unrealized gains on all other AFS securities
2,748
Net unrealized gains on HTM securities
Net unrealized losses on cash flow hedges
(869)
(858)
Net unrealized losses on pension plan liability
(2,213)
(2,400)
Net unrealized losses on SERP liability
(487)
(647)
Other comprehensive loss, net of tax
(2,892)
(1,568)
Comprehensive Income
$
10,949
$
11,561
See notes to consolidated financial statements
‎
First United Corporation and Subsidiaries
Consolidated Statement of Changes in Shareholders’ Equity
(In thousands, except number of shares)
Common
‎Stock
Surplus
Retained
‎Earnings
Accumulated
‎Other
‎Comprehensive
‎Loss, net of tax
Total
‎Shareholders'
‎Equity
Balance at January 1, 2019
$
31,921
109,477
(24,403)
117,066
Net income
13,129
13,129
Other comprehensive loss, net of tax
(1,568)
(1,568)
Common stock issued - 23,390 shares
Common stock dividend declared -
‎ $0.44 per share
(3,125)
(3,125)
Stock based compensation
Balance at December 31, 2019
32,359
119,481
(25,971)
125,940
Net income
13,841
13,841
Other comprehensive loss, net of tax
(2,892)
(2,892)
Common stock issued- 28,180 shares
Common stock dividend declared -
‎ $0.52 per share
(3,631)
(3,631)
Stock based compensation
Stock repurchase - 145,291 shares
(1)
(2,753)
(2,754)
Balance at December 31, 2020
$
$
30,149
$
129,691
$
(28,863)
$
131,047
See notes to consolidated financial statements
‎
First United Corporation and Subsidiaries
Consolidated Statement of Cash Flows
(In thousands)
Year Ended
December 31,
Operating activities
Net income
$
13,841
$
13,129
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses
5,401
1,320
Depreciation
3,301
3,115
Stock compensation
Gains on sales of other real estate owned
(130)
(160)
Write-downs of other real estate owned
1,459
Origination of loans held for sale
(73,797)
(20,668)
Proceeds from sales of loans held for sale
74,403
19,502
Gains on sales of loans held for sale
(2,403)
(337)
Loss on disposal of fixed assets
Net amortization /(accretion) of investment securities discounts and premiums- AFS
(3)
Net amortization of investment securities discounts and premiums- HTM
Net gain on sales of investment securities - available-for-sale
(632)
-
Net losses on calls of investment securities - held to maturity
-
Amortization of deferred loan fees
(2,683)
(935)
Deferred tax expense
Earnings on bank owned life insurance
(1,253)
(2,257)
Amortization of operating lease right of use asset
Operating lease liability
(281)
(287)
Increase in accrued interest receivable and other assets
(6,830)
(3)
Increase in accrued interest payable and other liabilities
5,010
Net cash provided by operating activities
16,169
16,390
Investing activities
Proceeds from maturities/calls of investment securities available-for-sale
45,595
26,553
Proceeds from maturities/calls of investment securities held-to-maturity
46,926
8,124
Proceeds from sales of investment securities available-for-sale
43,278
21,872
Purchases of investment securities available-for-sale
(184,079)
(39,307)
Purchases of investment securities held-to-maturity
(21,658)
(8,207)
Proceeds from sales of other real estate owned
2,175
2,777
Proceeds from BOLI
2,125
Net (increase)/decrease in FHLB stock
(53)
Net increase in loans
(122,589)
(43,465)
Purchases of premises and equipment
(1,604)
(3,973)
Net cash used in investing activities
(191,281)
(32,522)
Financing activities
Net increase in deposits
280,335
74,504
Proceeds from issuance of common stock
Cash dividends paid on common stock
(3,646)
(3,125)
Net increase/(decrease) in short-term borrowings
(28,979)
Stock repurchase
(2,754)
-
Net cash provided by financing activities
274,565
42,570
Increase in cash and cash equivalents
99,453
26,438
Cash and cash equivalents at beginning of the year
49,979
23,541
Cash and cash equivalents at end of period
$
149,432
$
49,979
Supplemental information
Interest paid
$
9,763
$
11,485
Taxes paid
$
1,210
$
1,011
Non-cash investing activities:
Transfers from loans to other real estate owned
$
7,420
$
1,605
Initial recognition of operating lease right of use assets at adoption
$
-
$
2,730
Initial recognition of operating lease liabilities at adoption
$
-
$
3,317
See notes to consolidated financial statements
First United Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Business
First United Corporation is a Maryland corporation chartered in 1985 and a bank holding company registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding Company Act of 1956, as amended. 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”), both Connecticut statutory business trusts. Until September 14, 2019 when it was canceled, the Corporation also served as the parent company to First United Statutory Trust III, a Delaware statutory business trust (“Trust III” and together with Trust I and Trust II, the “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. The Bank also owns 99.9% of the limited partnership interests in Liberty Mews Limited Partnership; a Maryland limited partnership formed for the purpose of acquiring, developing and operating low-income housing units in Garrett County, Maryland (“Liberty Mews”).
First United Corporation and its subsidiaries operate principally in four counties in Western Maryland and four counties in West Virginia.
As used in these Notes, the terms “the Corporation”, “we”, “us”, and “our” mean First United Corporation and, unless the context clearly suggests otherwise, its consolidated subsidiaries.
Basis of Presentation
The accompanying consolidated financial statements of the Corporation have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) as required by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) that require management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities at the date of the financial statements as well as the reported amount of revenues and expenses during the reporting period. Actual results could differ from these estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the assessment of other-than-temporary impairment (“OTTI”) pertaining to investment securities, potential impairment of goodwill, and the valuation of deferred tax assets. For purposes of comparability, certain prior period amounts have been reclassified to conform to the 2019 presentation. Such reclassifications had no impact on net income or shareholders’ equity.
The Corporation has evaluated events and transactions occurring subsequent to the statement of financial condition date of December 31, 2020 for items that should potentially be recognized or disclosed in these consolidated financial statements as prescribed by ASC Topic 855, Subsequent Events.
Principles of Consolidation
The consolidated financial statements of the Corporation include the accounts of First United Corporation, the Bank, the OakFirst Loan Centers, First OREO Trust and FUBT OREO I, LLC. All significant inter-company accounts and transactions have been eliminated.
First United Corporation determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity (“VIE”) in accordance with GAAP. Voting interest entities are entities in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make financial and operating decisions. The Corporation consolidates voting interest entities in which it has 100%, or at least a majority, of the voting interest. As defined in applicable accounting standards, a VIE is an entity that either (i) does not have equity investors with voting rights or (ii) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A controlling financial interest in an entity exists when an enterprise has a variable interest, or a combination of variable interests that will absorb a majority of an entity’s expected losses, receive a majority of an entity’s expected residual returns, or both. The enterprise with a controlling financial interest, known as the primary beneficiary, consolidates the VIE.
The Corporation accounts for its investment in Liberty Mews utilizing the effective yield method under guidance that applies specifically to investments in limited partnerships that operate qualified affordable housing projects. Under the effective yield method,
the investor recognizes tax credits as they are allocated and amortizes the initial cost of the investment to provide a constant effective yield over the period that tax credits are allocated to the investor. The effective yield is the internal rate of return on the investment, based on the cost of the investment and the guaranteed tax credits allocated to the investor. The tax credit allocated, net of the amortization of the investment in the limited partnership, is recognized in the income statement as a component of income taxes attributable to continuing operations.
Significant Concentrations of Credit Risk
Most of the Corporation’s relationships are with customers located in Western Maryland and Northeastern West Virginia. At December 31, 2020, approximately 10%, or $117.0 million, of total loans were secured by real estate acquisition, construction and development projects, with $115.0 million performing according to their contractual terms and $2.0 million considered to be impaired based on management’s concerns about the borrowers’ ability to comply with present repayment terms. Of the $2.0 million in impaired loans, $1.1 million were performing, $0.5 million were classified as troubled debt restructurings (“TDRs”) performing in accordance with their modified terms and $0.4 million were classified as non-performing loans at December 31, 2020. Additionally, loans collateralized by commercial rental properties represented 15% of the total loan portfolio as of December 31, 2020. Note 7 discusses the types of securities in which the Corporation invests and Note 8 discusses the Corporation’s lending activities.
Investments
The investment portfolio is classified and accounted for based on the guidance of ASC Topic 320, Investments - Debt and Equity Securities. Securities bought and held principally for the purpose of selling them in the near term are classified as trading account securities and reported at fair value with unrealized gains and losses included in net gains/losses in other operating income. Securities purchased with the intent and ability to hold the securities to maturity are classified as held-to-maturity securities and are recorded at amortized cost. All other investment securities are classified as available-for-sale. These securities are held for an indefinite period of time and may be sold in response to changing market and interest rate conditions or for liquidity purposes as part of our overall asset/liability management strategy. Available-for-sale securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of other comprehensive income included in the consolidated statement of comprehensive income, net of applicable income taxes.
The amortized cost of debt securities is adjusted for the amortization of premiums to the first call date, if applicable, or to maturity, and for the accretion of discounts to maturity, or, in the case of mortgage-backed securities, over the estimated life of the security. Such amortization and accretion is included in interest income from investments. Interest and dividends are included in interest income from investments. Gains and losses on the sale of securities are recorded using the specific identification method.
Restricted Investment in Bank Stock
Restricted stock, which represents required investments in the common stock of the Federal Home Loan Bank (“FHLB”) of Atlanta, Atlantic Community Bankers Bank (“ACBB”) and Community Banker’s Bank (“CBB”), is carried at cost and is considered a long-term investment.
Management evaluates the restricted stock for impairment in accordance with ASC Industry Topic 942, Financial Services - Depository and Lending, (942-325-35). Management’s evaluation of potential impairment is based on its assessment of the ultimate recoverability of the cost of the restricted stock rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability is influenced by criteria such as (i) the significance of the decline in net assets of the issuing bank as compared to the capital stock amount for that bank and the length of time this situation has persisted, (ii) commitments by the issuing bank to make payments required by law or regulation and the level of such payments in relation to the operating performance of that bank, and (iii) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the issuing bank. Management has evaluated the restricted stock for impairment and believes that no impairment charge is necessary as of December 31, 2020 or 2019.
The Corporation recognizes dividends on a cash basis. For the years ended December 31, 2020 and December 31, 2019, dividends of $212,252 and $290,415, respectively, were recorded in other operating income.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or full repayment by the borrower are reported at their unpaid principal balance outstanding, adjusted for any deferred fees or costs pertaining to origination. Loans that management has the intent to sell are reported at the lower of cost or fair value determined on an individual basis. Loans held for sale were $3.5 million at December 31, 2020 and $1.7 million at December 31, 2019.
The segments of the Bank’s loan portfolio are disaggregated to a level that allows management to monitor risk and performance. The commercial real estate (“CRE”) loan segment is further disaggregated into two classes. Non-owner occupied CRE loans, which include loans secured by non-owner occupied nonfarm nonresidential properties, generally have a greater risk profile than all other CRE loans, which include loans secured by farmland, multifamily structures and owner-occupied commercial structures. The acquisition and development (“A&D”) loan segment is further disaggregated into two classes. One-to-four family residential construction loans are generally made to individuals for the acquisition of and/or construction on a lot or lots on which a residential dwelling is to be built. All other A&D loans are generally made to developers or investors for the purpose of acquiring, developing and constructing residential or commercial structures. These loans have a higher risk profile because the ultimate buyer, once development is completed, is generally not known at the time of the A&D loan. The commercial and industrial (“C&I”) loan segment consists of loans made for the purpose of financing the activities of commercial customers. The residential mortgage loan segment is further disaggregated into two classes: amortizing term loans, which are primarily first liens, and home equity lines of credit, which are generally second liens. The consumer loan segment consists primarily of installment loans (direct and indirect), student loans and overdraft lines of credit connected with customer deposit accounts.
Interest and Fees on Loans
Interest on loans (other than those on non-accrual status) is recognized based upon the principal amount outstanding. Loan fees in excess of the costs incurred to originate the loan are recognized as income over the life of the loan utilizing either the interest method or the straight-line method, depending on the type of loan. Generally, fees on loans with a specified maturity date, such as residential mortgages, are recognized using the interest method. Loan fees for lines of credit are recognized using the straight-line method.
A loan is considered to be past due when a payment has not been received for 30 days past its contractual due date. For all loan segments, the accrual of interest is discontinued when principal or interest is delinquent for 90 days or more unless the loan is well-secured and in the process of collection. All non-accrual loans are considered to be impaired. Interest payments received on non-accrual loans are applied as a reduction of the loan principal balance. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. The Corporation’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.
Generally, consumer installment loans are not placed on non-accrual status, but are charged off after they are 120 days contractually past due. Loans other than consumer loans are charged-off based on an evaluation of the facts and circumstances of each individual loan.
Allowance for Loan Losses
An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.
The Corporation’s methodology for determining the ALL is based on the requirements of ASC Section 310-10-35, Receivables-Overall-Subsequent Measurement, for loans individually evaluated for impairment and ASC Subtopic 450-20, Contingencies-Loss Contingencies, for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance. The total of the two components represents the Bank’s ALL.
The Corporation maintains an ALL on unfunded commercial lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements. The allowance is determined utilizing a methodology that is similar to that used to determine the ALL, modified to take into account the probability of a draw down on the commitment. This allowance is reported as a liability on the balance sheet within accrued interest payable and other liabilities. The balance in the liability account was $109,559 at December 31, 2020 and $78,463 at December 31, 2019.
Premises and Equipment
Land is carried at cost. Premises and equipment are carried at cost, less accumulated depreciation. The provision for depreciation for financial reporting has been made by using the straight-line method based on the estimated useful lives of the assets, which range from 10 to 31.5 years for buildings and 3 to 20 years for furniture and equipment. Accelerated depreciation methods are used for income tax purposes.
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired in business combinations. In accordance with ASC Topic 350, Intangibles - Goodwill and Other, goodwill is not amortized but is subject to an annual impairment test.
Bank-Owned Life Insurance (“BOLI”)
BOLI policies are recorded at their cash surrender values. Changes in the cash surrender values are recorded as other operating income.
Other Real Estate Owned (“OREO”)
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less the cost to sell at the date of foreclosure, with any losses charged to the ALL, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Changes in the valuation allowance, sales gains and losses, and revenue and expenses from holding and operating properties are all included in net expenses from other real estate owned.
Income Taxes
First United Corporation and its subsidiaries file a consolidated federal income tax return. Income taxes are accounted for using the asset and liability method. Under the asset and liability method, the deferred tax liability or asset is determined based on the difference between the financial statement and tax bases of assets and liabilities (temporary differences) and is measured at the enacted tax rates that will be in effect when these differences reverse. Deferred tax expense is determined by the change in the net liability or asset for deferred taxes adjusted for changes in any deferred tax asset valuation allowance.
ASC Topic 740, Taxes, provides clarification on accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We have not identified any income tax uncertainties.
State corporate income tax returns are filed annually. Federal and state returns may be selected for examination by the Internal Revenue Service and the states where we file, subject to statutes of limitations. At any given point in time, the Corporation may have several years of filed tax returns that may be selected for examination or review by taxing authorities.
Interest and penalties on income taxes are recognized as a component of income tax expense.
Defined Benefit Plans
The defined benefit pension plan and supplemental executive retirement plan are accounted for in accordance with ASC Topic 715, Compensation - Retirement Benefits. Under the provisions of Topic 715, the defined benefit pension plan and the supplemental executive retirement plan are recognized as liabilities in the Consolidated Statement of Financial Condition, and unrecognized net actuarial losses, prior service costs and a net transition asset are recognized as a separate component of other comprehensive loss, net of tax. Actuarial gains and losses in excess of 10 percent of the greater of plan assets or the pension benefit obligation are amortized over a blend of future service of active employees and life expectancy of inactive participants. Refer to Note 20 for a further discussion of the pension plan and supplemental executive retirement plan obligations.
Statement of Cash Flows
Cash and cash equivalents are defined as cash and due from banks and interest-bearing deposits in banks in the Consolidated Statement of Cash Flows.
Trust Assets and Income
Assets held in an agency or fiduciary capacity are not the Bank’s assets and, accordingly, are not included in the Consolidated Statement of Financial Condition. Income from the Bank’s trust department represents fees charged to customers.
Business Segments
The Corporation operates in one segment, community banking, as defined by ASC Topic 280, Segment Reporting. The Corporation in its entirety is managed and evaluated on an ongoing basis by First United Corporation’s Board of Directors and executive management, with no division or subsidiary receiving separate analysis regarding performance or resource allocation.
Stock Repurchases
Under the Maryland General Corporation Law, shares of capital stock that are repurchased are cancelled and treated as authorized but unissued shares. When a share of capital stock is repurchased, the payment of the repurchase price reduces stated capital by the par value of that share (currently, $0.01 for common stock), and any excess over par value reduces capital surplus. During 2020, the Corporation repurchased 145,291 shares of common stock at a weighted average price of $18.96. The Trust department purchased 194,124 shares as an investment in the pension plan at a weighted average price of $13.49.
Adoption of New Accounting Standards and Effects of New Accounting Pronouncements
In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchases financial assets with credit deterioration since their origination. The new model referred to as current expected credit losses (“CECL”) model, will apply to: (a) financial assets subject to credit losses and measured at amortized cost; and (b) certain off-balance sheet credit exposures. This includes loans, held to maturity debt securities, loan commitments, financial guarantees and net investments in leases as well as reinsurance and trade receivables. The estimate of expected credit losses should consider historical information, current information, and supportable forecasts, including estimates of prepayments. ASU 2016-13 was originally effective for SEC filers for annual periods beginning after December 15, 2019, and interim periods within those annual periods. In November 2019, the FASB approved a delay of the required implementation date of ASU No. 2016-13 for smaller reporting companies, as defined by the Securities and Exchange Commission, including the Corporation, resulting in a required implementation date for the Corporation of January 1, 2023.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820)” - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements on fair value measurements by requiring that Level 3 fair value disclosures include the range and weighted average of significant unobservable inputs used to develop those fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 became effective for the Corporation on January 1, 2020 and did not have a significant impact on its financial condition or results of operations.
In August 2018, the FASB issued ASU 2018-14, “Compensation-Retirement Benefits-Defined Benefit Plans-General”. The amendments in this update remove disclosures that are no longer considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. The update is effective for public business entities for fiscal years ending after December 15, 2020. Early adoption is permitted. The Corporation adopted this ASU effective December 31, 2020.
In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs incurred in a Cloud Computing Arrangement that is a Service Contract”. This update amends Subtopic 350-40 “Intangibles-Goodwill and other-Internal-Use Software” by adding a subsection to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. The update is effective for public business entities for fiscal years ending after December 15, 2019, and interim periods within those fiscal years. ASU 2018-15 became effective for the Corporation on January 1, 2020 and did not have a significant impact on its financial condition or results of operations.
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848).” The ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendment only applies to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of the reference rate reform. The ASU is effective as of March 12, 2020 through December 31, 2022. The Corporation is in the process of evaluating the impact of this standard on the loan portfolio, investment portfolio and interest rate swaps, but believes that its adoption will not have a material impact on the Corporation’s financial condition or results of operations.
2. Significant Event
On March 11, 2020, the World Health Organization declared a pandemic as a result of the global spread of the coronavirus, commonly referred to as COVID-19. The spread of the disease quickly accelerated in the United States and to date, all 50 states have reported cases. In response, President Trump declared a public health emergency and issued two related national emergency declarations on March 13, 2020. In addition, the U.S. and state governments reacted to the pandemic by issuing shelter at home orders and requiring that non-essential businesses be closed to prevent spread of the virus. The health crisis quickly turned into a financial crisis resulting in guidance and mandates regarding foreclosures and repossessions and accounting and regulatory changes designed to encourage banks to work with customers suffering detrimental financial impact.
As a result of the pandemic effecting the states and local markets in which it operates, the Corporation successfully implemented its Business Continuity Plan with the goal of protecting the health, safety and financial well-being of its associates and customers. As part of its plan to protect the financial well-being of its customers, the Corporation chose to participate and educate its customers on the government sponsored plans established to provide financial assistance to businesses.
The U.S. Government’s Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) established the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) which provides small businesses with resources to maintain payroll, hire back employees who may have been laid off, and to cover applicable overhead expenses. We continued to provide access to the PPP and process applications until the window closed on August 8, 2020. These loans are 100% guaranteed by the SBA, have up to a two year or five year maturity, provide for the earlier of when the Bank received forgiveness payment from the SBA or 10 months after the end of the covered payroll period, and have an interest rate of 1%. These loans may be forgiven, in whole or in part, by the SBA if the borrower meets certain conditions, including by using at least 60% of the loan proceeds for payroll costs. The SBA also established processing fees from 1% to 5%, depending on the loan amount, which resulted in $3.7 million of deferred loan fees. Of the $3.7 million in deferred fees, we recognized approximately $2.0 million in 2020.
In January 2021, President Trump signed the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (“CARES II”) into law. CARES II provides an extension of stimulus package benefits and unemployment through March 14, 2021 as well as funding for additional PPP loans. PPP loans made under CARES II have the same general loan terms as PPP loans made under the CARES Act. These loans have a maturity of five years and processing fees of the lessor of 0.50% or $2,500 up to 5.0%, depending on the loan amount.
During 2020, we processed 1,174 loan applications totaling $148.9 million and have received forgiveness of $34.5 million. Thus far in 2021, we have processed 561 PPP2 loan applications totaling $56.4 million.
In April 2020, the Bank established eligibility to participate in the Paycheck Protection Program Liquidity Facility (“PPPLF”) which was established by Congress and administered by the Federal Reserve Bank. This facility uses the SBA guaranteed PPP loans as collateral, offering 100% collateral coverage with no recourse to the Bank. The majority of the PPP loan disbursements have been to internal, non-interest-bearing accounts awaiting use by borrowers. During 2020, we did not access this facility. We will continue to monitor our liquidity position and determine appropriate timing to utilize these funds.
During 2020, the Bank was approved to participate in the Main Street Lending Program established by the Federal Reserve. This program supports lending to small and medium-sized businesses and non-profit organizations that were in sound financial condition before the onset of the COVID-19 pandemic.
Section 4013 of the CARES Act allows financial institutions to suspend application of certain current TDR accounting guidance under ASC Subtopic 310-40 for loan modifications related to the COVID-19 pandemic made between March 1, 2020 and the date that is 60 days after the end of the COVID-19 national emergency, provided that certain criteria are met. This relief can be applied to loan modifications for borrowers that were not more than 30 days past due as of December 31, 2019 and to loan modifications that defer or delay the payment of principal or interest, or that change the interest rate on the loan. In April 2020, federal and state banking regulators issued the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus to provide further interpretation of when a borrower is experiencing financial difficulty, specifically indicating that if the modification is either short-term (i.e., six months or less) or mandated by a federal or state government in response to the COVID-19 pandemic, the borrower is not experiencing financial difficulty as determined under ASC Subtopic 310-40. In response to the COVID-19 pandemic, the Corporation developed a set of guidelines to provide relief to qualified commercial, mortgage and consumer loans customers, including the deferment of certain loan payments on these loans of up to 180 days. Initial deferrals of 90 days were granted to qualified customers with the option to request a second deferral for an additional 90 days. Of the 19 commercial loans in modification status at December 31, 2020, there were seven classified loans. In accommodations, three were on their third deferral with one on its fourth deferral; two loans in owner occupied rentals on their third deferral period and one loan in food service in its third deferral period.
‎
We have not characterized as TDRs any modified loans that met the criteria established pursuant to Section 4013 of the CARES Act, nor have we designated them as past due or nonaccrual. The following table includes data on our consumer, residential mortgage and commercial loan portfolios, including a breakdown by industry, the percentage of the portfolio that has been modified through February 28, 2021, as well as loans still subject to modifications at February 28, 2021 as a result of COVID-19. For comparative purposes, total modifications for 2020 are included.
Total Loans at 12/31/20 (*)
COVID Modifications at 02/28/21
All COVID Modifications
Industry Category
# of Loans (**)
Balance (000s)
Balance as % of Total Portfolio
# of Loans
Balance (000s)
Balance as % of Total Portfolio
# of Loans
Balance (000s)
Balance as % of Category
RE/Rental/Leasing - NOO
$
135,665
12.9%
-
$
-
0.0%
$
55,293
40.8%
RE/Rental/Leasing - OO, C&I
99,029
9.4%
2,610
2.6%
27,994
28.3%
Construction - Developers
53,867
5.1%
-
-
0.0%
2,922
5.4%
Services
52,370
5.0%
-
-
0.0%
11,129
21.2%
Accommodations
50,819
4.8%
6,854
13.5%
38,660
76.1%
RE/Rental/Leasing - Multifamily
35,759
3.4%
1.6%
7,308
20.4%
Trade
34,030
3.2%
-
-
0.0%
1,003
2.9%
Health Care/Social Assistance
31,734
3.0%
-
-
0.0%
11,166
35.2%
Manufacturing
25,268
2.4%
-
-
0.0%
10,485
41.5%
Prof/Scientific/Technical
22,065
2.1%
-
-
0.0%
7,207
32.7%
Construction - All Other
20,117
1.9%
2.2%
3,412
17.0%
RE/Rental/Leasing - Developers
20,093
1.9%
-
-
0.0%
1.0%
Transportation/Warehousing
18,502
1.8%
0.1%
0.9%
Public Administration
12,773
1.2%
-
-
0.0%
-
-
0.0%
Food Service
11,456
1.1%
1.7%
3,092
27.0%
Entertainment/Recreation
7,869
0.7%
4,884
62.1%
7,183
91.3%
Agriculture
4,456
0.4%
-
-
0.0%
10.7%
Energy
1,620
0.2%
-
-
0.0%
-
-
0.0%
Total Commercial
2,314
$
637,492
58.2%
$
15,576
2.4%
$
187,712
29.4%
Total Residential Mortgage
2,055
314,349
32.0%
2,240
0.7%
37,642
12.0%
Total Consumer
6,522
101,980
9.8%
0.4%
5,260
5.2%
Total Loans
10,891
$
1,053,821
100.0%
$
18,240
1.7%
$
230,614
21.9%
(*) Excluding 884 PPP loans totaling $114.0 million, 1.6% including PPP loans
(**) Including active loans/lines with no outstanding balance
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. There were 5,070 common stock equivalents of restricted stock units at December 31, 2020 and no common stock equivalents at December 31, 2019.
‎
The following table sets forth the calculation of basic and diluted earnings per common share for the years ended December 31, 2020 and 2019:
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
$
13,841
7,004
$
1.98
$
13,129
7,101
$
1.85
Diluted Earnings Per Share:
Net income
$
13,841
7,013
$
1.97
$
13,129
7,101
$
1.85
4. Net Gains
The following table summarizes the gain/(loss) activity for the years ended December 31, 2020 and 2019:
(in thousands)
Net gains/(losses):
Available-for-sale securities:
Realized gains
$
$
Realized losses
(185)
(75)
Held-to-Maturity:
Realized losses
(97)
-
Gain on sale of consumer loans
2,403
Loss on disposal of fixed assets
(150)
(3)
Net gains
$
2,788
$
5. Regulatory Capital Requirements
We require capital to fund loans, satisfy our obligations under the Bank’s letters of credit, meet the deposit withdrawal demands of the Bank’s customers, and satisfy our other monetary obligations. To the extent that deposits are not adequate to fund our capital requirements, we can rely on a number of funding sources, including an unsecured Fed Funds lines of credit with upstream correspondent banks; secured advances with the FHLB of Atlanta, which are collateralized by eligible one to four family residential mortgage loans, home equity lines of credit, commercial real estate loans, and various securities. Cash may also be pledged as collateral. In addition, First United Corporation has a 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; and One Way Buy CDARS/ ICS funding, which is a form of brokered deposits that has become a viable supplement to brokered deposits obtained directly. At December 31, 2020, the Bank had $130.0 million available through unsecured lines of credit with correspondent banks, $1.1 million through a secured line of credit with the Fed Discount Window and approximately $134.4 million at the FHLB. Management is not aware of any demands, commitments, events or uncertainties that are likely to materially affect our ability to meet our future capital requirements.
‎
The following table presents our capital ratios for years ended December 31, 2020 and 2019:
Actual
For Capital Adequacy
‎Purposes
To Be Well Capitalized
‎Under Prompt Corrective
‎Action Provisions
(in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2020
Total Capital (to risk-weighted assets)
Consolidated
$
193,391
16.08%
$
96,353
8.00%
$
120,442
10.00%
First United Bank & Trust
181,977
15.50%
94,084
8.00%
117,605
10.00%
Tier 1 Capital (to risk-weighted assets)
Consolidated
178,336
14.83%
72,265
6.00%
96,353
8.00%
First United Bank & Trust
167,276
14.25%
70,563
6.00%
94,084
8.00%
Common Equity Tier 1 Capital
‎ (to risk-weighted assets)
Consolidated
151,709
12.61%
54,199
4.50%
78,287
6.50%
First United Bank & Trust
167,276
14.25%
52,922
4.50%
76,443
6.50%
Tier 1 Capital (to average assets)
Consolidated
178,336
10.36%
68,384
4.00%
85,480
5.00%
First United Bank & Trust
167,276
9.81%
67,643
4.00%
84,554
5.00%
Actual
For Capital Adequacy
‎Purposes
To Be Well Capitalized
‎Under Prompt Corrective
‎Action Provisions
(in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2019
Total Capital (to risk-weighted assets)
Consolidated
$
182,941
16.29%
$
89,837
8.00%
$
112,296
10.00%
First United Bank & Trust
169,943
15.60%
87,159
8.00%
108,948
10.00%
Tier 1 Capital (to risk-weighted assets)
Consolidated
170,326
15.17%
67,378
6.00%
89,837
8.00%
First United Bank & Trust
157,328
14.44%
65,369
6.00%
87,159
8.00%
Common Equity Tier 1 Capital
‎ (to risk-weighted assets)
Consolidated
143,614
12.79%
50,533
4.50%
72,992
6.50%
First United Bank & Trust
157,328
14.44%
49,027
4.50%
70,817
6.50%
Tier 1 Capital (to average assets)
Consolidated
170,326
11.77%
57,491
4.00%
71,864
5.00%
First United Bank & Trust
157,328
10.99%
56,729
4.00%
70,912
5.00%
As of December 31, 2020 and 2019, the most recent notifications from the regulators categorized First United Corporation and the Bank as “well capitalized” under the regulatory framework for prompt corrective action. The consolidated total risk-based capital ratios include $30.9 million of First United Corporation’s junior subordinated debentures (“TPS Debentures”) which qualified as Tier 1 capital at December 31, 2020 under guidance issued by the Federal Reserve. At the Bank and Consolidated level, the ratios decreased when comparing December 31, 2020 to December 31, 2019. At December 31, 2020, we were in compliance with the requirements.
‎
6. Cash and Cash Equivalents
Cash and due from banks, which represents vault cash in the retail offices and invested cash balances at the Federal Reserve, is carried at fair value.
(in thousands)
December 31, 2020
December 31, 2019
Cash and due from banks, weighted average interest rate of 0.18% (at December 31, 2020)
$
146,673
$
48,512
Interest bearing deposits in banks, which represent funds invested at a correspondent bank, are carried at fair value and, as of December 31, 2020 and 2019, consisted of daily funds invested at the FHLB of Atlanta, and M&T Bank. In addition, at December 31, 2020, cash was pledged at Raymond James for the interest rate swap.
(in thousands)
December 31, 2020
December 31, 2019
FHLB daily investments, interest rate of 0.36% (at December 31, 2020)
$
$
Raymond James pledged cash, interest rate of 0.09% (at December 31, 2020)
2,000
1,000
$
2,759
$
1,467
‎
7. Investment Securities
The following table shows a comparison of amortized cost and fair values of investment securities at December 31, 2020 and 2019:
(in thousands)
Amortized
‎Cost
Gross
‎Unrealized
‎Gains
Gross
‎Unrealized
‎Losses
Fair
‎Value
OTTI
‎in AOCL
December 31, 2020
Available for Sale:
U.S. government agencies
$
75,856
$
$
$
76,433
$
-
Residential mortgage-backed agencies
22,999
-
22,899
-
Commercial mortgage-backed agencies
32,549
33,042
-
Collateralized mortgage obligations
70,372
70,637
-
Obligations of states and political subdivisions
10,144
-
10,614
-
Collateralized debt obligations
18,544
-
5,284
13,260
(3,839)
Total available for sale
$
230,464
$
2,164
$
5,743
$
226,885
$
(3,839)
Held to Maturity:
Residential mortgage-backed agencies
$
34,597
$
1,173
$
$
35,732
$
-
Commercial mortgage-backed agencies
11,716
-
12,303
-
Collateralized mortgage obligations
1,348
-
1,406
-
Obligations of states and political subdivisions
20,602
7,569
-
28,171
-
Total held to maturity
$
68,263
$
9,387
$
$
77,612
$
-
December 31, 2019
Available for Sale:
U.S. government agencies
$
39,987
$
-
$
$
39,894
$
-
Commercial mortgage-backed agencies
27,634
27,764
-
Collateralized mortgage obligations
29,903
29,923
-
Obligations of states and political subdivisions
14,124
-
14,470
-
Collateralized debt obligations
18,443
-
4,089
14,354
(2,835)
Total available for sale
$
135,008
$
$
4,400
$
131,305
$
(2,835)
Held to Maturity:
U.S. government agencies
$
16,164
$
$
-
$
16,823
$
-
Residential mortgage-backed agencies
42,939
43,253
-
Commercial mortgage-backed agencies
15,521
-
15,865
-
Collateralized mortgage obligations
3,140
-
3,143
-
Obligations of states and political subdivisions
16,215
5,357
-
21,572
-
Total held to maturity
$
93,979
$
6,832
$
$
100,656
$
-
‎
Proceeds from sales of available-for-sale securities and the realized gains and losses for the years ended December 31, 2020 and 2019 are as follows:
(in thousands)
Proceeds
$
43,278
$
21,872
Realized gains
Realized losses
The following table shows the Corporation’s securities with gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized position, at December 31, 2020 and 2019:
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, 2020
Available for Sale:
U.S. government agencies
$
39,611
$
$
-
$
-
-
Residential mortgage-backed agencies
22,899
-
-
-
Commercial mortgage-backed agencies
16,034
-
-
-
Collateralized mortgage obligations
39,628
-
-
-
Collateralized debt obligations
-
-
-
13,260
5,284
Total available for sale
$
118,172
$
$
13,260
$
5,284
Held to Maturity:
Residential mortgage-backed agencies
$
2,973
$
$
-
$
-
-
Total held to maturity
$
2,973
$
$
-
$
-
-
December 31, 2019
Available for Sale:
U.S. government agencies
$
24,907
$
$
14,987
$
Residential mortgage-backed agencies
4,900
-
-
-
Commercial mortgage-backed agencies
4,623
5,793
Collateralized mortgage obligations
-
-
-
35,472
Obligations of states and political subdivisions
-
-
-
-
-
-
Collateralized debt obligations
-
-
-
14,353
4,089
Total available for sale
$
34,430
$
$
70,605
$
4,266
Held to Maturity:
Residential mortgage-backed agencies
$
2,722
$
$
9,486
$
Total held to maturity
$
2,722
$
$
9,486
$
Management systematically evaluates securities for impairment on a quarterly basis. Based upon application of accounting guidance for subsequent measurement in ASC Topic 320 (ASC Section 320-10-35), management assesses whether (i) the Corporation has the intent to sell a security being evaluated and (ii) it is more likely than not that the Corporation will be required to sell the security prior to its anticipated recovery. If neither applies, then declines in the fair values of securities below their cost that are considered other-than-temporary declines are split into two components. The first is the loss attributable to declining credit quality. Credit losses are recognized in earnings as realized losses in the period in which the impairment determination is made. The second component consists of all other losses, which are recognized in other comprehensive loss. In estimating OTTI losses, management considers (a) the length of time and the extent to which the fair value has been less than cost, (b) adverse conditions specifically related to the security, an industry, or a geographic area, (c) the historic and implied volatility of the fair value of the security, (d) changes in the rating of the security by a rating agency, (e) recoveries or additional declines in fair value subsequent to the balance sheet date, (f) failure of the issuer of the security to make scheduled interest or principal payments, and (g) the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future. Management also monitors cash flow projections for securities that are considered beneficial interests under the guidance of ASC Subtopic 325-40, Investments - Other - Beneficial Interests in Securitized Financial Assets, (ASC Section 325-40-35).
Management believes that the valuation of certain securities is a critical accounting policy that requires significant estimates in preparation of its consolidated financial statements. Management utilizes an independent third party to prepare both the impairment valuations and fair value determinations for its collateralized debt obligation (“CDO“) portfolio consisting of pooled trust preferred securities. Management performs due diligence on the third-party processes and believes that it has an adequate understanding of the analysis, assumptions and methodology used by the third party to prepare the fair value determination and the OTTI evaluation.
Management reviews the qualifications of the third party and believes they are qualified to provide the analysis and pricing determinations. Quarterly, management reviews the third party’s detailed assumptions and analyzes its projected discounted present value results for reasonableness and consistency with the trend of prior projections. Annually, management performs stress tests of the assumptions used in the third party models and performs back tests of the assumptions and prepayment projections to validate the impairment model results. As a result of its due diligence process, management believes that the fair value presented and the OTTI recognized are appropriate. A total of $3.0 million in impairment losses was realized during the time period 2009 through 2011 on the CDO portfolio remaining at December 31, 2020. Due to the prior credit impairment, the securities in this portfolio have continued to be evaluated to determine whether any additional OTTI has occurred. Based on management’s review of the third-party evaluations, management believes that there were no material differences in the relative valuations between December 31, 2020 and December 31, 2019.
Due to the duration and market value decline in the pooled trust preferred securities held in our portfolio, we performed more extensive testing on these securities for purposes of evaluating whether or not OTTI has occurred.
The market for these securities as of December 31, 2020 is not active and markets for similar securities are also not active. The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which these securities trade and then by a significant decrease in the volume of trades relative to historical levels. The new issue market is also inactive, as no new CDOs have been issued since 2007. There are currently very few market participants who are willing to effect transactions in these securities. The market values for these securities are very depressed relative to historical levels. Therefore, in the current market, a low market price for a particular bond may only provide evidence of stress in the credit markets in general rather than being an indicator of credit problems with a particular issue. Given the conditions in the current debt markets and the absence of observable transactions in the secondary and new issue markets, management has determined that (a) the few observable transactions and market quotations that are available are not reliable for the purpose of obtaining fair value at December 31, 2020, (b) an income valuation approach technique (i.e. present value) that maximizes the use of relevant unobservable inputs and minimizes the use of observable inputs will be equally or more representative of fair value than a market approach, and (c) the CDO segment is appropriately classified within Level 3 of the valuation hierarchy because management determined that significant adjustments were required to determine fair value at the measurement date.
Management utilizes an independent third party to prepare both the evaluations of OTTI and the fair value determinations for the CDO portfolio. Management does not believe that there were any material differences in the OTTI evaluations and pricing between December 31, 2019 and December 31, 2020.
The approach used by the third party to determine fair value involved several steps, which included detailed credit and structural evaluation of each piece of collateral in each bond, projection of default, recovery and prepayment/amortization probabilities for each piece of collateral in the bond, and discounted cash flow modeling. The discount rate methodology used by the third party combines a baseline current market yield for comparable corporate and structured credit products with adjustments based on evaluations of the differences found in structure and risks associated with actual and projected credit performance of each CDO being valued. Currently, the only active and liquid trading market that exists is for stand-alone trust preferred securities, with a limited market for highly-rated CDO securities that are more senior in the capital structure than the securities in the CDO portfolio. Therefore, adjustments to the baseline discount rate are also made to reflect the additional leverage found in structured instruments.
‎
The following table presents a cumulative roll-forward of the amount of non-cash OTTI charges related to credit losses which have been recognized in earnings for the trust preferred securities in the CDO portfolio held and not intended to be sold for the years ended December 31, 2020 and 2019:
(in thousands)
Balance of credit-related OTTI at January 1
$
2,446
$
2,646
Reduction for increases in cash flows expected to be collected
(202)
(200)
Balance of credit-related OTTI at December 31
$
2,244
$
2,446
The amortized cost and estimated fair value of securities by contractual maturity at December 31, 2020 are shown in the following table. Actual maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.
(in thousands)
Amortized
‎Cost
Fair
‎Value
Contractual Maturity
Available for sale:
Due after one year through five years
4,426
4,535
Due after five years through ten years
24,814
25,710
Due after ten years
75,304
70,062
104,544
100,307
Residential mortgage-backed agencies
22,999
22,899
Commercial mortgage-backed agencies
32,549
33,042
Collateralized mortgage obligations
70,372
70,637
Total available for sale
$
230,464
$
226,885
Held to Maturity:
Due after ten years
$
20,602
$
28,171
20,602
28,171
Residential mortgage-backed agencies
34,597
35,732
Commercial mortgage-backed agencies
11,716
12,303
Collateralized mortgage obligations
1,348
1,406
Total held to maturity
$
68,263
$
77,612
At December 31, 2020 and 2019, investment securities with a value of $137.1 million and $136.6 million, respectively, were pledged as permitted or required to secure public deposits, for securities sold under agreements to repurchase as required or permitted by law and as collateral for borrowing capacity.
8. Loans and Related Allowance for Loan Losses
The following table summarizes the primary segments of the loan portfolio as of December 31, 2020 and December 31, 2019:
(in thousands)
Commercial
‎Real Estate
Acquisition
‎and
‎Development
Commercial
‎and
‎Industrial
Residential
‎Mortgage
Consumer
Total
December 31, 2020
Individually evaluated for impairment
$
3,330
$
$
-
$
3,185
$
$
7,459
Collectively evaluated for impairment
$
365,846
$
116,119
$
266,745
$
375,985
$
35,658
$
1,160,353
Total loans
$
369,176
$
116,961
$
266,745
$
379,170
$
35,760
$
1,167,812
December 31, 2019
Individually evaluated for impairment
$
3,179
$
8,570
$
$
3,391
$
$
15,174
Collectively evaluated for impairment
$
332,325
$
109,320
$
122,322
$
435,033
$
36,195
$
1,035,195
Total loans
$
335,504
$
117,890
$
122,352
$
438,424
$
36,199
$
1,050,369
The segments of the Bank’s loan portfolio are disaggregated to a level that allows management to monitor risk and performance. The CRE loan segment is further disaggregated into two classes. Non-owner occupied CRE loans, which include loans secured by non-owner occupied nonfarm nonresidential properties, generally have a greater risk profile than all other CRE loans, which include loans secured by farmland, multifamily structures and owner-occupied commercial structures. The A&D loan segment is further disaggregated into two classes. One-to-four family residential construction loans are generally made to individuals for the acquisition
of and/or construction on a lot or lots on which a residential dwelling is to be built. All other A&D loans are generally made to developers or investors for the purpose of acquiring, developing and constructing residential or commercial structures. These loans have a higher risk profile because the ultimate buyer, once development is completed, is generally not known at the time of the A&D loan. The C&I loan segment consists of loans made for the purpose of financing the activities of commercial customers. The residential mortgage loan segment is further disaggregated into two classes: amortizing term loans, which are primarily first liens, and home equity lines of credit, which are generally second liens. The consumer loan segment consists primarily of installment loans (direct and indirect) and overdraft lines of credit connected with customer deposit accounts.
In the ordinary course of business, executive officers and directors of the Corporation, including their families and companies in which certain directors are principal owners, were loan customers of the Bank. Pursuant to the Bank’s lending policies, such loans were made on the same terms, including collateral, as those prevailing at the time for comparable transactions with persons who are not related to the Corporation and do not involve more than the normal risk of collectability. Changes in the dollar amount of loans outstanding to officers, directors and their associates were as follows for the year ended December 31:
(in thousands)
Balance at January 1
$
9,477
Loans or advances
Repayments
(1,348)
Balance at December 31
$
8,857
Management uses a 10-point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are considered Substandard. Only the portion of a specific allocation of the allowance for loan losses that management believes is associated with a pending event that could trigger loss in the short term is classified in the Doubtful category. Any portion of a loan that has been charged off is placed in the Loss category. It is possible for a loan to be classified as Substandard in the internal risk rating system, but not considered impaired under GAAP, due to the broader reach of “well-defined weaknesses” in the application of the Substandard definition.
To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. The Bank’s Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in the commercial segments at origination and on an ongoing basis. The Bank’s experienced Credit Quality and Loan Review Department performs an annual review of all commercial relationships of $1,000,000 or greater. Confirmation of the appropriate risk grade is included as part of the review process on an ongoing basis. The Credit Quality and Loan Review Department continually reviews and assesses loans within the portfolio. In addition, the Bank engages an external consultant to conduct loan reviews on at least an annual basis. Generally, the external consultant reviews commercial relationships greater than $1,000,000 and/or criticized non-consumer loans greater than $750,000. Detailed reviews, including plans for resolution, are performed on loans classified as Substandard on a quarterly basis. Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.
‎
The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention and Substandard. There were no loans classified as Doubtful within the internal risk rating system as of December 31, 2020 and 2019:
(in thousands)
Pass
Special
‎Mention
Substandard
Total
December 31, 2020
Commercial real estate
Non owner-occupied
$
178,670
$
5,526
$
6,322
$
190,518
All other CRE
166,504
5,664
6,490
178,658
Acquisition and development
1-4 family residential construction
18,920
-
-
18,920
All other A&D
97,648
98,041
Commercial and industrial
245,185
8,867
12,693
266,745
Residential mortgage
Residential mortgage - term
309,177
6,117
315,577
Residential mortgage - home equity
62,804
-
63,593
Consumer
35,648
35,760
Total
$
1,114,556
$
20,360
$
32,896
$
1,167,812
December 31, 2019
Commercial real estate
Non owner-occupied
$
164,584
$
2,765
$
1,864
$
169,213
All other CRE
157,407
6,556
2,328
166,291
Acquisition and development
1-4 family residential construction
10,781
-
-
10,781
All other A&D
98,823
8,268
107,109
Commercial and industrial
116,221
2,896
3,235
122,352
Residential mortgage
Residential mortgage - term
364,150
5,597
369,806
Residential mortgage - home equity
67,143
1,336
68,618
Consumer
36,047
36,199
Total
$
1,015,156
$
12,437
$
22,776
$
1,050,369
Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. A loan is considered to be past due when a payment has not been received for 30 days past its contractual due date. For all loan segments, the accrual of interest is discontinued when principal or interest is delinquent for 90 days or more unless the loan is well-secured and in the process of collection. All non-accrual loans are considered to be impaired. Interest payments received on non-accrual loans are applied as a reduction of the loan principal balance. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. The Corporation’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.
The increase of $10.1 million in the substandard category from December 31, 2019 to December 31, 2020 was primarily due to the addition of three large relationships in the “CRE” and “Commercial and Industrial” categories. These loans are current and well collateralized and are not considered impaired. They were classified as substandard due to a reduction in cash flows and a slight deterioration in the borrower’s balance sheet. The increase was offset by the movement of an $8.0 million A&D loan to OREO in the third quarter of 2020. The increase in the special mention category of $7.9 million is due to the addition of one hotel loan in the non-owner occupied category as business continues to be at reduced capacity thereby reducing cash flows. The increase in the commercial and industrial category is related to one medical profession loan and one relationship with a chartered airline company. As of December 31, 2020, the Bank had granted approximately $16.0 million in prudent forbearance to our borrowers comprising of 19 commercial accounts. Of those, approximately $12.3 million were classified as special mention and $4.6 million as substandard. The pandemic triggered the Bank to proactively communicate with borrowers initially based on types of industry deemed to be at a higher risk level (i.e. hospitality, accommodations, etc.). This was then expanded to our top borrowers regardless of industry. Discussions evolved into weekly meetings between borrowers and Bank personnel; with the goal being to provide prudent assistance to the communities we serve.
‎
The following table presents the classes of the loan portfolio at December 31, 2020 and December 31, 2019, summarized by the aging categories of performing loans and non-accrual loans. Loans under modification are reported as current in accordance with CARES Act requirements:
(in thousands)
Current
30-59 Day
‎Past Due
60-89 Days
‎Past Due
90 Days+
‎Past Due
Total
‎Past Due
‎and still
‎accruing
Non-
‎Accrual
Total Loans
December 31, 2020
Commercial real estate
Non owner-occupied
$
190,510
$
-
$
-
$
-
$
-
$
$
190,518
All other CRE
177,360
-
-
178,658
Acquisition and development
1-4 family residential construction
18,920
-
-
-
-
-
18,920
All other A&D
97,660
-
98,041
Commercial and industrial
266,708
-
-
-
266,745
Residential mortgage
Residential mortgage - term
312,500
1,443
1,634
315,577
Residential mortgage - home equity
63,036
-
63,593
Consumer
35,473
35,760
Total
$
1,162,167
$
$
$
$
2,306
$
3,339
$
1,167,812
December 31, 2019
Commercial real estate
Non owner-occupied
$
169,180
$
-
$
-
$
-
$
-
$
$
169,213
All other CRE
165,289
-
-
166,291
Acquisition and development
1-4 family residential construction
10,781
-
-
-
-
-
10,781
All other A&D
98,916
-
-
8,058
107,109
Commercial and industrial
122,050
-
-
122,352
Residential mortgage
Residential mortgage - term
366,882
1,705
1,219
369,806
Residential mortgage - home equity
67,121
68,618
Consumer
35,834
36,199
Total
$
1,036,053
$
1,088
$
1,654
$
$
3,467
$
10,849
$
1,050,369
Non-accrual loans which have been subject to a partial charge-off totaled $0.4 million at December 31, 2020, compared to $0.1 million at December 31, 2019. The amount of loans secured by 1-4 family residential real estate properties in the process of foreclosure was $0.4 million at December 31, 2020 and $0.1 million at December 31, 2019. The decline in non-accrual balance was due to the movement of one large A&D loan totaling $8.0 million to OREO in the fourth quarter of 2020.
The ALL is maintained to absorb losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.
‎
The Bank’s methodology for determining the ALL is based on the requirements of ASC Section 310-10-35, Receivables-Overall-Subsequent Measurement, for loans individually evaluated for impairment and ASC Subtopic 450-20, Contingencies-Loss Contingencies, for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance. The total of the two components represents the Bank’s ALL.
(in thousands)
Commercial
‎Real Estate
Acquisition
‎and
‎Development
Commercial
‎and
‎Industrial
Residential
‎Mortgage
Consumer
Unallocated
Total
December 31, 2020
Individually evaluated for impairment
$
$
$
-
$
$
-
$
-
$
Collectively evaluated for impairment
$
5,539
$
2,326
$
2,584
$
5,110
$
$
$
16,429
Total ALL
$
5,543
$
2,339
$
2,584
$
5,150
$
$
$
16,486
December 31, 2019
Individually evaluated for impairment
$
$
2,142
$
-
$
$
-
$
-
$
2,173
Collectively evaluated for impairment
$
2,873
$
1,532
$
1,341
$
3,806
$
$
$
10,364
Total ALL
$
2,882
$
3,674
$
1,341
$
3,828
$
$
$
12,537
Management evaluates individual loans in all of the commercial segments for possible impairment if the loan is greater than $500,000 or is part of a relationship that is greater than $750,000 and (i) is either in non-accrual status or (ii) is risk-rated Substandard and is greater than 60 days past due. Loans are considered to be impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Bank does not separately evaluate individual consumer and residential mortgage loans for impairment, unless such loans are part of larger relationship that is impaired; otherwise loans in these segments are considered impaired when they are classified as non-accrual.
Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using one of three methods: (i) the present value of expected future cash flows discounted at the loan’s effective interest rate; (ii) the loan’s observable market price; or (iii) the fair value of the collateral less selling costs. The method is selected on a loan-by-loan basis, with management utilizing the fair value of collateral method for all of the analyses. If the fair value of the collateral less selling costs method is utilized for collateral securing loans in the commercial segments, then an updated external appraisal is ordered on the collateral supporting the loan if the loan balance is greater than $500,000 and the existing appraisal is greater than 18 months old. If the loan balance is less than $500,000, then the estimated fair value of the collateral is determined by adjusting the existing appraisal by the appropriate percentage from an internally prepared appraisal discount grid. This grid considers the age of a third-party appraisal and the geographic region where the collateral is located in order to discount an appraisal. The discount rates in the appraisal discount grid are updated at least annually to reflect the most current knowledge that management has available, including the results of current appraisals. If there is a delay in receiving an updated appraisal or if the appraisal is found to be deficient in our internal appraisal review process and re-ordered, the Bank continues to use a discount factor from the appraisal discount grid based on the collateral location and current appraisal age in order to determine the estimated fair value. If management believes that general market conditions in that geographic market have changed considerably, the property has deteriorated or perhaps lost an income stream, or a recent appraisal for a similar property indicates a significant change, then management may adjust the fair value indicated by the existing appraisal until a new appraisal is obtained. A specific allocation of the ALL is recorded if there is any deficiency in collateral value determined by comparing the estimated fair value to the recorded investment of the loan. When updated appraisals are received and reviewed, adjustments are made to the specific allocation as needed.
The evaluation of the need and amount of a specific allocation of the ALL and whether a loan can be removed from impairment status is made on a quarterly basis.
‎
The following table presents impaired loans by class, at December 31, 2020 and December 31, 2019, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary:
Impaired Loans
‎with Specific Allowance
Impaired Loans
‎with No Specific
‎Allowance
Total Impaired Loans
(in thousands)
Recorded
‎Investment
Related
‎Allowances
Recorded
‎Investment
Recorded
‎Investment
Unpaid
‎Principal
‎Balance
December 31, 2020
Commercial real estate
Non owner-occupied
$
$
$
$
$
All other CRE
-
-
3,211
3,211
3,211
Acquisition and development
1-4 family residential construction
-
-
All other A&D
1,724
Commercial and industrial
-
-
-
-
2,214
Residential mortgage
Residential mortgage - term
1,910
2,846
3,031
Residential mortgage - home equity
Consumer
-
-
Total impaired loans
$
1,399
$
$
6,060
$
7,459
$
11,063
December 31, 2019
Commercial real estate
Non owner-occupied
$
$
$
$
$
8,224
All other CRE
-
-
3,030
3,030
3,030
Acquisition and development
1-4 family residential construction
-
-
All other A&D
8,219
2,142
8,279
8,340
Commercial and industrial
-
-
2,266
Residential mortgage
Residential mortgage - term
1,668
2,533
2,724
Residential mortgage - home equity
-
-
Consumer
-
-
Total impaired loans
$
9,200
$
2,173
$
5,974
$
15,174
$
25,865
Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative factors.
The classes described above, which are based on the Federal call code assigned to each loan, provide the starting point for the ALL analysis. Management tracks the historical net charge-off activity (full and partial charge-offs, net of full and partial recoveries) at the call code level. A historical charge-off factor is calculated utilizing a defined number of consecutive historical quarters. Consumer pools currently utilize a rolling twelve quarters, while Commercial pools currently utilize a rolling eight quarters.
“Pass” rated credits are segregated from “Criticized” credits for the application of qualitative factors. The un-criticized (“pass”) pools for commercial and residential real estate are further segmented based upon the geographic location of the underlying collateral. There are seven geographic regions utilized - six that represent the Bank’s lending footprint and a seventh for all out-of-market credits. Different economic environments and resultant credit risks exist in each region that are acknowledged in the assignment of qualitative factors. Loans in the criticized pools, which possess certain qualities or characteristics that may lead to collection and loss issues, are closely monitored by management and subject to additional qualitative factors.
Management supplements the historical charge-off factor with a number of additional qualitative factors that are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors, which are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources, are: (i) national and local economic trends and conditions; (ii) levels of and trends in delinquency rates and non-accrual loans; (iii) trends in volumes and terms of loans; (iv) effects of changes in lending policies; (v) experience, ability, and depth of lending staff; (vi) value of underlying collateral; and (vii) concentrations of credit from a loan type, industry and/or geographic standpoint.
Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL. Residential mortgage and consumer loans are charged off after they are 120 days contractually past due. All other loans are charged off based on an evaluation of the facts and circumstances of each individual loan. When the Bank believes that its ability to collect is solely dependent on the liquidation of the collateral, a full or partial charge-off is recorded promptly to bring the recorded investment to an amount that the Bank believes is supported by an ability to collect on the collateral. The circumstances that may impact the Bank’s decision to charge-off all or a portion of a loan include default or non-payment by the borrower, scheduled foreclosure actions, and/or prioritization of the Bank’s claim in bankruptcy. There may be circumstances
where due to pending events, the Bank will place a specific allocation of the ALL on a loan for which a partial charge-off has been previously recognized. This specific allocation may be either charged-off or removed depending upon the outcome of the pending event. Full or partial charge-offs are not recovered until full principal and interest on the loan have been collected, even if a subsequent appraisal supports a higher value. In most cases, loans with partial charge-offs remain in non-accrual status. Both full and partial charge-offs reduce the recorded investment of the loan and the ALL and are considered to be charge-offs for purposes of all credit loss metrics and trends, including the historical rolling charge-off rates used in the determination of the ALL.
Activity in the ALL is presented for the years ended December 31, 2020 and December 31, 2019:
(in thousands)
Commercial
‎Real Estate
Acquisition
‎and
‎Development
Commercial
‎and
‎Industrial
Residential
‎Mortgage
Consumer
Unallocated
Total
ALL balance at
‎ January 1, 2020
$
2,882
$
3,674
$
1,341
$
3,828
$
$
$
12,537
Charge-offs
-
(1,172)
(232)
(217)
(341)
-
(1,962)
Recoveries
-
Provision
2,592
(200)
1,324
1,456
-
5,401
ALL balance at
‎ December 31, 2020
$
5,543
$
2,339
$
2,584
$
5,150
$
$
$
16,486
ALL balance at
‎ January 1, 2019
$
2,780
$
1,721
$
1,187
$
4,544
$
$
$
11,047
Charge-offs
(41)
(29)
(126)
(200)
(320)
-
(716)
Recoveries
-
Provision
(7)
1,817
(863)
-
1,320
ALL balance at
‎ December 31, 2019
$
2,882
$
3,674
$
1,341
$
3,828
$
$
$
12,537
The ALL is based on estimates, and actual losses will vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date.
‎
The following table presents the average recorded investment in impaired loans and related interest income recognized for the years ended December 31, 2020 and 2019:
(in thousands)
Average
‎investment
Interest income
‎recognized on
‎an accrual basis
Interest income
‎recognized on
‎a cash basis
Average
‎investment
Interest income
‎recognized on
‎an accrual basis
Interest income
‎recognized on
‎a cash basis
Commercial real estate
Non owner-occupied
$
$
$
-
$
$
$
-
All other CRE
3,203
-
4,322
Acquisition and development
1-4 family residential construction
-
-
All other A&D
6,709
6,505
-
Commercial and industrial
-
-
-
-
Residential mortgage
Residential mortgage - term
2,593
-
2,971
Residential mortgage - home equity
-
-
Consumer
-
-
-
-
Total
$
13,554
$
$
$
15,170
$
$
In the normal course of business, the Bank modifies loan terms for various reasons. These reasons may include as a retention strategy to compete in the current interest rate environment, and to re-amortize or extend a loan term to better match the loan’s payment stream with the borrower’s cash flows. A modified loan is considered to be a TDR when the Bank has determined that the borrower is troubled (i.e. experiencing financial difficulties). The Bank evaluates the probability that the borrower will be in payment default on any of its debt in the foreseeable future without modification. To make this determination, the Bank performs a global financial review of the borrower and loan guarantors to assess their current ability to meet their financial obligations. See Note 2 for more details on loan modifications and the CARES Act.
When the Bank restructures a loan to a troubled borrower, the loan terms (i.e. interest rate, payment, amortization period and/or maturity date) are modified in such a way to enable the borrower to cover the modified debt service payments based on current financials and cash flow adequacy. If a borrower’s hardship is thought to be temporary, then modified terms are only offered for that time period. Where possible, the Bank obtains additional collateral and/or secondary payment sources at the time of the restructure in order to put the Bank in the best possible position if the borrower is not able to meet the modified terms. To date, the Bank has not forgiven any principal as a restructuring concession. The Bank will not offer modified terms if it believes that modifying the loan terms will only delay an inevitable permanent default.
All loans designated as TDRs are considered impaired loans and may be in either accruing or non-accruing status. The Corporation’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition. Accordingly, the accrual of interest is discontinued when principal or interest is delinquent for 90 days or more unless the loan is well-secured and in the process of collection. If the loan was accruing at the time of the modification, then it continues to be in accruing status subsequent to the modification. Non-accrual TDRs may return to accruing status when there has been sufficient payment performance for a period of at least six months. TDRs are considered to be in payment default if, subsequent to modification, the loans are transferred to non-accrual status or to foreclosure. A loan may be removed from being reported as a TDR in the calendar year following the modification if the interest rate at the time of modification was consistent with the interest rate for a loan with comparable credit risk and the loan has performed according to its modified terms for at least six months. Further, a loan that has been removed from TDR reporting status and has been subsequently re-modified at standard market terms, may be removed from impaired status as well.
The volume, type and performance of TDR activity is considered in the assessment of the local economic trend qualitative factor used in the determination of the ALL for loans that are evaluated collectively for impairment.
‎
There were 14 loans totaling $4.0 million and 15 loans totaling $4.2 million that were classified as TDRs at December 31, 2020 and December 31, 2019, respectively. The following table presents the volume and recorded investment at the time of modification of TDRs by class and type of modification that occurred during the periods indicated:
Temporary Rate
‎Modification
Extension of Maturity
Modification of Payment
‎and Other Terms
(Dollars in thousands)
Number of
‎Contracts
Recorded
‎Investment
Number of
‎Contracts
Recorded
‎Investment
Number of
‎Contracts
Recorded
‎Investment
For the year ended December 31, 2020
Commercial real estate
Non owner-occupied
-
$
-
-
$
-
-
$
-
All other CRE
-
-
-
-
2,226
Acquisition and development
1-4 family residential construction
-
-
-
-
-
-
All other A&D
-
-
-
Commercial and industrial
-
-
-
-
-
-
Residential mortgage
Residential mortgage - term
Residential mortgage - home equity
-
-
-
-
-
-
Consumer
-
-
-
-
-
-
Total
$
$
$
2,582
For the year ended December 31, 2019
Commercial real estate
Non owner-occupied
-
$
-
-
$
-
-
$
All other CRE
-
-
-
-
-
-
Acquisition and development
1-4 family residential construction
-
-
-
-
-
-
All other A&D
-
-
-
-
Commercial and industrial
-
-
-
-
-
-
Residential mortgage
Residential mortgage - term
-
-
Residential mortgage - home equity
-
-
-
-
-
-
Consumer
-
-
-
-
-
-
Total
$
$
-
$
During the year ended December 31, 2020, there were no new TDRs and nine existing TDRs that had reached their original modification maturity were re-modified. These re-modifications did not impact the ALL.
During the year ended December 31, 2020, there were no payment defaults. There were no additional funds committed to be advanced in connection with TDRs at December 31, 2020 or 2019.
See Note 2 to these Notes to Consolidated Financial Statements, which provides information about loans that were modified during 2020 in response to the COVID-19 pandemic and that are not being accounted for as TDRs or past due or nonaccrual loans pursuant to Section 4013 of the CARES Act and the related accounting guidance.
9. Other Real Estate Owned
The following table presents the components of OREO, net of related valuation allowance, as of December 31, 2020 and 2019:
(in thousands)
Commercial real estate
$
$
2,256
Acquisition and development
8,441
1,780
Residential mortgage
-
Total OREO
$
9,386
$
4,127
In February 2021, the Bank received proceeds of $2.2 million from a sale of a parcel in an A&D property.
The following table presents the activity in the OREO valuation allowance for the years ended December 31, 2020 and 2019:
(in thousands)
Balance January 1
$
1,790
$
1,988
Fair value write-down
1,459
Sales of OREO
(896)
(1,657)
Balance December 31
$
1,010
$
1,790
The following table presents the components of OREO expenses, net, for the years ended December 31, 2020 and 2019:
(in thousands)
Gains on real estate, net
$
(130)
$
(160)
Fair value write-down
1,459
Expenses, net
Rental and other income
(159)
(76)
Total OREO expenses, net
$
$
1,542
10. Premises and Equipment
The following table presents the components of premises and equipment at December 31, 2020 and 2019:
(in thousands)
Land
$
6,953
$
7,035
Land Improvements
1,411
1,389
Premises
34,701
33,996
Furniture and Equipment
18,113
18,443
61,178
60,863
Less accumulated depreciation
(24,315)
(22,153)
Total
$
36,863
$
38,710
The Corporation recorded depreciation expense of $3.3 million in 2020 and $3.1 million in 2019.
11. Leases
Substantially all of the leases in which the Corporation is the lessee are comprised of real estate property for branches, ATM locations, and office equipment with terms extending through 2030. All of the Corporation’s leases are classified as operating leases. The present value of lease payments is reported as a lease liability and right of use asset on the Corporation’s Consolidated Statement of Financial Condition.
The following table represents the Consolidated Statement of Financial Condition classification of the Corporation’s ROU assets and lease liabilities. The Corporation elected not to include short-term leases (i.e., leases with remaining terms of 12 months or less), or equipment leases that were deemed immaterial on the Consolidated Statement of Financial Condition.
(in thousands)
December 31, 2020
December 31, 2019
Lease Right-of Use Assets
Operating lease right-of-use assets
$
2,408
$
2,661
Lease Liabilities
Operating lease liabilities
$
2,958
$
3,239
In calculating the present value of the lease payments, the Corporation has utilized its incremental borrowing rate based on electing the original lease term to account for each lease component.
The following table presents the weighted-average lease term and discount rate for operating leases at December 31, 2020:
December 31, 2020
December 31, 2019
Weighted-average remaining lease term
Operating leases
7.77 years
8.65 years
Weighted-average discount rate
Operating leases
5.06%
5.08%
The Corporation elected, for all classes of underlying assets, to separate lease and non-lease components. Total operating lease expense was $0.5 million for the years ended December 31, 2020 and 2019, respectively. Short-term lease expense was $20 thousand for the year ended December 31, 2020 and $46 thousand for the year ended December 31, 2019.
Future minimum payments for operating leases with initial or remaining terms of one year or more at December 31, 2020 were as follows:
(in thousands)
$
Thereafter
1,374
Total future minimum lease payments
3,611
Amounts representing interest
(653)
Present value of net future minimum lease payments
$
2,958
12. Deposits
The aggregate amount of time deposits in denomination of $250,000 or more was $68.6 million at December 31, 2020 and $93.6 million at December 31, 2019. The aggregate amount of time deposits with a minimum denomination of $100,000 was $139.5 million and $157.7 million at December 31, 2020 and 2019, respectively. At December 31, 2020, $0.2 million of deposit overdrafts were re-classified as loans.
The following is a summary of the scheduled maturities of all time deposits as of December 31, 2020 (in thousands):
$
142,767
55,372
23,447
3,421
3,177
Thereafter
Total
$
228,229
In the ordinary course of business, executive officers and directors of the Corporation, including their families and companies in which certain directors are principal owners, were deposit customers of the Bank. Pursuant to the Bank’s policies, such deposits are on the same terms as those prevailing at the time for comparable deposits with persons who are not related to the Corporation. At December 31, 2020, executive officers and directors had approximately $11.2 million in deposits with the Bank compared to $7.8 million at December 31, 2019.
13. Borrowed Funds
The following is a summary of short-term borrowings at December 31, 2020 and 2019 with original maturities of less than one year:
(Dollars in thousands)
Securities sold under agreements to repurchase:
Outstanding at end of year
$
49,160
$
48,728
Weighted average interest rate at year end
0.19%
0.23%
Maximum amount outstanding as of any month end
$
55,290
$
50,345
Average amount outstanding
$
46,519
$
39,778
Approximate weighted average rate during the year
0.20%
0.28%
At December 31, 2020, the repurchase agreements were secured by $68.3 million in investment securities.
The following is a summary of long-term borrowings at December 31, 2020 and 2019 with original maturities exceeding one year:
(In thousands)
FHLB advances, bearing fixed interest rates ranging from 1.37% to 2.90% at December 31, 2020
$
70,000
$
70,000
Junior subordinated debt, bearing variable interest rate of 2.98% at December 31, 2020
30,929
30,929
Total long-term debt
$
100,929
$
100,929
At December 31, 2020, the long-term FHLB advances were secured by $206.0 million in loans.
The contractual maturities of long-term borrowings at December 31, 2020 and 2019 are as follows:
Fixed
Floating
(in thousands)
Rate
Rate
Total
Total
Due in 2021
$
5,000
$
-
$
5,000
$
20,000
Due in 2022
-
-
-
-
Due in 2023
15,000
-
15,000
30,000
Due in 2024
-
-
-
20,000
Due in 2025
30,000
-
30,000
-
Thereafter
20,000
30,929
50,929
30,929
Total long-term debt
$
70,000
$
30,929
$
100,929
$
100,929
The Bank has a borrowing capacity agreement with the FHLB in an amount equal to 30% of the Bank’s assets. At December 31, 2020, the available line of credit equaled $515.2 million. This line of credit, which can be used for both short and long-term funding, can only be utilized to the extent of available collateral. The line is secured by certain qualified mortgage, commercial and home equity loans as follows (in thousands):
1-4 family mortgage loans
$
130,638
Commercial loans
48,392
Multi-family loans
4,998
Home equity loans
21,954
$
205,982
At December 31, 2020, $134.4 million was available for additional borrowings.
The Bank also has various unsecured lines of credit totaling $130.0 million with various financial institutions and a $ 1.1 million secured line with the Federal Reserve to meet daily liquidity requirements. At December 31, 2020, there were no borrowings under these credit facilities. In addition, there was approximately $142.3 million of available funding through brokered money market funds at December 31, 2020. The Bank also was eligible to utilize the Federal Reserve PPPLF in relation to outstanding PPP loans at December 31, 2020.
Repurchase Agreements - The Bank has retail repurchase agreements with customers within its local market areas. Repurchase agreements generally have maturities of one to four days from the transaction date. These borrowings are collateralized with securities that we own and are held in safekeeping at independent correspondent banks.
FHLB Advances - The FHLB advances consist of various borrowings with maturities generally ranging from 5 to 10 years with initial fixed rate periods of one, two or three years. After the initial fixed rate period, the FHLB has one or more options to convert each advance to a LIBOR based, variable rate advance, but the Bank may repay the advance in whole or in part, without a penalty, if the FHLB exercises its option. At all other times, the Bank’s early repayment of any advance could be subject to a prepayment penalty.
14. Junior Subordinated Debentures and Restrictions on Dividends
In March 2004, Trust I and Trust II issued preferred securities with an aggregate liquidation amount of $30.0 million to third-party investors and issued common equity with an aggregate liquidation amount of $0.9 million to First United Corporation. These Trusts used the proceeds of these offerings to purchase an equal amount of TPS Debentures, as follows:
$20.6 million-floating rate payable quarterly based on three-month LIBOR plus 275 basis points (2.98% at December 31, 2020), maturing in 2034, became redeemable five years after issuance at First United Corporation’s option.
$10.3 million--floating rate payable quarterly based on three-month LIBOR plus 275 basis points (2.98% at December 31, 2020) maturing in 2034, became redeemable five years after issuance at First United Corporation’s option.
The TPS Debentures issued to each of the Trusts represent the sole assets of that Trust, and payments of the TPS Debentures by First United Corporation are the only sources of cash flow for the Trust. First United Corporation has the right, without triggering a default, to defer interest on all of the TPS Debentures for up to 20 quarterly periods, in which case distributions on the preferred securities will also be deferred. Should this occur, the Corporation may not pay dividends or distributions on, or repurchase, redeem or acquire any shares of its capital stock.
15. Goodwill
ASC Topic 350, Intangibles - Goodwill and Other 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 its fair value. A goodwill impairment loss is recognized for the amount that the carrying amount of a reporting unit, including goodwill, exceeds its 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 more likely than not that the fair value of a reporting unit is less than its carrying amount, then the entity shall perform a quantitative goodwill impairment test. However, 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.
The emergence of COVID-19 as a global pandemic in beginning in March 2020, resulted in significant deterioration in general economic conditions and caused a deterioration in the environment in which the Corporation operates. This uncertainty resulted in a significant decrease in the market prices for the stock of institutions in the financial services industry, including the Corporation. 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. As such, quantitative analyses of the fair value of the Corporation were performed by a third party for each of the first three quarters of 2020 and no impairment was recognized.
During the fourth quarter of 2020, the economy began to see improvements with stimulus funding, decreasing unemployment rates within our market areas, the distributions of COVID-19 vaccine, and the significant improvement in our stock price since September 2020. Based on these positive circumstances, Management performed a qualitative assessment on the impairment of goodwill at December 31, 2020.
Having considered each of the qualitative factors and the negative and positive evidence of the totality of events and circumstances qualitatively, management has determined that it is not more likely than not that the fair value of our reporting unit is less than its carrying amount and a quantitative goodwill impairment test is unnecessary. As such, management concludes there is no goodwill impairment at December 31, 2020.
16. Variable Interest Entities
As noted in Note 14, First United Corporation created the Trusts for the purposes of raising regulatory capital through the sale of mandatorily redeemable preferred capital securities to third party investors and common equity interests to First United Corporation. The Trusts are considered VIEs, but are not consolidated because First United Corporation is not the primary beneficiary of the Trusts. At December 31, 2020, the Corporation reported all of the $30.9 million of TPS Debentures issued in connection with these offerings as long-term borrowings, and it reported its $0.9 million equity interest in the Trusts as “Other Assets”.
In November 2009, the Bank became a 99.99% limited partner in Liberty Mews. Liberty Mews was financed with a total of $10.6 million of funding, including a $6.1 million equity contribution from the Bank as the limited partner. Liberty Mews used the proceeds from these sources to purchase land and construct thereon a 36-unit low income housing rental complex at a total cost of $10.6 million. The total assets of Liberty Mews were $7.8 million at December 31, 2020 and $8.0 million at December 31, 2019.
Through December 31, 2020, the Bank had made contributions to Liberty Mews totaling $6.1 million. The project for which Liberty Mews was formed was completed in June 2011, and the Bank is entitled to $8.4 million in federal investment tax credits over a 10-year period as long as certain qualifying hurdles are maintained. The Bank will also receive the benefit of tax operating losses from Liberty Mews to the extent of its capital contribution. The investment in Liberty Mews assists the Bank in achieving its community reinvestment initiatives.
Because Liberty Mews is considered to be a VIE, management performed an analysis to determine whether its involvement with Liberty Mews would lead it to determine that it must consolidate Liberty Mews. In performing its analysis, management evaluated the risks creating the variability in Liberty Mews and identified which activities most significantly impact the VIE’s economic performance. Finally, it examined each of the variable interest holders to determine which, if any, of the holders was the primary beneficiary based on their power to direct the most significant activities and their obligation to absorb potentially significant losses of Liberty Mews.
The Bank, as a limited partner, generally has no voting rights. The Bank is not in any way involved in the daily management of Liberty Mews and has no other rights that provide it with the power to direct the activities that most significantly impact Liberty Mews’ economic performance, which are to develop and operate the housing project in such a manner that complies with specific tax credit guidelines. As a limited partner, there is no recourse to the Bank by the creditors of Liberty Mews. The tax credits that result from the Bank’s investment in Liberty Mews are generally subject to recapture should the partnership fail to comply with the applicable government regulations. The Bank has not provided any financial or other support to Liberty Mews beyond its required capital contributions and does not anticipate providing such support in the future. Management currently believes that no material losses are probable as a result of the Bank’s investment in Liberty Mews.
On the basis of management’s analysis, the general partner is deemed to be the primary beneficiary of Liberty Mews. Because the Bank is not the primary beneficiary, Liberty Mews has not been included in the Corporation’s consolidated financial statements.
The Corporation accounts for the Bank’s investment in Liberty Mews utilizing the effective yield method under guidance that applies specifically to investments in limited partnerships that operate qualified affordable housing projects. Under the effective yield method, the investor recognizes tax credits as they are allocated and amortizes the initial cost of the investment to provide a constant effective yield over the period that tax credits are allocated to the investor. The effective yield is the internal rate of return on the investment, based on the cost of the investment and the guaranteed tax credits allocated to the investor. The tax credit allocated, net of the amortization of the investment in the limited partnership, is recognized in the income statement as a component of income taxes attributable to continuing operations.
The Corporation’s tax expense for the year ended December 31, 2020 was approximately $0.8 million lower than for 2019 as a result of the impact of the tax credits and the tax losses relating to the partnership. The tax credit expires in June 2021.
At December 31, 2020 and December 31, 2019, the Corporation included the Bank’s total investment in Liberty Mews in “Other Assets” in its Consolidated Statements of Financial Condition. As of December 31, 2020, the Corporation’s commitment in Liberty Mews is fully funded. The following table presents details of the Bank’s involvement with Liberty Mews at the dates indicated:
(In thousands)
Investment in LIHTC Partnership
Carrying amount on Balance Sheet of:
Investment (Other Assets)
$
$
1,115
Maximum exposure to loss
1,115
‎
17. Accumulated Other Comprehensive Loss (“AOCL”)
The following table presents the changes in each component of accumulated other comprehensive loss for the years ended December 31, 2020 and 2019:
(in thousands)
Investment
‎securities-
‎with OTTI
‎AFS
Investment
‎securities-
‎all other
‎AFS
Investment
‎securities-
‎HTM
Cash Flow
‎Hedge
Pension
‎Plan
SERP
Total
Accumulated OCL, net:
Balance - January 1, 2019
$
(1,899)
$
(3,601)
$
(1,131)
$
$
(18,017)
$
(528)
$
(24,403)
Other comprehensive income/(loss)
‎ before reclassifications
(497)
2,748
-
(858)
(3,189)
(730)
(2,526)
Amounts reclassified from accumulated
‎ other comprehensive loss
(146)
-
-
Balance - December 31, 2019
$
(2,542)
$
(853)
$
(899)
$
(85)
$
(20,417)
$
(1,175)
$
(25,971)
Other comprehensive income/(loss)
‎ before reclassifications
(587)
1,291
-
(869)
(3,262)
(625)
(4,052)
Amounts reclassified from accumulated
‎ other comprehensive loss
(148)
(463)
-
1,049
1,160
Balance - December 31, 2020
$
(3,277)
$
(25)
$
(315)
$
(954)
$
(22,630)
$
(1,662)
$
(28,863)
‎
The following tables present the components of other comprehensive loss for the years ended December 31, 2020 and 2019:
Components of Other Comprehensive Loss
‎(in thousands)
Before Tax
‎Amount
Tax (Expense)
‎Benefit
Net
For the year ended December 31, 2020
Available for sale (AFS) securities with OTTI:
Unrealized holding losses
$
(803)
$
$
(587)
Less: accretable yield recognized in income
(54)
Net unrealized losses on investments with OTTI
(1,005)
(735)
Available for sale securities - all other:
Unrealized holding gains
1,765
(474)
1,291
Less: gains recognized in income
(169)
Net unrealized gains on all other AFS securities
1,133
(305)
Held to maturity securities:
Unrealized holding gains
-
-
-
Less: amortization recognized in income
(798)
(584)
Net unrealized gains on HTM securities
(214)
Cash flow hedges:
Unrealized holding losses
(1,187)
(869)
Net unrealized losses on cash flow hedges
(1,187)
(869)
Pension Plan:
Unrealized net actuarial loss
(4,456)
1,194
(3,262)
Less: amortization of unrecognized loss
(1,433)
(1,049)
Net pension plan liability adjustment
(3,023)
(2,213)
SERP:
Unrealized net actuarial loss
(854)
(625)
Less: amortization of unrecognized loss
(188)
(138)
Less: amortization of prior service costs
-
-
-
Net SERP liability adjustment
(666)
(487)
Other comprehensive loss
$
(3,950)
$
1,058
$
(2,892)
‎
Components of Other Comprehensive Loss
‎(in thousands)
Before Tax
‎Amount
Tax (Expense)
‎Benefit
Net
For the year ended December 31, 2019
Available for sale (AFS) securities with OTTI:
Unrealized holding losses
$
(679)
$
$
(497)
Less: accretable yield recognized in income
(54)
Net unrealized losses on investments with OTTI
(879)
(643)
Available for sale securities - all other:
Unrealized holding gains
3,753
(1,005)
2,748
Net unrealized losses on all other AFS securities
3,753
(1,005)
2,748
Held to maturity securities:
Unrealized holding gains
-
-
-
Less: amortization recognized in income
(317)
(232)
Net unrealized gains on HTM securities
(85)
Cash flow hedges:
Unrealized holding losses
(1,172)
(858)
Net unrealized losses on cash flow hedges
(1,172)
(858)
Pension Plan:
Unrealized net actuarial loss
(4,355)
1,166
(3,189)
Less: amortization of unrecognized loss
(1,077)
(789)
Net pension plan liability adjustment
(3,278)
(2,400)
SERP:
Unrealized net actuarial loss
(997)
(730)
Less: amortization of unrecognized loss
(116)
(85)
Less: amortization of prior service costs
(1)
Net SERP liability adjustment
(884)
(647)
Other comprehensive loss
$
(2,143)
$
$
(1,568)
‎
The following tables present the details of accumulated other comprehensive loss components for the years ended December 31, 2020 and 2019:
Details of Accumulated Other Comprehensive Loss Components
Amount Reclassified from Accumulated Other Comprehensive Loss
Affected Line Item in the Statement
(in thousands)
Where Net Income is Presented
Net unrealized losses on investment securities
‎ with OTTI:
Accretable Yield
$
Interest income on taxable investment securities
Taxes
(54)
Provision for Income Tax Expense
$
Net of tax
Net unrealized gains on available for sale
‎ investment securities - all other:
Gains on sales
$
Net gains
Taxes
(169)
Provision for Income Tax Expense
$
Net of tax
Net unrealized gains on held to maturity
‎ investment securities:
Amortization
$
(798)
Interest income on taxable investment securities
Taxes
Provision for Income Tax Expense
$
(584)
Net of tax
Net pension plan liability adjustment:
Amortization of unrecognized loss
$
(1,433)
Other expense
Taxes
Provision for Income Tax Expense
$
(1,049)
Net of tax
Net SERP liability adjustment:
Amortization of unrecognized loss
$
(188)
Other expense
Amortization of prior service costs
-
Other expense
Taxes
Provision for Income Tax Expense
$
(138)
Net of tax
Total reclassifications for the period
$
(1,160)
Net of tax
‎
Details of Accumulated Other Comprehensive Loss Components
Amount Reclassified from Accumulated Other Comprehensive Loss
Affected Line Item in the Statement
(in thousands)
Where Net Income is Presented
Net unrealized gains on investment securities with OTTI:
Accretable Yield
$
Interest income on taxable investment securities
Taxes
(54)
Provision for Income Tax Expense
$
Net of tax
Net unrealized gains on held to maturity
‎ investment securities:
Amortization
$
(317)
Interest income on taxable investment securities
Taxes
Provision for Income Tax Expense
$
(232)
Net of tax
Net pension plan liability adjustment:
Amortization of unrecognized loss
$
(1,077)
Other expense
Taxes
Provision for Income Tax Expense
$
(789)
Net of tax
Net SERP liability adjustment:
Amortization of unrecognized loss
$
(116)
Other expense
Amortization of prior service costs
Other expense
Taxes
Provision for Income Tax Expense
$
(83)
Net of tax
Total reclassifications for the period
$
(958)
Net of tax
18. Income Taxes
The provision for income taxes consists of the following for the years ended December 31, 2020 and 2019:
(In thousands)
Current Tax expense:
Federal
$
1,957
$
1,547
State
1,463
$
3,420
$
2,383
Deferred tax expense:
Federal
$
$
State
(245)
$
$
Income tax expense for the year
$
3,947
$
3,336
‎
The reconciliation between the statutory federal income tax rate and effective income tax rate for the years ended December 31, 2020 and 2019 is as follows:
Federal statutory rate
21.0%
21.0%
Tax-exempt income on securities and loans
(1.3)
(1.4)
Tax-exempt BOLI income
(1.5)
(2.9)
State income tax, net of federal tax benefit
5.1
4.8
Tax credits
(1.2)
(1.5)
Other
0.1
0.3
22.2%
20.3%
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Corporation’s temporary differences as of December 31, 2020 and 2019 are as follows:
(In thousands)
Deferred tax assets:
Allowance for loan losses
$
4,417
$
3,357
Deferred fees
Deferred compensation
1,019
Federal and state tax loss carry forwards
2,743
2,617
Tax credit carry forwards
-
1,853
Unrealized loss on investment securities
1,089
1,336
Pension/SERP
3,141
2,412
Lease liability
Low income housing tax credit
Other than temporary impairment on investment securities
Derivative contract
Other real estate owned
Other
Total deferred tax assets
15,497
15,278
Valuation allowance
(2,743)
(2,617)
Total deferred tax assets less valuation allowance
12,754
12,661
Deferred tax liabilities:
Goodwill
(2,805)
(2,805)
Lease right-of-use asset
(545)
(720)
Depreciation
(1,380)
(1,528)
Other
(52)
(167)
Total deferred tax liabilities
(4,782)
(5,220)
Net deferred tax assets
$
7,972
$
7,441
In assessing the ability to realize deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income of the appropriate character (for example, ordinary income or capital gain) within the carry-back or carry-forward period available under the tax law during the periods in which temporary differences are deductible. The Corporation has considered future market growth, forecasted earnings, future taxable income, and feasible and permissible tax planning strategies in determining whether it will be able to realize the deferred tax asset. If the Corporation were to determine that it will not be able to realize a portion of its net deferred tax asset in the future for which there is currently no valuation allowance, an adjustment to the net deferred tax asset would be charged to earnings in the period such determination was made. Conversely, if the Corporation were to make a determination that it is more likely than not that the deferred tax assets for which there is a valuation allowance will be realized, the related valuation allowance would be reduced and a benefit would be recorded.
At December 31, 2020, the Corporation had Maryland net operating losses (“NOLs”) of $40.4 million for which a deferred tax asset of $2.7 million has been recorded. There has been and continues to be a full valuation allowance on these NOLs based on management’s belief that it is more likely than not that these NOLs will not be realized prior to the expiration of their carry-forward periods because the Corporation will not generate sufficient taxable income in the future to fully utilize the NOLs. The valuation allowance was $2.7 million at December 31, 2020 and $2.6 million at December 31, 2019.
19. Equity Compensation Plan
At the 2018 Annual Meeting of Shareholders, First United Corporation’s shareholders approved the First United Corporation 2018 Equity Compensation Plan (the “2018 Equity Plan”), which authorizes the issuance of awards relating to up to 325,000 shares of common stock to employees, directors and qualifying consultants. Awards may take the form of stock options, stock appreciation rights, stock awards, dividend equivalents, or other stock-based awards and may provide for the issuance of shares of common stock or the cash value thereof.
The Corporation measures and records compensation expenses for share-based payments based on the instruments fair value on the date of grant. The fair value of stock awards is based on the Corporation’s stock price. Share-based compensation expense is recognized over the service period, generally defined as the vesting period.
Stock based awards were made to non-employee directors in June 2020 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 $10,000 to be paid, at the director’s election, in cash or additional shares of common stock. In June 2020, a total of 13,160 fully vested shares of common stock were issued to directors, which had a grant date fair market value of $14.52 per share. Director stock compensation expense was $220,598 for the year ended December 31, 2020 and $267,577 for the year ended December 31, 2019.
Restricted Stock Units
On March 26, 2020, the Compensation Committee of First United Corporation’s Board of Directors (the “Compensation Committee”) adopted a Long Term Incentive Plan as a sub-plan of the 2018 Equity Plan and granted restricted stock units (each, an “RSU”) thereunder to the Corporation’s principal executive officer, its principal financial officer, and certain of its other executive officers. An RSU contemplates the issuance of shares of common stock of the 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 ending December 31, 2021, (ii) a performance vesting award for a three year performance period ending December 31, 2022, and (iii) a time-vesting award that will vest ratably over a three year period beginning on March 26, 2021. Under the performance vesting RSUs, the officers will receive 50% of the target number of shares if at least one of the threshold performance levels is met, 100% of the target number of shares if at least one of the target performance levels is met, and 150% of the target number of shares if at least one of the maximum performance levels is met. Actual vesting amounts will be pro-rated between threshold and target levels and target and maximum levels to reward incremental improvement. For the performance period ending December 31, 2021, the performance goal is based on earnings per share for the year ending December 31, 2021. For the performance period ending December 31, 2022, the 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. The threshold, target and maximum performance levels for these RSUs will be disclosed pursuant to Item 402 of Regulation S-K following the conclusion of the applicable performance period.
To receive any shares under an RSU, a grantee must be employed by First United 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 his or her RSUs. In the case of performance-vesting RSUs, the pro-rated portion will be based on an assumption that the “target” performance goals were satisfied.
In the first quarter of 2020, RSUs relating to 25,004 shares of common stock (target level) were granted, which had a grant date fair market value of $12.54 per share of common stock underlying each RSU. Stock compensation expense was $124,970 for the year ended 2020. Compensation expense related to unvested units was $188,554.
20. Employee Benefit Plans
First United Corporation sponsors a noncontributory defined benefit Pension Plan (the “Pension Plan”) covering the employees who were hired prior to the freeze and others who were grandfathered into the Pension Plan. The benefits are based on years of service and the employees’ compensation during the last five years of employment.
Effective April 30, 2010, the Pension Plan was amended, resulting in a “soft freeze”, the effect of which prohibits new entrants into the Pension Plan and ceases crediting of additional years of service, after that date. Effective January 1, 2013, the Pension Plan was amended to unfreeze it for those employees for whom the sum of (i) their ages, at their closest birthday, plus (ii) years of service for vesting purposes equals 80 or greater. The “soft freeze” continues to apply to all other plan participants. Pension benefits for these participants will be managed through discretionary contributions to the First United Corporation 401(k) Profit Sharing Plan (the “401(k) Plan”).
During 2001, the Bank established an unfunded Defined Benefit Supplemental Executive Retirement Plan (“Defined Benefit SERP”). The Defined Benefit SERP is available only to a select group of management or highly compensated employees to provide
supplemental retirement benefits in excess of limits imposed on qualified plans by federal tax law. Concurrent with the establishment of the Defined Benefit SERP, the Bank acquired BOLI policies on the senior management personnel and officers of the Bank. The benefits resulting from the favorable tax treatment accorded the earnings on the BOLI policies are intended to provide a source of funds for the future payment of the Defined Benefit SERP benefits as well as other employee benefit costs.
The benefit obligation activity for both the Pension Plan and Defined Benefit SERP was calculated using an actuarial measurement date of January 1. Plan assets and the benefit obligations were calculated using an actuarial measurement date of December 31.
On January 9, 2015, First United Corporation and members of management who do not participate in the Defined Benefit SERP entered into participation agreements under the Deferred Compensation Plan, each styled as a Defined Contribution SERP Agreement (the “Contribution Agreement”). Pursuant to each Contribution Agreement, First United Corporation agreed, for each Plan Year (as defined in the Deferred Compensation Plan) in which it determines that it has been Profitable (as defined in the Contribution Agreement), to make a discretionary contribution to the participant’s Employer Account in an amount equal to 15% of the participant’s base salary level for such Plan Year, with the first Plan Year being the year ending December 31, 2015. The Contribution Agreement provides that the participant will become 100% vested in the amount maintained in his or her Employer Account upon the earliest to occur of the following events: (i) Normal Retirement (as defined in the Contribution Agreement); (ii) Separation from Service (as defined in the Contribution Agreement) following a Change of Control (as defined in the Deferred Compensation Plan) and subsequent Triggering Event (as defined in the Contribution Agreement); (iii) Separation from Service due to a Disability (as defined in the Contribution Agreement); (iv) with respect to a particular award of Employer Contribution Credits, the participant’s completion of two consecutive Years of Service (as defined in the Contribution Agreement) immediately following the Plan Year for which such award was made; or (v) death. Notwithstanding the foregoing, however, a participant will lose entitlement to the amount maintained in his or her Employer Account in the event employment is terminated for Cause (as defined in the Contribution Agreement). In addition, the Contribution Agreement conditions entitlement to the amounts held in the Employer Account on the participant (a) refraining from engaging in Competitive Employment (as defined in the Contribution Agreement) for three years following his or her Separation from Service, (b) refraining from injurious disclosure of confidential information concerning the Corporation, and (c) remaining available, at the First United Corporation’s reasonable request, to provide at least six hours of transition services per month for 12 months following his or her Separation from Service (except in the case of death or Disability), except that only item (b) will apply in the event of a Separation from Service following a Change of Control and subsequent Triggering Event.
In January 2019, the Board approved discretionary contributions to four participants totaling $123,179. The contributions had a two year vesting period that ended on December 31, 2020. The Corporation recorded $48,027 of the related compensation for the year ended December 31, 2020 and $75,175 for the year ended 2019. In January 2020, the Board of Directors of First United Corporation approved discretionary contributions to four participants totaling $126,058. The Corporation recorded $63,029 of related compensation expense for the year ended December 31, 2020. In January 2021, the Board of Directors approved discretionary contributions to three participants totaling $101,257. Each discretionary contribution has a two year vesting period.
The following tables summarize benefit obligation and funded status, plan asset activity, components of net pension cost, and weighted average assumptions for the Pension Plan and the Defined Benefit SERP:
Pension
Defined Benefit SERP
(in thousands)
Change in Benefit Obligation
Obligation at the beginning of the year
$
50,995
$
42,022
$
8,647
$
7,544
Service cost
Interest cost
1,624
1,748
Change in discount rate and mortality assumptions
5,971
7,981
-
-
Actuarial losses
1,157
Benefits paid
(2,074)
(2,000)
(266)
(283)
Obligation at the end of the year
57,898
50,995
9,614
8,647
Change in Plan Assets
Fair value at the beginning of the year
50,829
43,056
-
-
Actual return on plan assets
6,216
7,773
-
-
Employer contribution
1,000
2,000
Benefits paid
(2,074)
(2,000)
(266)
(283)
Fair value at the end of the year
55,971
50,829
-
-
(Unfunded)/Funded Status
$
(1,927)
$
(166)
$
(9,614)
$
(8,647)
Pension
Defined Benefit SERP
(in thousands)
Components of Net Pension Cost
Service cost
$
$
$
$
Interest cost
1,624
1,748
Expected return on assets
(3,548)
(3,055)
-
-
Amortization of recognized loss
1,433
1,077
Amortization of prior service cost
-
-
(3)
(3)
Net pension (income)/expense in employee benefits
$
(266)
$
$
$
Weighted Average Assumptions used to
‎ determine benefit obligations:
Discount rate for benefit obligations
2.50%
3.25%
2.52%
3.14%
Discount rate for net pension cost
3.25%
4.25%
-
-
Expected long-term return on assets
7.00%
7.00%
-
-
Rate of compensation increase
3.00%
3.00%
3.00%
3.00%
Mortality tables
PRI-2012 White Collar
RP-2014
PRI-2012
RP-2014
The accumulated benefit obligation for the Pension Plan was $54.0 million and $48.9 million at December 31, 2020 and 2019, respectively. The accumulated benefit obligation for the Defined Benefit SERP was $8.7 million and $7.7 million at December 31, 2020 and 2019, respectively.
‎
The investment assets of a defined benefit plan are managed with the goal of providing for retiree distributions while also supporting long-term plan obligations with a moderate level of portfolio risk. In order to address the variability over time of both risk and return, the plan investment strategy entails a dynamic approach to asset allocation, providing for normalized targets for major asset classes, with the ability to tactically adjust within the following specified ranges around those targets.
Asset Class
Normalized
‎Target
Range
Cash
4%
0% - 20%
Fixed Income
39%
30% - 50%
Equities
57%
45% - 65%
Decisions regarding tactical adjustments within the above noted ranges for asset classes are based on a top down review of factors expected to have material impact on the risk and reward dynamics of the portfolio as a whole. Such factors include, but are not limited to, the following:
Anticipated domestic and international economic growth as a whole;
The position of the economy within its longer term economic cycle; and
The expected impact of economic vitality, cycle positioning, financial market risks, industry/demographic trends and political forces on the various market sectors and investment styles.
With respect to individual company securities, additional company specific matters are considered, which could include management track record and guidance, future earnings expectations, current relative price expectations and the impact of identified risks on expected performance, among others. A core equity position of large cap stocks will be maintained, with more aggressive or volatile sectors meaningfully represented in the asset mix in pursuit of higher returns.
Strategic and specific investment decisions are guided by an in-house investment committee as well as a number of outside institutional resources that provide economic, industry and company data and analytics. It is management’s intent to give the Pension Plan’s investment managers flexibility with respect to investment decisions and their timing within the overall guidelines. However, certain investments require specific review and approval by management. Management is also informed of anticipated changes in nonproprietary investment managers, significant modifications of any previously approved investment, or the anticipated use of derivatives to execute investment strategies.
Portfolio risk is managed in large part by a focus on diversification across multiple levels as well as an emphasis on financial strength. For example, current investment policies restrict initial investments in debt securities to be rated investment grade at the time of purchase. Also, with the exception of the highest rated securities (e.g. - U.S. Treasury or government-backed agency securities), no more than 10% of the portfolio may be invested in a single entity’s securities. As a result of the previously noted approaches to controlling portfolio risk, any concentrations of risk would be associated with general systemic risks faced by industry sectors or the portfolio as a whole.
Assets in the Pension Plan are valued by the Corporation’s accounting system provider who utilizes a third-party pricing service. Valuation data is based on actual market data for stocks and mutual funds (Level 1) and matrix pricing for bonds (Level 2). Cash and cash equivalents are also considered Level 1 within the fair value hierarchy.
‎
As of December 31, 2020 and 2019, the value of Pension Plan investments was as follows:
December 31, 2020
Fair Value Hierarchy
(Dollars in thousands)
Assets at
‎Fair Value
% of
‎Portfolio
Level 1
Level 2
Cash and cash equivalents
$
2,312
4.1%
$
2,312
$
-
Fixed income securities:
U.S. Government and Agencies
0.6%
-
Taxable municipal bonds and notes
4,215
7.5%
-
4,215
Corporate bonds and notes
10,681
19.1%
-
10,681
Preferred stock
1.7%
-
Fixed income mutual funds
6,256
11.2%
6,256
-
Total fixed income
22,423
40.1%
6,256
16,167
Equities:
Large Cap
24,886
44.5%
24,886
-
Mid Cap
1,511
2.7%
1,511
-
Small Cap
0.8%
-
International
4,362
7.8%
4,362
-
Total equities
31,236
55.8%
31,236
-
Total market value
$
55,971
100.0%
$
39,804
$
16,167
Note: The Large cap equities includes 194,124 shares of First United Corporation common stock
December 31, 2019
Fair Value Hierarchy
(Dollars in thousands)
Assets at
‎Fair Value
% of
‎Portfolio
Level 1
Level 2
Cash and cash equivalents
$
0.5%
$
-
Fixed income securities:
U.S. Government and Agencies
1,904
3.7%
-
1,904
Taxable municipal bonds and notes
4,555
8.9%
-
4,555
Corporate bonds and notes
9,588
18.9%
-
9,588
Preferred stock
1.3%
-
Fixed income mutual funds
6,441
12.7%
6,441
-
Total fixed income
23,145
45.5%
6,441
16,704
Equities:
Large Cap
21,460
42.2%
21,460
-
Mid Cap
1,660
3.3%
1,660
-
Small Cap
1,009
2.0%
1,009
-
International
3,308
6.5%
3,308
-
Total equities
27,437
54.0%
27,437
-
Total market value
$
50,829
100.0%
$
34,125
$
16,704
The expected rate of return on Pension Plan assets is based on a combination of the following:
Historical returns of the portfolio of assets;
Monte Carlo simulations of expected returns for a portfolio with strategic asset targets similar to the normalized targets; and
Market impact adjustments to reflect expected future investment environment considerations.
At December 31, 2020, the 25-year average return on pension portfolio assets was 7.05%, exceeding the expected long-term return of 7.00% utilized for 2020. Considering that future equity returns are partially a function of current starting valuations and the general level of interest rates is near a historically low point, one could start to build a case for lower expected returns going forward. However, according to a recent Vanguard Global Economics Team white paper, over half of the volatility in expected returns is not explained by current valuations. As potential returns remain widely dispersed and expected returns are based on a time horizon that will likely exceed the timing of current concerns, it is considered appropriate to maintain the forward expected long-term rate of return of 7.00%.
Estimated cash flows related to expected future benefit payments from the Pension Plan and Defined Benefit SERP are as follows:
(In thousands)
Pension
‎Plan
Defined
‎Benefit
‎SERP
$
2,117
$
2,156
2,296
2,402
2,464
2026-2030
13,351
2,671
First United Corporation made a $1.0 million contribution to the Pension Plan in 2020. First United Corporation will continue to evaluate future annual contributions to the Pension Plan based upon its funded status and an evaluation of the future benefits to be provided thereunder. The Bank expects to fund the annual projected benefit payments for the Defined Benefit SERP from operations.
The estimated costs that will be amortized from accumulated other comprehensive loss into net periodic pension cost during the next fiscal year are as follows:
(In thousands)
Pension
Defined
‎Benefit
‎SERP
Prior service costs
$
-
$
(2)
Net actuarial loss
1,510
$
1,510
$
21. 401(k) Profit Sharing Plan
In furtherance of First United Corporation’s belief that every employee should have the ability to accrue retirement benefits, it adopted the 401(k) Profit Sharing Plan, which is available to all employees, including executive officers. Employees are automatically entered in the plan on the first of the month following completion of 30 days of service to First United Corporation and/or its subsidiaries. Employees have the opportunity to opt out of participation or change their deferral amounts under the plan at any time. In addition to contributions by participants, the plan contemplates employer matching and the potential of discretionary contributions to the accounts of participants. First United Corporation believes that matching contributions encourage employees to participate and thereby plan for their post-retirement financial future. Beginning with the 2008 plan year, First United Corporation enhanced the match formula to 100% on the first 1% of salary reduction and 50% on the next 5% of salary reduction. This match is accrued for all participants, including executive officers, immediately upon entering the plan on the first day of the month following the completion of 30 days of employment. The employee must be a plan participant and be actively employed on the last day of the plan year to share in the employer matching contribution, except in the case of death, disability or retirement of the participant. Additionally, First United Corporation accrued a non-elective employer contribution during 2020 for all employees other than employees who participate in the Defined Benefit SERP and Defined Contribution SERP and those employees meeting the age plus service requirement in the Pension Plan equal to 4.0% of each employee’s salary, and 0.05% of each employee’s salary hired before January 1, 2010, which will be paid in the first quarter of 2021. Expense charged to operations for the 401(k) Plan was $1.1 million in 2020 and $1.2 million in 2019.
22. Federal Reserve Requirements
The Bank is required to maintain cash reserves with the Federal Reserve Bank of Richmond based on specified deposit liabilities. Effective March 26, 2020, the Federal Reserve Board reduced reserve requirement ratios to 0%. This action eliminated reserve requirements for all depository institutions.
23. Restrictions on Subsidiary Dividends, Loans or Advances
Federal and state banking regulations place certain restrictions on the amount of dividends paid and loans or advances made by the Bank to First United Corporation. The total amount of dividends that may be paid at any date is generally limited to the retained earnings of the Bank, and loans or advances are limited to 10% of the Bank’s capital stock and surplus on a secured basis. In addition, dividends paid by the Bank to First United Corporation would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements.
24. Contractual Obligations, Commitments and Contingent Liabilities
Contractual Obligations
The Corporation enters into contractual obligations in the normal course of business. Among these obligations are FHLB advances and junior subordinated debentures, operating lease agreements for banking and subsidiaries’ offices, and for data processing and telecommunications equipment. Payments required under these obligations are set forth in the table following as of December 31, 2020:
(In thousands)
Less than
‎1 year
1-3
‎years
3-5
‎years
After
‎5 years
Total
Short-term borrowings
$
49,160
$
-
$
-
$
-
$
49,160
Long-term borrowings
5,000
15,000
30,000
50,929
100,929
Certificates of deposit
142,767
78,819
6,598
228,229
Data processing obligations
3,128
6,771
7,513
4,058
21,470
Operating lease obligations
1,374
3,611
Total
$
200,550
$
101,524
$
44,919
$
56,406
$
403,399
Commitments
Loan commitments are made to accommodate the financial needs of our customers. Loan commitments have credit risk essentially the same as that involved in extending loans to customers and are subject to normal credit policies. Commitments to extend credit generally have fixed expiration dates, may require payment of a fee, and contain cancellation clauses in the event of an adverse change in the customer’s credit quality.
‎
Commitments to extend credit in the form of consumer, commercial and business as of December 31, 2020 and December 31, 2019 are as follows:
(In thousands)
Residential Mortgage - home equity
$
59,615
$
53,827
Residential Mortgage - construction
12,220
4,995
Commercial
125,294
85,089
Consumer - personal credit lines
4,314
3,903
Standby letters of credit
17,675
9,112
Total
$
219,118
$
156,926
We do not issue any guarantees that would require liability recognition or disclosure other than the standby letters of credit issued by the Bank. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party to support contractual obligations and to ensure job performance. Generally, the Bank’s letters of credit are issued with expiration dates within one year. Historically, most letters of credit expire unfunded, and therefore, cash requirements are substantially less than the total commitment. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank generally holds collateral and/or personal guarantees supporting letters of credit. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payment required by the letters of credit. Management does not believe that the amount of the liability associated with guarantees under standby letters of credit outstanding at December 31, 2020 and December 31, 2019 is material.
25. 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.
Management believes that the Corporation’s valuation techniques are appropriate and consistent with the techniques used by other market participants. However, the use of different methodologies and assumptions could result in a different estimate of fair values at the reporting date. The following valuation techniques were used to measure the fair value of assets in the table below which are measured on a recurring and non-recurring basis as of December 31, 2020.
Investments - The investment portfolio is classified and accounted for based on the guidance of ASC Topic 320, Investments - Debt and Equity Securities.
The fair value of investments available-for-sale is determined using a market approach. At December 31, 2020, the U.S. Government agencies and treasuries, residential and commercial mortgage-backed securities, and municipal bonds segments are classified as Level 2 within the valuation hierarchy. Their fair values were determined based upon market-corroborated inputs and valuation matrices, which were obtained through third party data service providers or securities brokers through which we have historically transacted both purchases and sales of investment securities.
The CDO segment, which consists of pooled trust preferred securities issued by banks, thrifts and insurance companies, is classified as Level 3 within the valuation hierarchy. At December 31, 2020, the Corporation owned 9 pooled trust preferred securities with an amortized cost of $18.5 million and a fair value of $13.3 million. The market for these securities at December 31, 2020 was not active and markets for similar securities are also not active. The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which these securities trade and then by a significant decrease in the volume of trades relative to historical levels. The new issue market is also inactive, as few CDOs have been issued since 2007. There are currently very few market participants who are willing to effect transactions in these securities. The market values for these securities are very depressed relative to historical levels. Therefore, in the current market, a low market price for a particular bond may only provide evidence of stress in the credit markets in general rather than being an indicator of credit problems with a particular issue. Given the conditions in the current debt markets and the absence of observable transactions in the secondary and new issue markets, management has determined that (i) the few observable transactions and market quotations that are available are not reliable for the purpose of obtaining fair value at December 31, 2020, (ii) an income valuation approach technique (i.e. present value) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative of fair value than a market approach, and (iii) the CDO segment is appropriately classified within Level 3 of the valuation hierarchy because management determined that significant adjustments were required to determine fair value at the measurement date.
Management believes that the valuation of certain securities is a critical accounting policy that requires significant estimates in preparation of its consolidated financial statements. Management utilizes an independent third party to prepare both the impairment valuations and fair value determinations for its CDO portfolio consisting of pooled trust preferred securities. Management performs due diligence on the third-party processes and believes that it has an adequate understanding of the analysis, assumptions and methodology used by the third party to prepare the fair value determination and the OTTI evaluation. Management reviews the qualifications of the third party and believes they are qualified to provide the analysis and pricing determinations. Quarterly, management reviews the third party’s detailed assumptions and analyzes its projected discounted present value results for reasonableness and consistency with the trend of prior projections. Annually, management performs stress tests of the assumptions used in the third party models and performs back tests of the assumptions and prepayment projections to validate the impairment model results. As a result of its due diligence process, management believes that the fair value presented and the OTTI recognized are appropriate. A total of $3.0 million in impairment losses were realized during the time period 2009 through 2011 on the CDO portfolio remaining at December 31, 2020. Due to the prior credit impairment, the securities in this portfolio have continued to be evaluated to determine whether any additional OTTI has occurred. Based on management’s review of the third-party evaluations, management believes that there were no material differences in the valuations between December 31, 2020 and December 31, 2019.
The approach used by the third party to determine fair value involved several steps, which included detailed credit and structural evaluation of each piece of collateral in each bond, projection of default, recovery and prepayment/amortization probabilities for each piece of collateral in the bond, and discounted cash flow modeling. The discount rate methodology used by the third party combines a baseline current market yield for comparable corporate and structured credit products with adjustments based on evaluations of the differences found in structure and risks associated with actual and projected credit performance of each CDO being valued. Currently, the only active and liquid trading market that exists is for stand-alone trust preferred securities, with a limited market for highly-rated CDO securities that are more senior in the capital structure than the securities in the CDO portfolio. Therefore, adjustments to the baseline discount rate are also made to reflect the additional leverage found in structured instruments.
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.
Impaired loans - Loans included in the table below are those that are considered impaired with a specific allocation or with partial charge-offs, based upon the guidance of the loan impairment subsection of the Receivables Topic, ASC Section 310-10-35, under which the Corporation has measured impairment generally based on the fair value of the loan’s collateral. Fair value consists of the loan balance less its valuation allowance and is generally determined based on independent third-party appraisals of the collateral or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values based upon the lowest level of input that is significant to the fair value measurements.
Other real estate owned - OREO 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.
‎
For Level 3 assets and liabilities measured at fair value on a recurring and non-recurring basis as of December 31, 2020 and 2019, the significant unobservable inputs used in the fair value measurements were as follows:
(in thousands)
Fair Value at
‎December 31,
‎2020
Valuation
‎Technique
Significant
‎Unobservable
‎Inputs
Significant
‎Unobservable
‎Input Value
Recurring:
Investment Securities -
‎ available for sale - CDO
$
13,260
Discounted Cash Flow
Discount Rate
Libor+ 5.25%
Non-recurring:
Impaired Loans
$
1,465
Market Comparable Properties
Marketability Discount
10.0% to 15.0% (1)
‎(weighted avg 12.5%)
Other Real Estate Owned
$
Market Comparable Properties
Marketability Discount
15.0%
(in thousands)
Fair Value at
‎December 31,
‎2019
Valuation
‎Technique
Significant
‎Unobservable
‎Inputs
Significant
‎Unobservable
‎Input Value
Recurring:
Investment Securities -
‎ available for sale - CDO
$
14,354
Discounted Cash Flow
Discount Rate
Libor+ 4.5%
Non-recurring:
Impaired Loans
$
6,995
Market Comparable Properties
Marketability Discount
10.0% to 15.0% (1)
‎(weighted avg 12.9%)
Other Real Estate Owned
$
2,571
Market Comparable Properties
Marketability Discount
10.0% to 15.0% (1)
‎(weighted avg 12.5%)
(1)Range would include discounts taken since appraisal and estimated values
‎
For assets and liabilities measured at fair value on a recurring and non-recurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2020 and 2019 are as follows:
Fair Value Measurements at
December 31, 2020 Using
(In Thousands)
Assets & Liabilities
‎Measured at
Quoted Prices
‎in Active
‎Markets for
‎Identical Assets
Significant
‎Other
‎Observable
‎Inputs
Significant
‎Unobservable
‎Inputs
Description
12/31/20
(Level 1)
(Level 2)
(Level 3)
Recurring:
Investment securities available-for-sale:
U.S. government agencies
$
76,433
$
76,433
Residential mortgage-backed agencies
$
22,899
$
22,899
Commercial mortgage-backed agencies
$
33,042
$
33,042
Collateralized mortgage obligations
$
70,637
$
70,637
Obligations of states and political subdivisions
$
10,614
$
10,614
Collateralized debt obligations
$
13,260
$
13,260
Financial derivative
$
(1,320)
$
(1,320)
Non-recurring:
Impaired loans
$
1,465
$
1,465
Other real estate owned
$
$
Fair Value Measurements at
December 31, 2019 Using
(In Thousands)
Assets & Liabilities
‎Measured at
Quoted Prices
‎in Active
‎Markets for
‎Identical Assets
Significant
‎Other
‎Observable
‎Inputs
Significant
‎Unobservable
‎Inputs
Description
12/31/19
(Level 1)
(Level 2)
(Level 3)
Recurring:
Investment securities available-for-sale:
U.S. government agencies
$
39,894
$
39,894
Residential mortgage-backed agencies
$
4,900
$
4,900
Commercial mortgage-backed agencies
$
27,764
$
27,764
Collateralized mortgage obligations
$
29,923
$
29,923
Obligations of states and political subdivisions
$
14,470
$
14,470
Collateralized debt obligations
$
14,354
$
14,354
Financial derivative
$
(133)
$
(133)
Non-recurring:
Impaired loans
$
6,995
$
6,995
Other real estate owned
$
2,571
$
2,571
There were no transfers of assets between any of the levels of the fair value hierarchy for the years ended December 31, 2020 or December 31, 2019.
‎
The following tables show a reconciliation of the beginning and ending balances for fair valued assets measured using Level 3 significant unobservable inputs for the years ended December 31, 2020 and 2019:
Fair Value
‎Measurements Using
‎Significant
Unobservable Inputs
(Level 3)
(In Thousands)
Investment Securities
‎Available for Sale
Beginning balance January 1, 2020
$
14,354
Total gains/(losses) realized/unrealized:
Included in other comprehensive loss
(1,094)
Ending balance December 31, 2020
$
13,260
Fair Value
‎Measurements Using
‎Significant
Unobservable Inputs
(Level 3)
(In Thousands)
Investment Securities
‎Available for Sale
Beginning balance January 1, 2019
$
15,277
Total gains/(losses) realized/unrealized:
Calls/maturities of investments
-
Included in other comprehensive income
(923)
Ending balance December 31, 2019
$
14,354
Gains and losses (realized and unrealized) included in earnings for the periods above are reported in the Consolidated Statement of Income in other operating income.
The fair values disclosed may vary significantly between institutions based on the estimates and assumptions used in the various valuation methodologies. The derived fair values are subjective in nature and involve uncertainties and significant judgment. Therefore, they cannot be determined with precision. Changes in the assumptions could significantly impact the derived estimates of fair value. Disclosure of non-financial assets such as buildings as well as certain financial instruments such as leases is not required. Accordingly, the aggregate fair values presented do not represent the underlying value of the Corporation.
‎
The following table presents fair value information about financial instruments, whether or not recognized in the statement of financial condition, for which it is practicable to estimate that value. The actual carrying amounts and estimated fair values of the Corporation’s financial instruments that are included in the statement of financial condition are as follows:
December 31, 2020
Fair Value Measurements
Carrying
Fair
Quoted Prices
‎in Active
‎Markets for
‎Identical
‎Assets
Significant
‎Other
‎Observable
‎Inputs
Significant
‎Unobservable
‎Inputs
(in thousands)
Amount
Value
(Level 1)
(Level 2)
(Level 3)
Financial Assets:
Cash and due from banks
$
146,673
$
146,673
$
146,673
Interest bearing deposits in banks
2,759
2,759
2,759
Investment securities - AFS
226,885
226,885
$
213,625
$
13,260
Investment securities - HTM
68,263
77,612
49,442
28,170
Restricted bank stock
4,468
4,468
4,468
Loans, net
1,149,596
1,150,186
1,150,186
Accrued interest receivable
6,241
6,241
6,241
Financial Liabilities:
Deposits - non-maturity
1,194,140
1,194,140
1,194,140
Deposits - time deposits
228,226
231,241
231,241
Financial derivative
1,320
1,320
1,320
Short-term borrowed funds
49,160
49,160
49,160
Long-term borrowed funds
100,929
104,825
104,825
Accrued interest payable
Off balance sheet financial instruments
-
-
-
December 31, 2019
Fair Value Measurements
Carrying
Fair
Quoted Prices
‎in Active
‎Markets for
‎Identical
‎Assets
Significant
‎Other
‎Observable
‎Inputs
Significant
‎Unobservable
‎Inputs
(In thousands)
Amount
Value
(Level 1)
(Level 2)
(Level 3)
Financial Assets:
Cash and due from banks
$
48,512
$
48,512
$
48,512
Interest bearing deposits in banks
1,467
1,467
1,467
Investment securities - AFS
131,305
131,305
$
116,951
$
14,354
Investment securities - HTM
93,979
100,656
79,084
21,572
Restricted bank stock
4,415
4,415
4,415
Loans, net
1,038,894
1,024,495
1,024,495
Accrued interest receivable
4,116
4,116
4,116
Financial Liabilities:
Deposits - non-maturity
888,141
888,141
888,141
Deposits - time deposits
253,890
256,227
256,227
Financial derivative
Short-term borrowed funds
48,728
48,728
48,728
Long-term borrowed funds
100,929
100,848
100,848
Accrued interest payable
Off balance sheet financial instruments
-
-
-
26. 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. These contracts included a three year $5.0 million contract that matured on June 17, 2019, a five year $5.0 million contract that will mature on March 17, 2021, a seven year $5.0 million contract that will mature on March 17, 2023 and a 10 year $15.0 million contract that will mature on March 17, 2026.
The fair value of the interest rate swap contracts was $(1.3) million and $(0.1) million at December 31, 2020 and 2019, respectively, and was reported in Other Liabilities on the Consolidated Statement of Financial Condition.
For the year ended December 31, 2020, the Corporation recorded a decrease in the value of the derivatives of $1.2 million and the related deferred tax of $0.3 million in accumulated other comprehensive loss to reflect the effective portion of cash flow hedges. ASC Subtopic 815-30 requires this amount to be reclassified to earnings if the hedge becomes ineffective or is terminated. There was no hedge ineffectiveness recorded for the twelve months ending December 31, 2020. The Corporation does not expect any losses relating to these hedges to be reclassified into earnings within the next 12 months.
Interest rate swap agreements are entered into with counterparties that meet established credit standards and the Corporation believes that the credit risk inherent in these contracts is not significant at December 31, 2020.
The table below discloses the impact of derivative financial instruments on the Corporation’s Consolidated Financial Statements for the years ended December 31, 2020 and December 31, 2019.
Derivative in Cash Flow Hedging Relationships
(In thousands)
Amount of gain (loss) recognized in OCI on derivative (effective portion)
Amount of gain or (loss) reclassified from accumulated OCI into income (effective portion) (1)
Amount of gain or (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing) (2)
Interest rate contracts:
December 31, 2020
$
(869)
$
-
$
-
December 31, 2019
$
(858)
$
-
$
-
Notes:
(1)Reported as interest expense
(2)Reported as other income
27. Revenue Recognition
Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. Topic 606 is applicable to noninterest revenue streams such as wealth management, including trust and brokerage services, service charges on deposit accounts, interchange fee income - debit card income and gains/losses on OREO sales. Noninterest revenue streams in-scope of Topic 606 are discussed below.
Wealth Management
Trust and asset management income is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Corporation’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. The Corporation’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered.
Service Charges on Deposit Accounts
Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, and other deposit account related fees. The Corporation’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Corporation’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.
Interchange Fees - Debit and Credit Card Income
Fees, exchange, and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Corporation’s debit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a
Corporation cardholder uses a non-Corporation ATM or a non-Corporation cardholder uses a Corporation ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Corporation’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.
The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the years ended December 31, 2020 and 2019.
Year Ended
December 31,
(in thousands)
Noninterest income
In-scope of Topic 660:
Service charges
$
1,929
$
2,192
Trust department
7,446
7,148
Debit card income
2,902
2,706
Brokerage commissions
1,004
Noninterest income (in-scope of Topic 660)
13,281
12,965
Noninterest income (out-of-scope of Topic 660)
2,508
3,484
Total Noninterest Income
$
15,789
$
16,449
28. Assets and Liabilities Subject to Enforceable Master Netting Arrangements
Interest Rate Swap Agreements (“Swap Agreements”)
The Corporation has entered into interest rate swap agreements to modify the re-pricing characteristics of certain interest-bearing liabilities as a part of managing interest rate risk. The swap agreements have been designated as cash flow hedges, and accordingly, the fair value of the interest rate swap contracts is reported in Other Liabilities on the Consolidated Statement of Financial Condition. The swap agreements were entered into with a third party financial institution. The Corporation is party to master netting arrangements with its financial institution counterparty; however the Corporation does not offset assets and liabilities under these arrangements for financial statement presentation purposes. The master netting arrangements provide for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract. Collateral, in the form of cash, is posted by the Corporation as the counterparty with net liability positions in accordance with contract thresholds. See Note 26 to the Consolidated Financial Statements for more information.
Securities Sold Under Agreements to Repurchase
The Bank enters into agreements under which it sells interests in U.S. securities to certain customers subject to an obligation to repurchase, and on the part of the customers to resell, such interests. Under these repurchase arrangements, the Bank may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Bank to repurchase the assets. As a result, these repurchase agreements are accounted for as collateralized financing arrangements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is reflected as a liability in the consolidated statement of condition, while the securities underlying the repurchase agreements remain in the respective investment securities asset accounts. There is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities. In addition, as the Bank does not enter into reverse repurchase agreements, there is no such offsetting to be done with the repurchase agreements. The right of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral would be used to settle the fair value of the repurchase agreement should the Bank fail to repurchase the U.S. securities on the maturity date of the agreement. The investment security collateral is held by a third party financial institution in the counterparty’s custodial account.
The following table presents the liabilities subject to an enforceable master netting arrangement or repurchase agreements at December 31, 2020 and December 31, 2019.
Gross Amounts Not Offset in
‎the Statement of Condition
(In thousands)
Gross Amounts
‎of Recognized
‎(Assets)/
‎Liabilities
Gross Amounts
‎Offset in the
‎Statement of
‎Condition
Net Amounts of
‎(Assets)/Liabilities
‎Presented in the
‎Statement of
‎Condition
Financial
‎Instruments
Cash
‎Collateral
‎Pledged
Net
‎Amount
December 31, 2020
Interest Rate Swap Agreements
$
1,320
$
-
$
1,320
$
(1,320)
$
-
$
-
Repurchase Agreements
$
49,160
$
-
$
49,160
$
(49,160)
$
-
$
-
December 31, 2019
Interest Rate Swap Agreements
$
$
-
$
$
(133)
$
-
$
-
Repurchase Agreements
$
48,728
$
-
$
48,728
$
(48,728)
$
-
$
-
‎
29. Parent Company Only Financial Information
Condensed Statement of Financial Condition
December 31,
(In thousands)
Assets
Cash
$
$
Investment securities- Available for Sale (at fair value)
12,198
13,164
Investment in bank subsidiary
150,895
142,290
Investment in non-bank subsidiaries
Other assets
7,082
5,427
Total Assets
$
171,290
$
162,044
Liabilities and Shareholders' Equity
Accrued interest and other liabilities
$
8,405
$
4,250
Dividends payable
Junior subordinated debt
30,929
30,929
Shareholders' equity
131,046
125,940
Total Liabilities and Shareholders' Equity
$
171,290
$
162,044
Condensed Statement of Income
Year Ended
December 31,
(In thousands)
Income:
Dividend income from bank subsidiary
$
7,328
$
3,141
Interest income on investments
Other income
Total other income
1,047
Total Income
7,992
4,188
Expenses:
Interest expense
1,354
1,418
Other expenses
3,607
Total Expenses
4,961
1,694
Income before income taxes and equity in undistributed net income of subsidiaries
3,031
2,494
Applicable income tax benefit
Net income before equity in undistributed net income of subsidiaries
4,013
2,624
Equity in undistributed net income of subsidiaries:
Bank
9,828
10,505
Net Income
$
13,841
$
13,129
Condensed Statement of Comprehensive Income
Year Ended
December 31,
Components of Comprehensive Income (in thousands)
Net Income
$
13,841
$
13,129
Unrealized losses on AFS Securities, net of tax
(3,330)
(685)
Unrealized losses on cash flow hedges, net of tax
(869)
(858)
Other comprehensive loss, net of tax
(4,199)
(1,543)
Comprehensive income
$
9,642
$
11,586
Condensed Statement of Cash Flows
Year Ended
December 31,
(In thousands)
Operating Activities
Net Income
$
13,841
$
13,129
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed net income of subsidiaries
(9,828)
(10,505)
Increase in other assets
(1,490)
(478)
Increase in accrued interest payable and other liabilities
3,286
Stock compensation
Net cash provided by operating activities
6,154
2,953
Financing Activities
Proceeds from issuance of common stock
Repurchase of common stock
(2,754)
-
Cash dividends on common stock
(3,646)
(3,125)
Net cash used in financing activities
(6,202)
(2,955)
Decrease in cash and cash equivalents
(48)
(2)
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$
$
Accumulated Other Comprehensive Income
Components of Other Comprehensive Loss (in thousands)
Before Tax
‎Amount
Tax (Expense)
‎Benefit
Net
For the year ended December 31, 2020
Available for Sale Securities:
Unrealized holding losses
$
(4,548)
$
1,218
$
(3,330)
Cash flow hedges:
Unrealized holding losses
(1,187)
(869)
Other comprehensive loss
$
(5,735)
$
1,536
$
(4,199)
For the year ended December 31, 2019
Available for Sale Securities:
Unrealized holding losses
$
(936)
$
$
(685)
Cash flow hedges:
Unrealized holding losses
(1,172)
(858)
Other comprehensive loss
$
(2,108)
$
$
(1,543)
‎

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
The Corporation maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Corporation’s reports filed under the Exchange Act with the SEC, such as this annual report, is recorded, processed, summarized and reported within the time periods specified in those rules and forms, and that such information is accumulated and communicated to the Corporation’s management, including the principal executive officer (“PEO”) and the principal financial officer (“PFO”), as appropriate, to allow for timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
An evaluation of the effectiveness of these disclosure controls and procedures as of December 31, 2020 was carried out under the supervision and with the participation of the Corporation’s management, including the PEO and the PFO. Based on that evaluation, the Corporation’s management, including the PEO and the PFO, has concluded that the Corporation’s disclosure controls and procedures are, in fact, effective at the reasonable assurance level.
As required by Section 404 of the Sarbanes-Oxley Act of 2002, management has performed an evaluation and testing of the Corporation’s internal control over financial reporting as of December 31, 2020. Management’s report on the Corporation’s internal control over financial reporting is included on the following page.
‎
Management’s Report on Internal Control Over Financial Reporting
The Board of Directors and Shareholders
First United Corporation
First United Corporation’s management is responsible for establishing and maintaining adequate internal control over financial reporting. This internal control system was designed to provide reasonable assurance to management and the Board of Directors as to the reliability of First United Corporation’s financial reporting and the preparation and presentation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States, as well as to safeguard assets from unauthorized use or disposition.
An internal control system, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation and may not prevent or detect misstatements in the financial statements or the unauthorized use or disposition of First United Corporation’s assets. Also, projections of any evaluation of effectiveness of internal controls to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies and procedures may deteriorate.
Management assessed the effectiveness of First United Corporation’s internal control over financial reporting as of December 31, 2020, based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control--Integrated Framework (2013 Framework). Based on this assessment and on the foregoing criteria, management has concluded that, as of December 31, 2020, First United Corporation’s internal control over financial reporting is effective.
Dated: March 25, 2021
/s/ Carissa L. Rodeheaver
/s/ Tonya K. Sturm
Carissa L. Rodeheaver, CPA, CFP
Tonya K. Sturm
Chairman of the Board, President
Senior Vice President and
And Chief Executive Officer
Chief Financial Officer
(Principal Executive Officer)
(Principal Financial Officer)
‎

---

ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
None.
PART III

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The Corporation has adopted a Code of Ethics applicable to its principal executive officer, principal financial officer, principal accounting officer, or controller, or persons performing similar functions, a Code of Ethics applicable to all employees, and a Code of Ethics applicable to members of the Board of Directors. Copies of these Codes of Ethics are available free of charge upon request to Mr. Jason B. Rush, Senior Vice President and Chief Operating Officer, First United Corporation, c/o First United Bank & Trust, 19 S. Second Street, Oakland, MD 21550. Copies are also available on the Corporation’s website at www.mybank.com in the “Governance Documents” tab under “Investor Relations”.
All other information required by this item is incorporated herein by reference to the following sections of the Corporation’s definitive Proxy Statement for the 2021 Annual Meeting of Shareholders to be filed with the SEC pursuant to Regulation 14A (the “2021 Proxy Statement”):
Election of Directors (Proposal 1);
Continuing Directors;
Qualifications of Director Nominees and Current Directors;
Executive Officers;
Delinquent Section 16(a) Reports; and
Corporate Governance and Other Matters (under Committees of the Board - Audit Committee).

---

ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the sections of the 2021 Proxy Statement entitled “Director Compensation” and “Executive Compensation”.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
At the 2018 Annual Meeting of Shareholders, the Corporation’s shareholders approved the First United Corporation 2018 Equity Compensation Plan (the “Equity Plan”), which authorizes the grant of stock options, stock appreciation rights, stock awards, dividend equivalents, and other stock-based awards. Subject to the anti-dilution provisions of the Equity Plan, the maximum number of shares for which awards may be granted to any one participant in any calendar year is 20,000 shares, without regard to whether an award is paid in cash or shares. The following table contains information as of December 31, 2020 regarding securities that are authorized for issuance under the Equity Plan:
Number of securities to be issued upon exercise of outstanding options, warrants, and rights
Weighted-average exercise price of outstanding options, warrants, and rights
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Plan Category
(a)
(b)
(c)
Equity compensation plans approved by security holders
-
N/A
248,059
(1)
Equity compensation plans not approved by security holders
-
N/A
N/A
Total
-
N/A
248,059
Notes:
(1)As of December 31, 2020, no options, warrants, or rights have been granted under the Equity Plan. Unexercised equity awards outstanding as of December 31, 2020 consist of time vesting and performance vesting restricted stock units (“RSUs”). The amounts shown in column (c) assume that outstanding performance vesting RSUs will vest based on the achievement of the maximum performance levels applicable thereto.
All other information required by this item is incorporated herein by reference to the section of the 2021 Proxy Statement entitled “Beneficial Ownership of Common Stock by Principal Shareholders and Management”.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by reference to the sections of the 2019 Proxy Statement entitled “Certain Relationships and Related Transactions” and “Corporate Governance and Other Matters” (under “Director Independence”).

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated herein by reference to the section of the 2021 Proxy Statement entitled “Audit Fees and Services”.
‎
PART IV

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1), (2) and (c) Financial Statements.
Report of Independent Registered Public Accounting Firm
Consolidated Statement of Financial Condition as of December 31, 2020 and 2019
Consolidated Statement of Income for the years ended December 31, 2020 and 2019
Consolidated Statement of Comprehensive Income for the years ended December 31, 2020 and 2019
Consolidated Statement of Changes in Shareholders’ Equity for the years ended December 31, 2020 and 2019
Consolidated Statement of Cash Flows for the years ended December 31, 2020 and 2019
Notes to Consolidated Financial Statements for the years ended December 31, 2020 and 2019
(a)(3) and (b) Exhibits.
The exhibits filed or furnished with this annual report are listed in the following Exhibit Index.
Exhibit
Description
3.1(i)
Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to First United Corporation’s Quarterly Report on Form 10-Q for the period ended June 30, 1998)
3.2(i)
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2(i) to First United Corporation’s Annual Report on Form 10-K for the year ended December 31, 2007)
3.2(ii)
First Amendment to Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2(ii) to First United Corporation’s Annual Report on Form 10-K for the year ended December 31, 2007)
3.2(iii)
Second Amendment to Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to First United Corporation’s Current Report on Form 8-K filed on February 9, 2009)
3.2(iv)
Third Amendment to Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to First United Corporation’s Current Report on Form 8-K filed on March 27, 2020, Film No. 20752016)
4.1
Letter Agreement, including the related Securities Purchase Agreement - Standard Terms, dated January 30, 2009 by and between First United Corporation and the U.S. Department of Treasury (incorporated by reference to Exhibit 10.1 to First United Corporation’s Form 8-K filed on February 2, 2009)
4.2
Certificate of Notice, including the Certificate of Designations incorporated therein, relating to the Fixed Rate Cumulative Perpetual Preferred Stock, Series A (incorporated by reference Exhibit 4.1 to First United Corporation’s Form 8-K filed on February 2, 2009)
4.3
Sample Stock Certificate for Series A Preferred Stock for the Series A Preferred Stock (incorporated by reference Exhibit 4.3 to First United Corporation’s Form 8-K filed on February 2, 2009)
10.1
First United Bank & Trust Amended and Restated Defined Benefit Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.1 to First United Corporation’s Current Report on Form 8-K filed on February 1, 2019)
10.2
Form of Amended and Restated Participation Agreement under the Defined Benefit Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.2 to First United Corporation’s Current Report on Form 8-K filed on February 1, 2019)
10.3
Form of Endorsement Split Dollar Agreement between the Bank and each of William B. Grant, Robert W. Kurtz, Jeannette R. Fitzwater, Phillip D. Frantz, Eugene D. Helbig, Jr., Steven M. Lantz, Robin M. Murray, Carissa L. Rodeheaver, and Frederick A. Thayer, IV (incorporated by reference to Exhibit 10.3 to First United Corporation’s Quarterly Report on Form 10-Q for the period ended September 30, 2003)
10.4
Amended and Restated First United Corporation Executive and Director Deferred Compensation Plan (incorporated by reference to Exhibit 10.1 to First United Corporation’s Current Report on Form 8-K filed on November 24, 2008)
10.5
Form of Amended and Restated First United Corporation Defined Contribution SERP Agreement (incorporated by reference to Exhibit 10.5 to First United Corporation’s annual report on Form 10-K for the year ended December 31, 2019)
10.6
Amended and Restated First United Corporation Change in Control Severance Plan (incorporated by reference to Exhibit 10.5 to First United Corporation’s Current Report on Form 8-K filed on June 23, 2008)
10.7
Amended and Restated Agreement Under the First United Corporation Change in Control Severance Plan, dated as of January 8, 2021 (incorporated by reference to Exhibit 10.1 to First United Corporation’s Current Report on Form 8-K filed on January 8, 2021)
10.8
First United Corporation 2019 Equity Compensation Plan (incorporated by reference to Exhibit 10.1 to First United Corporation’s Current Report on Form 8-K filed on May 21, 2019)
10.9
First United Corporation Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to First United Corporation’s Current Report on Form 8-K filed on March 16, 2020)
10.10
First United Corporation Short-Term Incentive Plan (incorporated by reference to Exhibit 10.2 to First United Corporation’s Current Report on Form 8-K filed on March 16, 2020)
10.11
Form of Restricted Stock Unit Award Agreement (Performance-Vesting) (incorporated by reference to Exhibit 10.1 to First United Corporation’s Current Report on Form 8-K filed on March 27, 2020, Film No. 20747391)
10.12
Form of Restricted Stock Unit Award Agreement (Time-Vesting) (incorporated by reference to Exhibit 10.2 to First United Corporation’s Current Report on Form 8-K filed on March 27, 2020, Film No. 20747391)
Subsidiaries (filed herewith)
23.1
Consent of Baker Tilly US, LLP, Independent Registered Public Accounting Firm (filed herewith)
31.1
Certifications of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith)
31.2
Certifications of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith)
32.1
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act (furnished herewith)
101.INS
XBRL Instance Document (filed herewith)
101.SCH
XBRL Taxonomy Extension Schema (filed herewith)
101.CAL
XBRL Taxonomy Extension Calculation Linkbase (filed herewith)
101.DEF
XBRL Taxonomy Extension Definition Linkbase (filed herewith)
101.LAB
XBRL Taxonomy Extension Label Linkbase (filed herewith)
101.PRE
XBRL Taxonomy Extension Presentation Linkbase (filed herewith)
The cover page of First United Corporation’s Annual Report on Form 10K for the year ended December 31, 2020, formatted in Inline XBRL, included within the Exhibit 101 attachments (filed herewith).
‎