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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For quarterly period ended March 31, 2021

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

For the transition period from _______________ to ________________

Commission file number 0-14237

First United Corporation

(Exact name of registrant as specified in its charter)

Maryland |  | 52-1380770
(State or other jurisdiction of ‎incorporation or organization) |  | (I. R. S. Employer Identification No.)
19 South Second Street, Oakland, Maryland |  | 21550-0009
(Address of principal executive offices) |  | (Zip Code)

(800) 470-4356

(Registrant's telephone number, including area code)

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

Title of each class | Trading Symbols | Name of each exchange on which registered
Common Stock | FUNC | Nasdaq Stock Market

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

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

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

Large Accelerated filer £ | Accelerated Filer £
Non-Accelerated filer R | Smaller Reporting Company R
Emerging Growth Company £ |

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 6,598,617 shares of common stock, par value $.01 per share, as of April 30, 2021.

INDEX TO QUARTERLY REPORT

FIRST UNITED CORPORATION

|  | Page
PART I. FINANCIAL INFORMATION | 3
Item 1. | Financial Statements (unaudited) | 3
| Consolidated Statement of Financial Condition – March 31, 2021 and December 31, 20 20 | 3
| Consolidated Statement of Operations – for the three months ended March 31, 2021 and 2020 | 4
| Consolidated Statement of Comprehensive Loss – for the three months ended March 31, 2021 and 20 20 | 5
| Consolidated Statement of Changes in Shareholders’ Equity – for three months ended March 31, 2021 and 20 20 | 6
| Consolidated Statement of Cash Flows – for the three months ended March 31, 2021 and 2020 | 8
| Notes to Consolidated Financial Statements | 9
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 34
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 54
Item 4. | Controls and Procedures | 54
PART II. OTHER INFORMATION | 55
Item 1. | Legal Proceedings | 55
Item 1A. | Risk Factors | 55
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 55
Item 3. | Defaults upon Senior Securities | 55
Item 4. | Mine Safety Disclosures | 55
Item 5. | Other Information | 55
Item 6. | Exhibits | 56
SIGNATURES | 57

‎

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

First United Corporation and Subsidiaries

Consolidated Statement of Financial Condition

(In thousands, except share data)

|  | March 31, ‎2021 |  | December 31, ‎2020
|  | (Unaudited) |  |  |
Assets |  |  |  |  |  |
Cash and due from banks |  | $ | 189,744 |  | $ | 146,673
Interest bearing deposits in banks |  |  | 3,273 |  |  | 2,759
Cash and cash equivalents |  |  | 193,017 |  |  | 149,432
Investment securities – available for sale (at fair value) |  |  | 204,006 |  |  | 226,885
Investment securities – held to maturity (fair value $77,571 at March 31, 2021 and $77,612 at December 31, 2020) |  |  | 69,357 |  |  | 68,263
Restricted investment in bank stock, at cost |  |  | 3,654 |  |  | 4,468
Loans held for sale |  |  | 1,430 |  |  | 3,546
Loans |  |  | 1,199,325 |  |  | 1,167,812
Unearned fees |  |  | (3,330) |  |  | (1,730)
Allowance for loan losses |  |  | (16,554) |  |  | (16,486)
Net loans |  |  | 1,179,441 |  |  | 1,149,596
Premises and equipment, net |  |  | 36,279 |  |  | 36,863
Goodwill |  |  | 11,004 |  |  | 11,004
Bank owned life insurance |  |  | 44,260 |  |  | 43,974
Deferred tax assets |  |  | 9,580 |  |  | 7,972
Other real estate owned, net |  |  | 7,533 |  |  | 9,386
Operating lease asset |  |  | 2,495 |  |  | 2,408
Accrued interest receivable and other assets |  |  | 19,777 |  |  | 19,617
Total Assets |  | $ | 1,781,833 |  | $ | 1,733,414
Liabilities and Shareholders’ Equity |  |  |  |  |  |
Liabilities: |  |  |  |  |  |
Non-interest bearing deposits |  | $ | 485,311 |  | $ | 420,427
Interest bearing deposits |  |  | 982,952 |  |  | 1,001,939
Total deposits |  |  | 1,468,263 |  |  | 1,422,366
Short-term borrowings |  |  | 51,454 |  |  | 49,160
Long-term borrowings |  |  | 100,929 |  |  | 100,929
Operating lease liability |  |  | 3,035 |  |  | 2,958
Accrued interest payable and other liabilities |  |  | 27,914 |  |  | 26,044
Dividends payable |  |  | 1,049 |  |  | 910
Total Liabilities |  |  | 1,652,644 |  |  | 1,602,367
Shareholders’ Equity: |  |  |  |  |  |
Common Stock – par value $0.01 per share; ‎ Authorized 25,000,000 shares; issued and outstanding ‎6,998,617 shares at March 31, 2021 and 6,992,911 at December 31, 2020 |  |  | 70 |  |  | 70
Surplus |  |  | 30,245 |  |  | 30,149
Retained earnings |  |  | 132,072 |  |  | 129,691
Accumulated other comprehensive loss |  |  | (33,198) |  |  | (28,863)
Total Shareholders’ Equity |  |  | 129,189 |  |  | 131,047
Total Liabilities and Shareholders’ Equity |  | $ | 1,781,833 |  | $ | 1,733,414

See accompanying notes to the consolidated financial statements

‎

3

First United Corporation and Subsidiaries

Consolidated Statement of Operations

(In thousands, except per share data)

|  | Three Months Ended
|  | March 31,
|  | 2021 |  | 2020
|  | (Unaudited)
Interest income |  |  |  |  |  |
Interest and fees on loans |  | $ | 12,732 |  | $ | 12,839
Interest on investment securities |  |  |  |  |  |
Taxable |  |  | 990 |  |  | 1,308
Exempt from federal income tax |  |  | 275 |  |  | 260
Total investment income |  |  | 1,265 |  |  | 1,568
Other |  |  | 65 |  |  | 209
Total interest income |  |  | 14,062 |  |  | 14,616
Interest expense |  |  |  |  |  |
Interest on deposits |  |  | 1,146 |  |  | 1,870
Interest on short-term borrowings |  |  | 24 |  |  | 28
Interest on long-term borrowings |  |  | 656 |  |  | 831
Total interest expense |  |  | 1,826 |  |  | 2,729
Net interest income |  |  | 12,236 |  |  | 11,887
Provision for loan losses |  |  | 110 |  |  | 2,654
Net interest income after provision for loan losses |  |  | 12,126 |  |  | 9,233
Other operating income |  |  |  |  |  |
Net gains |  |  | 588 |  |  | 41
Other Income |  |  |  |  |  |
Service charges on deposit accounts |  |  | 405 |  |  | 615
Other service charges |  |  | 211 |  |  | 290
Trust department |  |  | 2,241 |  |  | 1,753
Debit card income |  |  | 810 |  |  | 634
Bank owned life insurance |  |  | 286 |  |  | 303
Brokerage commissions |  |  | 268 |  |  | 277
Other |  |  | 521 |  |  | 136
Total other income |  |  | 4,742 |  |  | 4,008
Total other operating income |  |  | 5,330 |  |  | 4,049
Other operating expenses |  |  |  |  |  |
Salaries and employee benefits |  |  | 4,988 |  |  | 5,923
FDIC premiums |  |  | 183 |  |  | 43
Equipment |  |  | 851 |  |  | 926
Occupancy |  |  | 725 |  |  | 747
Data processing |  |  | 726 |  |  | 1,052
Marketing |  |  | 146 |  |  | 130
Professional services |  |  | 1,170 |  |  | 723
Contract labor |  |  | 148 |  |  | 151
Line rentals |  |  | 215 |  |  | 217
Other real estate owned |  |  | (412) |  |  | —
Investor relations |  |  | 124 |  |  | 93
Settlement expense |  |  | 3,300 |  |  | —
Other |  |  | 763 |  |  | 1,000
Total other operating expenses |  |  | 12,927 |  |  | 11,005
Income before income tax expense |  |  | 4,529 |  |  | 2,277
Provision for income tax expense |  |  | 1,099 |  |  | 522
Net Income |  | $ | 3,430 |  | $ | 1,755
Basic net income per share |  | $ | 0.49 |  | $ | 0.25
Diluted net income per share |  | $ | 0.49 |  | $ | 0.25
Weighted average number of basic shares outstanding |  |  | 6,996 |  |  | 7,063
Weighted average number of diluted shares outstanding |  |  | 7,000 |  |  | 7,071
Dividends declared per common share |  | $ | 0.15 |  | $ | 0.13

See accompanying notes to the consolidated financial statements

4

First United Corporation and Subsidiaries

Consolidated Statement of Comprehensive Loss

(In thousands)

|  | Three Months Ended
|  | March 31,
|  | 2021 |  | 2020
Comprehensive Loss |  | (Unaudited)
Net Income |  | $ | 3,430 |  | $ | 1,755
Other comprehensive loss, net of tax and reclassification adjustments: |  |  |  |  |  |
Net unrealized gains/(losses) on investments with OTTI |  |  | 229 |  |  | (1,225)
Net unrealized (losses)/gains on all other AFS securities |  |  | (5,202) |  |  | 1,384
Net unrealized gains on HTM securities |  |  | 45 |  |  | 53
Net unrealized gains/(losses) on cash flow hedges |  |  | 405 |  |  | (963)
Net unrealized gains/(losses) on pension |  |  | 133 |  |  | (4,915)
Net unrealized gains on SERP |  |  | 55 |  |  | 34
Other comprehensive loss, net of tax |  |  | (4,335) |  |  | (5,632)
Comprehensive loss |  | $ | (905) |  | $ | (3,877)

See accompanying notes to the consolidated financial statements

‎

5

First United Corporation and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity

(In thousands, except per share data)

|  | Common ‎Stock |  | Surplus |  | Retained ‎Earnings |  | Accumulated ‎Other ‎Comprehensive ‎Loss |  | Total ‎Shareholders' ‎Equity
Balance at January 1, 2021 |  | $ | 70 |  | $ | 30,149 |  | $ | 129,691 |  | $ | (28,863) |  | $ | 131,047
Net income |  |  |  |  |  |  |  |  | 3,430 |  |  |  |  |  | 3,430
Other comprehensive loss |  |  |  |  |  |  |  |  |  |  |  | (4,335) |  |  | (4,335)
Stock based compensation |  |  |  |  |  | 50 |  |  |  |  |  |  |  |  | 50
Common stock issued - 2,956 shares |  |  |  |  |  | 46 |  |  |  |  |  |  |  |  | 46
Common stock dividend declared - ‎$0.15 per share |  |  |  |  |  |  |  |  | (1,049) |  |  |  |  |  | (1,049)
Balance at March 31, 2021 |  | $ | 70 |  | $ | 30,245 |  | $ | 132,072 |  | $ | (33,198) |  | $ | 129,189

See accompanying notes to the consolidated financial statements

‎

6

First United Corporation and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity

(In thousands, except per share data)

|  | Common ‎Stock |  | Surplus |  | Retained ‎Earnings |  | Accumulated ‎Other ‎Comprehensive ‎Loss |  | Total ‎Shareholders' ‎Equity
Balance at January 1, 2020 |  | $ | 71 |  | $ | 32,359 |  | $ | 119,481 |  | $ | (25,971) |  | $ | 125,940
Net income |  |  |  |  |  |  |  |  | 1,755 |  |  |  |  |  | 1,755
Other comprehensive loss |  |  |  |  |  |  |  |  |  |  |  | (5,632) |  |  | (5,632)
Stock based compensation |  |  |  |  |  | 98 |  |  |  |  |  |  |  |  | 98
Common stock issued - 2,167 shares |  |  |  |  |  | 52 |  |  |  |  |  |  |  |  | 52
Stock repurchase - 145,291 shares |  |  | (1) |  |  | (2,753) |  |  |  |  |  |  |  |  | (2,754)
Common stock dividend declared - ‎$0.13 per share |  |  |  |  |  |  |  |  | (910) |  |  |  |  |  | (910)
Balance at March 31, 2020 |  | $ | 70 |  | $ | 29,756 |  | $ | 120,326 |  | $ | (31,603) |  | $ | 118,549

See accompanying notes to the consolidated financial statements

‎

7

First United Corporation and Subsidiaries

Consolidated Statement of Cash Flows

(In thousands)

|  | Three Months Ended
|  | March 31,
|  | 2021 |  | 2020
|  | (Unaudited)
Operating activities |  |  |  |  |  |
Net income |  | $ | 3,430 |  | $ | 1,755
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |  |  |  |
Provision for loan losses |  |  | 110 |  |  | 2,654
Depreciation |  |  | 819 |  |  | 813
Stock based compensation |  |  | 50 |  |  | 98
Gains on sales of other real estate owned |  |  | (491) |  |  | (10)
Write-downs of other real estate owned |  |  | 4 |  |  | 26
Originations of loans held for sale |  |  | (12,702) |  |  | (8,476)
Proceeds from sale of loans held for sale |  |  | 15,406 |  |  | 8,539
Gains from sale of loans held for sale |  |  | (588) |  |  | (59)
Losses on disposal of fixed assets |  |  | — |  |  | 18
Net amortization of investment securities discounts and premiums- AFS |  |  | 317 |  |  | 4
Net amortization of investment securities discounts and premiums- HTM |  |  | 61 |  |  | 45
Earnings on Bank owned life insurance |  |  | (286) |  |  | (303)
Amortization of deferred loan fees |  |  | (776) |  |  | (318)
Amortization of operating lease asset |  |  | (87) |  |  | 71
Decrease/(increase) in accrued interest receivable and other assets |  |  | 947 |  |  | (6,956)
Deferred tax expense |  |  | (209) |  |  | 1
Operating lease liability |  |  | 77 |  |  | (75)
Increase in accrued interest payable and other liabilities |  |  | 1,811 |  |  | 5,842
Net cash provided by operating activities |  |  | 7,893 |  |  | 3,669
Investing activities |  |  |  |  |  |
Proceeds from maturities/calls of investment securities - AFS |  |  | 20,793 |  |  | 18,089
Proceeds from maturities/calls of investment securities - HTM |  |  | 5,176 |  |  | 2,535
Purchases of investment securities - AFS |  |  | (5,010) |  |  | (17,421)
Purchases of investment securities - HTM |  |  | (6,332) |  |  | —
Proceeds from sales of other real estate owned |  |  | 2,339 |  |  | 92
Net decrease/(increase) in restricted stock |  |  | 814 |  |  | (53)
Net increase in loans |  |  | (29,180) |  |  | (1,525)
Purchases of premises and equipment |  |  | (235) |  |  | (783)
Net cash (used in)/provided by investing activities |  |  | (11,635) |  |  | 934
Financing activities |  |  |  |  |  |
Net increase in deposits |  |  | 45,897 |  |  | 30,363
Issuance of common stock |  |  | 46 |  |  | 52
Cash dividends on common stock |  |  | (910) |  |  | (925)
Net increase/(decrease) in short-term borrowings |  |  | 2,294 |  |  | (9,310)
Stock repurchase |  |  | — |  |  | (2,754)
Net cash provided by financing activities |  |  | 47,327 |  |  | 17,426
Increase in cash and cash equivalents |  |  | 43,585 |  |  | 22,029
Cash and cash equivalents at beginning of the year |  |  | 149,432 |  |  | 49,979
Cash and cash equivalents at end of period |  | $ | 193,017 |  | $ | 72,008
Supplemental information |  |  |  |  |  |
Interest paid |  | $ | 2,581 |  | $ | 2,723
Taxes paid |  | $ | 88 |  | $ | 74
Non-cash investing activities: |  |  |  |  |  |
Transfers from loans to other real estate owned |  | $ | — |  | $ | 21

See accompanying notes to the consolidated financial statements

8

FIRST UNITED CORPORATION

NoteS to Consolidated Financial Statements (UNAUDITED)

Note 1 – Basis of Presentation

The accompanying unaudited consolidated financial statements of First United Corporation and its consolidated subsidiaries, including First United Bank & Trust (the “Bank”), have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, as required by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 270, Interim Reporting, and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all the information and footnotes required for annual financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation, consisting of normal recurring items, have been included. Certain prior period balances have been reclassified to conform to the current period presentation. Operating results for the three month period ended March 31, 2021 are not necessarily indicative of the results that may be expected for the full year or for any future interim period. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in First United Corporation’s Annual Report on Form 10-K for the year ended December 31, 2020.

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

The Corporation has evaluated events and transactions occurring subsequent to the statement of financial condition date of March 31, 2021 for items that should potentially be recognized or disclosed in these financial statements.

Note 2 – Subsequent Event

On April 16, 2021, First United Corporation entered into a Cooperation and Settlement Agreement (the “Cooperation Agreement”) with Driver Opportunity Partners I LP (“Driver Partners”) and certain of its affiliates (collectively, “Driver”) pursuant to which, among other things: (a) the Corporation agreed to voluntarily dismiss with prejudice its declaratory relief action against Driver, originally filed in the Circuit Court for Garrett Country, Maryland and then pending before the United States District Court for the District of Maryland (the “District Court”) and captioned First United Corp. v. Driver Opportunity Partners I LP, et al., No. 1:20-cv-2592-RDB; (b) Driver Partners agreed to voluntarily dismiss with prejudice (1) its lawsuit filed in the District Court captioned Driver Opportunity Partners I LP v. First United Corp., et al., No. 1:20-cv-2575 RDB and (2) its lawsuit in the District Court captioned Driver Opportunity Partners I, LP v. First United Corp., et al., No. 1:21-cv-0788 RDB; (c) Driver agreed to a general release of claims with respect to the Corporation and its affiliates and representatives; and (d) the Corporation agreed to pay to Driver, in settlement of the litigation instituted by Driver Partners and in exchange for the general release of claims given by the Driver Parties, the sum of $3,300,000 (the “Settlement Amount”). The Corporation recorded the Settlement Amount, or approximately $2.5 million net of taxes, in the first quarter of 2021. The Corporation was notified by one of its insurance carriers that the carrier intends to contribute $404,173 toward the Settlement Payment and the Corporation’s legal expenses incurred in connection with these matters. This contribution was also recorded in the first quarter of 2021 as non-interest income. The Corporation is pursuing additional amounts from its insurance carriers that it believes are due under its insurance policies, although no assurance can be given that the Corporation will recover any of such amounts.

Also, on April 16, 2021 (the “Effective Date”), First United Corporation (the “Corporation”) entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Driver Opportunity Partners I LP (“Driver Partners”) under which, pursuant to the Corporation’s stock repurchase program authorized by the Corporation’s Board of Directors on January 27, 2021, the Corporation agreed to repurchase from Driver Partners 360,737 shares of the common stock, par value $0.01 per share, of the Corporation at a purchase price of $18.00 per share.

Note 3 – COVID-19

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 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 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.

9

Congress, the President, and the Board of Governors of the Federal Reserve System (the “Federal Reserve”) have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), a $2 trillion legislative package, was signed into law at the end of March 2020. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. Section 4013 of the CARES Act, “Temporary Relief from Troubled Debt Restructurings,” provides banks the option to temporarily suspend certain requirements under U.S. GAAP related to trouble debt restructurings (TDR) for a limited period of time to account for the effects of COVID-19. Additionally, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act was enacted on December 27, 2020, providing for a second round of PPP loans (“PPP-2”). Also, the Consolidated Appropriations Act (CAA) passed on December 27, 2020. Section 541 of the CAA extends the provisions in Section 4013 of the CARES Act to January 1, 2022. The Federal Reserve also took actions to mitigate the economic impact of the COVID-19 pandemic, including cutting the federal funds rate 150 basis points and targeting a 0 to 25 basis point rate. In addition to the general impact of the COVID-19 pandemic, certain provisions of the CARES Act as well as other legislative and regulatory relief efforts are expected to have a material impact on the Company’s operations.

The Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the Economic Aid Act) amended the PPP by extending the authority of the SBA to guarantee loans and the ability of PPP lenders to disburse PPP loans until March 31, 2021. The PPP Extension Act of 2021, which was enacted on March 30, 2021, extends the PPP application deadline to May 31, 2021 and provides the SBA additional time to process applications through June 30, 2021.”

During the first quarter of 2021, we continued to assist our business customers with the Paycheck Protection Program (“PPP”) loan forgiveness process, as well as originating additional PPP loans. We continued to be diligent in protecting our associates and customers from the effects of the pandemic, delaying opening our lobbies until the first of April, as we allowed time for more of our communities to be vaccinated. Most of our sales and support employees continued to work remotely as we continue to monitor our market areas, maintaining travel protocols and utilizing safety precautions while continuing to provide full banking services to our customers.

Paycheck Protection Program

The Company continues to actively participate in the SBA’s PPP program. On January 19, 2021, the Small Business Administration (the “SBA”) implemented an additional PPP loan program. The Company originated $59.8 million in loans during the first quarter of 2021 related to this new program, consisting of 675 loans with an average loan size of $89 thousand. An additional 149 loans, totaling $5.3 million, were funded through April 24, 2021.

During the second and third quarters of 2020, a total of $148.5 million in PPP loans were originated under the initial program, consisting of 1,174 loans with an average loan size of $162 thousand, with $34.5 million, or 290 loans, forgiven in 2020, resulting in a remaining balance at December 31, 2020 of $114.0 million. During the first quarter of 2021, a total of 389 loans, with an aggregate principal balance of $28.7 million, were forgiven, resulting in a remaining balance of $85.3 million at March 31, 2021. An additional 136 loans, with an aggregate principal balance of $15.6 million, were forgiven through April 24, 2021. Of the 1,174 loans originated in 2020, 815 have been forgiven totaling $78.8 million through April 24, 2021, representing 69.4% of the number of 2020 loans originated and 53.1% of 2020 originated principal balances.

COVID Modifications

While the COVID-19 pandemic has had an impact on most industries, some have been more affected than others. In accordance with Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act and related regulatory pronouncements, we have not accounted for modifications of loans affected by the pandemic as troubled debt restructurings (“TDRs”) nor have we designated them as past due or nonaccrual.

As of April 24, 2021, there were 12 loans totaling $5.7 million in total loan modifications, comprised of five commercial loans totaling $5.0 million; three mortgage loans totaling $0.5 million; and four consumer loans totaling $0.2 million. Two commercial loans in the hospitality sector represent the majority of the commercial loan modifications.

Note 4 – Earnings Per Common Share

Basic earnings per common share is derived by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period and does not include the effect of any potentially dilutive common stock equivalents. Diluted earnings per share is derived by dividing net income available to common shareholders by the weighted-average number of shares outstanding, adjusted for the dilutive effect of outstanding common stock equivalents, such as restricted stock units (“RSUs”). At March 31, 2021, there were RSUs relating to 3,380 time-vested shares of common stock outstanding. There were no anti-dilutive shares at March 31, 2021 or March 31, 2020 respectively..

10

The following tables set forth the calculation of basic and diluted earnings per common share for the three month periods ended March 31, 2021 and 2020:

|  | Three months ended March 31,
|  | 2021 |  | 2020
|  |  |  |  | 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 |  | $ | 3,430 |  | 6,996 |  | $ | 0.49 |  | $ | 1,755 |  | 7,063 |  | $ | 0.25
Diluted Earnings Per Share: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net income |  | $ | 3,430 |  | 7,000 |  | $ | 0.49 |  | $ | 1,755 |  | 7,071 |  | $ | 0.25

Note 5 – Investments

The following table shows a comparison of amortized cost and fair values of investment securities at March 31, 2021 and December 31, 2020:

(in thousands) |  | Amortized ‎Cost |  | Gross ‎Unrealized ‎Gains |  | Gross ‎Unrealized ‎Losses |  | Fair ‎Value |  | OTTI ‎in AOCL
March 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Available for Sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government agencies |  | $ | 63,646 |  | $ | 545 |  | $ | 3,155 |  | $ | 61,036 |  | $ | —
Residential mortgage-backed agencies |  |  | 22,606 |  |  | — |  |  | 784 |  |  | 21,822 |  |  | —
Commercial mortgage-backed agencies |  |  | 33,257 |  |  | 274 |  |  | 774 |  |  | 32,757 |  |  | —
Collateralized mortgage obligations |  |  | 66,866 |  |  | 217 |  |  | 2,184 |  |  | 64,899 |  |  | —
Obligations of states and political subdivisions |  |  | 9,433 |  |  | 410 |  |  | — |  |  | 9,843 |  |  | —
Collateralized debt obligations |  |  | 18,556 |  |  | — |  |  | 4,907 |  |  | 13,649 |  |  | (3,526)
Total available for sale |  | $ | 214,364 |  | $ | 1,446 |  | $ | 11,804 |  | $ | 204,006 |  | $ | (3,526)
Held to Maturity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed agencies |  | $ | 38,470 |  | $ | 1,057 |  | $ | 463 |  | $ | 39,064 |  | $ | —
Commercial mortgage-backed agencies |  |  | 9,795 |  |  | 433 |  |  | — |  |  | 10,228 |  |  | —
Collateralized mortgage obligations |  |  | 490 |  |  | 8 |  |  | — |  |  | 498 |  |  | —
Obligations of states and political subdivisions |  |  | 20,602 |  |  | 7,179 |  |  | — |  |  | 27,781 |  |  | —
Total held to maturity |  | $ | 69,357 |  | $ | 8,677 |  | $ | 463 |  | $ | 77,571 |  | $ | —
December 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Available for Sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government agencies |  | $ | 75,856 |  | $ | 899 |  | $ | 322 |  | $ | 76,433 |  | $ | —
Residential mortgage-backed agencies |  |  | 22,999 |  |  | — |  |  | 100 |  |  | 22,899 |  |  | —
Commercial mortgage-backed agencies |  |  | 32,549 |  |  | 529 |  |  | 36 |  |  | 33,042 |  |  | —
Collateralized mortgage obligations |  |  | 70,372 |  |  | 266 |  |  | 1 |  |  | 70,637 |  |  | —
Obligations of states and political subdivisions |  |  | 10,144 |  |  | 470 |  |  | — |  |  | 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 |  | $ | 38 |  | $ | 35,732 |  | $ | —
Commercial mortgage-backed agencies |  |  | 11,716 |  |  | 587 |  |  | — |  |  | 12,303 |  |  | —
Collateralized mortgage obligations |  |  | 1,348 |  |  | 58 |  |  | — |  |  | 1,406 |  |  | —
Obligations of states and political subdivisions |  |  | 20,602 |  |  | 7,569 |  |  | — |  |  | 28,171 |  |  | —
Total held to maturity |  | $ | 68,263 |  | $ | 9,387 |  | $ | 38 |  | $ | 77,612 |  | $ | —

11

The following table shows the Corporation’s investment securities with gross unrealized losses and fair values at March 31, 2021 and December 31, 2020, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position:

|  | Less than 12 months |  |  |  | 12 months or more |  |
(in thousands) |  | Fair ‎Value |  | Unrealized ‎Losses |  | Number of ‎Investments |  | Fair ‎Value |  | Unrealized ‎Losses |  | Number of ‎Investments
March 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Available for Sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government agencies |  | $ | 36,765 |  | $ | 3,155 |  | 7 |  | $ | — |  | $ | — |  | —
Residential mortgage-backed agencies |  |  | 21,822 |  |  | 784 |  | 2 |  |  | — |  |  | — |  | —
Commercial mortgage-backed agencies |  |  | 25,632 |  |  | 774 |  | 3 |  |  | — |  |  | — |  | —
Collateralized mortgage obligations |  |  | 55,737 |  |  | 2,184 |  | 6 |  |  | — |  |  | — |  | —
Collateralized debt obligations |  |  | — |  |  | — |  | — |  |  | 13,649 |  |  | 4,907 |  | 9
Total available for sale |  | $ | 139,956 |  | $ | 6,897 |  | 18 |  | $ | 13,649 |  | $ | 4,907 |  | 9
Held to Maturity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed agencies |  |  | 8,849 |  |  | 463 |  | 3 |  |  | — |  |  | — |  | —
Total held to maturity |  | $ | 8,849 |  | $ | 463 |  | 3 |  | $ | — |  | $ | — |  | —
December 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Available for Sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government agencies |  | $ | 39,611 |  | $ | 322 |  | 7 |  | $ | — |  | $ | — |  | —
Residential mortgage-backed agencies |  |  | 22,899 |  |  | 100 |  | 2 |  |  | — |  |  | — |  | —
Commercial mortgage-backed agencies |  |  | 16,034 |  |  | 36 |  | 1 |  |  | — |  |  | — |  | —
Collateralized mortgage obligations |  |  | 39,628 |  |  | 1 |  | 4 |  |  | — |  |  | — |  | —
Collateralized debt obligations |  |  | — |  |  | — |  | — |  |  | 13,260 |  |  | 5,284 |  | 9
Total available for sale |  | $ | 118,172 |  | $ | 459 |  | 14 |  | $ | 13,260 |  | $ | 5,284 |  | 9
Held to Maturity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed agencies |  | $ | 2,973 |  | $ | 38 |  | 1 |  | $ | — |  | $ | — |  | —
Total held to maturity |  | $ | 2,973 |  | $ | 38 |  | 1 |  | $ | — |  | $ | — |  | —

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 (a) the Corporation has the intent to sell a security being evaluated and (b) it is more likely than not that the Corporation will be required to sell the security prior to the anticipated recovery of any decline in fair value. If neither applies, then any decline in the fair value below the security’s cost that is considered an other-than-temporary decline is split into two components. The first component 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 (1) the length of time and the extent to which the fair value has been less than cost, (2) adverse conditions specifically related to the security, an industry, or a geographic area, (3) the historic and implied volatility of the fair value of the security, (4) changes in the rating of the security by a rating agency, (5) recoveries or additional declines in fair value subsequent to the balance sheet date, (6) failure of the issuer of the security to make scheduled interest or principal payments, and (7) 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 the Corporation’s consolidated financial statements. Management utilizes an independent third party to prepare both the impairment valuations and fair value determinations for the Corporation’s collateralized debt obligation (“CDO”) portfolio consisting of pooled trust preferred securities. See Note 9 for a discussion of the methodology used by management to determine the fair values of these securities. Based upon a review of credit quality and the cash flow tests performed by the independent third party, management determined that there were no securities that had credit-related OTTI charges during the first three months of 2021 or 2020.

The Corporation believes that the investment securities that were in an unrealized loss position at March 31, 2021 do not represent other-than-temporary impairment. The Corporation does not intend to sell, nor is it anticipated that the Corporation will be required to sell, any of its impaired investment securities at a loss.

12

The following tables present a cumulative roll-forward of the amount of non-cash OTTI charges related to credit losses that have been recognized in earnings for the trust preferred securities held in the CDO portfolio during the three month periods ended March 31, 2021 and 2020 that the Corporation does not intend to sell:

|  | Three Months Ended
|  | March 31,
(in thousands) |  | 2021 |  | 2020
Balance of credit-related OTTI at January 1 |  | $ | 2,244 |  | $ | 2,446
Reduction for increases in cash flows expected to be collected |  |  | (50) |  |  | (50)
Balance of credit-related OTTI at March 31 |  | $ | 2,194 |  | $ | 2,396

The amortized cost and estimated fair value of securities by contractual maturity at March 31, 2021 are shown in the following table. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

|  | March 31, 2021
(in thousands) |  | Amortized ‎Cost |  | Fair ‎Value
Contractual Maturity |  |  |  |  |  |
Available for Sale: |  |  |  |  |  |
Due after one year through five years |  | $ | 4,418 |  | $ | 4,517
Due after five years through ten years |  |  | 20,052 |  |  | 20,613
Due after ten years |  |  | 67,165 |  |  | 59,398
|  |  | 91,635 |  |  | 84,528
Residential mortgage-backed agencies |  |  | 22,606 |  |  | 21,822
Commercial mortgage-backed agencies |  |  | 33,257 |  |  | 32,757
Collateralized mortgage obligations |  |  | 66,866 |  |  | 64,899
Total available for sale |  | $ | 214,364 |  | $ | 204,006
Held to Maturity: |  |  |  |  |  |
Due after ten years |  | $ | 20,602 |  | $ | 27,781
Residential mortgage-backed agencies |  |  | 38,470 |  |  | 39,064
Commercial mortgage-backed agencies |  |  | 9,795 |  |  | 10,228
Collateralized mortgage obligations |  |  | 490 |  |  | 498
Total held to maturity |  | $ | 69,357 |  | $ | 77,571

Note 6 – Loans and Related Allowance for Loan Losses

The following table summarizes the primary segments of the loan portfolio at March 31, 2021 and December 31, 2020:

(in thousands) |  | Commercial ‎Real Estate |  | Acquisition ‎and ‎Development |  | Commercial ‎and ‎Industrial |  | Residential ‎Mortgage |  | Consumer |  | Total
March 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | 7,846 |  | $ | 874 |  | $ | — |  | $ | 3,200 |  | $ | 23 |  | $ | 11,943
Collectively evaluated for impairment |  |  | 357,885 |  |  | 122,751 |  |  | 299,178 |  |  | 371,127 |  |  | 36,441 |  |  | 1,187,382
Total loans |  | $ | 365,731 |  | $ | 123,625 |  | $ | 299,178 |  | $ | 374,327 |  | $ | 36,464 |  | $ | 1,199,325
December 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | 3,330 |  | $ | 842 |  | $ | — |  | $ | 3,185 |  | $ | 102 |  | $ | 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

The commercial and industrial portfolio in the table above includes $145.2 million and $114.0 million of PPP loans, at March 31, 2021 and December 31, 2020, respectively, which are 100% guaranteed by the SBA, and no allowance for loan loss (“ALL”) has been assigned to them.

13

The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention and Substandard within the internal risk rating system at March 31, 2021 and December 31, 2020:

(in thousands) |  | Pass |  | Special ‎Mention |  | Substandard |  | Total
March 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |
Non owner-occupied |  | $ | 179,153 |  | $ | 5,489 |  | $ | 6,383 |  | $ | 191,025
All other CRE |  |  | 164,725 |  |  | 3,778 |  |  | 6,203 |  |  | 174,706
Acquisition and development |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential construction |  |  | 18,480 |  |  | — |  |  | — |  |  | 18,480
All other A&D |  |  | 104,721 |  |  | 16 |  |  | 408 |  |  | 105,145
Commercial and industrial |  |  | 278,581 |  |  | 8,639 |  |  | 11,958 |  |  | 299,178
Residential mortgage |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage - term |  |  | 306,749 |  |  | 147 |  |  | 5,826 |  |  | 312,722
Residential mortgage - home equity |  |  | 60,817 |  |  | — |  |  | 788 |  |  | 61,605
Consumer |  |  | 36,333 |  |  | — |  |  | 131 |  |  | 36,464
Total |  | $ | 1,149,559 |  | $ | 18,069 |  | $ | 31,697 |  | $ | 1,199,325
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 |  |  | 17 |  |  | 376 |  |  | 98,041
Commercial and industrial |  |  | 245,185 |  |  | 8,867 |  |  | 12,693 |  |  | 266,745
Residential mortgage |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage - term |  |  | 309,177 |  |  | 283 |  |  | 6,117 |  |  | 315,577
Residential mortgage - home equity |  |  | 62,804 |  |  | — |  |  | 789 |  |  | 63,593
Consumer |  |  | 35,648 |  |  | 3 |  |  | 109 |  |  | 35,760
Total |  | $ | 1,114,556 |  | $ | 20,360 |  | $ | 32,896 |  | $ | 1,167,812

‎

14

The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and non-accrual loans at March 31, 2021 and December 31, 2020:

(in thousands) |  | Current |  | 30-59 Days ‎Past Due |  | 60-89 Days ‎Past Due |  | 90 Days+ ‎Past Due |  | Total Past ‎Due and ‎Accruing |  | Non- ‎Accrual |  | Total Loans
March 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Non owner-occupied |  | $ | 186,443 |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | 4,582 |  | $ | 191,025
All other CRE |  |  | 173,535 |  |  | 305 |  |  | — |  |  | — |  |  | 305 |  |  | 866 |  |  | 174,706
Acquisition and development |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential construction |  |  | 18,480 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 18,480
All other A&D |  |  | 104,732 |  |  | — |  |  | 5 |  |  | — |  |  | 5 |  |  | 408 |  |  | 105,145
Commercial and industrial |  |  | 299,131 |  |  | 47 |  |  | — |  |  | — |  |  | 47 |  |  | — |  |  | 299,178
Residential mortgage |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage - term |  |  | 310,248 |  |  | 938 |  |  | — |  |  | 2 |  |  | 940 |  |  | 1,534 |  |  | 312,722
Residential mortgage - home equity |  |  | 60,766 |  |  | 361 |  |  | — |  |  | — |  |  | 361 |  |  | 478 |  |  | 61,605
Consumer |  |  | 36,267 |  |  | 126 |  |  | 44 |  |  | 4 |  |  | 174 |  |  | 23 |  |  | 36,464
Total |  | $ | 1,189,602 |  | $ | 1,777 |  | $ | 49 |  | $ | 6 |  | $ | 1,832 |  | $ | 7,891 |  | $ | 1,199,325
December 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Non owner-occupied |  | $ | 190,510 |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | 8 |  | $ | 190,518
All other CRE |  |  | 177,360 |  |  | 408 |  |  | — |  |  | — |  |  | 408 |  |  | 890 |  |  | 178,658
Acquisition and development |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential construction |  |  | 18,920 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 18,920
All other A&D |  |  | 97,660 |  |  | 5 |  |  | — |  |  | 10 |  |  | 15 |  |  | 366 |  |  | 98,041
Commercial and industrial |  |  | 266,708 |  |  | 37 |  |  | — |  |  | — |  |  | 37 |  |  | — |  |  | 266,745
Residential mortgage |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage - term |  |  | 312,500 |  |  | 63 |  |  | 670 |  |  | 710 |  |  | 1,443 |  |  | 1,634 |  |  | 315,577
Residential mortgage - home equity |  |  | 63,036 |  |  | 80 |  |  | 63 |  |  | — |  |  | 143 |  |  | 414 |  |  | 63,593
Consumer |  |  | 35,473 |  |  | 230 |  |  | 26 |  |  | 4 |  |  | 260 |  |  | 27 |  |  | 35,760
Total |  | $ | 1,162,167 |  | $ | 823 |  | $ | 759 |  | $ | 724 |  | $ | 2,306 |  | $ | 3,339 |  | $ | 1,167,812

The current status of commercial and industrial loans includes $145.2 million and $114.0 million of PPP loans, at March 31, 2021 and December 31, 2020, respectively.

Non-accrual loans totaled $7.9 million at March 31, 2021 compared to $3.3 million at December 31, 2020. The increase in non-accrual balances at March 31, 2021 was due to the movement of two hospitality loans totaling approximately $4.0 million in the first quarter of 2021. These loans suffered reduced cash flows due to the impact of the pandemic, have received modifications and were classified as substandard at December 31, 2020.

Non-accrual loans that have been subject to partial charge-offs totaled $0.4 million at March 31, 2021 and $0.2 million at December 31, 2020. Loans secured by 1-4 family residential real estate properties in the process of foreclosure were $0.4 million at March 31, 2021 and December 31, 2020. Foreclosure and repossession activities were temporarily suspended as a result of COVID-19. As a percentage of the loan portfolio, accruing loans past due 30 days or more decreased to 0.15%, including PPP loans, or 0.17% excluding PPP loans, compared to 0.67% at March 31, 2020.

15

The following table summarizes the primary segments of the ALL at March 31, 2021 and December 31, 2020, segregated by the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment:

(in thousands) |  | Commercial ‎Real Estate |  | Acquisition ‎and ‎Development |  | Commercial ‎and ‎Industrial |  | Residential ‎Mortgage |  | Consumer |  | Unallocated |  | Total
March 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated ‎for impairment |  | $ | 33 |  | $ | 2 |  | $ | — |  | $ | 17 |  | $ | — |  | $ | — |  | $ | 52
Collectively evaluated ‎for impairment |  | $ | 5,371 |  | $ | 2,421 |  | $ | 2,831 |  | $ | 5,011 |  | $ | 368 |  | $ | 500 |  | $ | 16,502
Total ALL |  | $ | 5,404 |  | $ | 2,423 |  | $ | 2,831 |  | $ | 5,028 |  | $ | 368 |  | $ | 500 |  | $ | 16,554
December 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated ‎for impairment |  | $ | 4 |  | $ | 13 |  | $ | — |  | $ | 40 |  | $ | — |  | $ | — |  | $ | 57
Collectively evaluated ‎for impairment |  | $ | 5,539 |  | $ | 2,326 |  | $ | 2,584 |  | $ | 5,110 |  | $ | 370 |  | $ | 500 |  | $ | 16,429
Total ALL |  | $ | 5,543 |  | $ | 2,339 |  | $ | 2,584 |  | $ | 5,150 |  | $ | 370 |  | $ | 500 |  | $ | 16,486

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.

‎

16

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not required at March 31, 2021 and December 31, 2020:

|  | Impaired Loans with ‎Specific Allowance |  | Impaired ‎Loans with ‎No Specific ‎Allowance |  | Total Impaired Loans
(in thousands) |  | Recorded ‎Investment |  | Related ‎Allowances |  | Recorded ‎Investment |  | Recorded ‎Investment (1) |  | Unpaid ‎Principal ‎Balance
March 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Non owner-occupied |  | $ | 1,867 |  | $ | 33 |  | $ | 2,826 |  | $ | 4,693 |  | $ | 4,693
All other CRE |  |  | — |  |  | — |  |  | 3,153 |  |  | 3,153 |  |  | 3,153
Acquisition and development |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential construction |  |  | — |  |  | — |  |  | 259 |  |  | 259 |  |  | 259
All other A&D |  |  | 207 |  |  | 2 |  |  | 408 |  |  | 615 |  |  | 1,825
Commercial and industrial |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 2,214
Residential mortgage |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage – term |  |  | 491 |  |  | 17 |  |  | 2,231 |  |  | 2,722 |  |  | 2,904
Residential mortgage – home equity |  |  | — |  |  | — |  |  | 478 |  |  | 478 |  |  | 510
Consumer |  |  | — |  |  | — |  |  | 23 |  |  | 23 |  |  | 48
Total impaired loans |  | $ | 2,565 |  | $ | 52 |  | $ | 9,378 |  | $ | 11,943 |  | $ | 15,606
December 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Non owner-occupied |  | $ | 111 |  | $ | 4 |  | $ | 8 |  | $ | 119 |  | $ | 119
All other CRE |  |  | — |  |  | — |  |  | 3,211 |  |  | 3,211 |  |  | 3,211
Acquisition and development |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential construction |  |  | — |  |  | — |  |  | 266 |  |  | 266 |  |  | 266
All other A&D |  |  | 276 |  |  | 13 |  |  | 300 |  |  | 576 |  |  | 1,724
Commercial and industrial |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 2,214
Residential mortgage |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage – term |  |  | 936 |  |  | 34 |  |  | 1,910 |  |  | 2,846 |  |  | 3,031
Residential mortgage – home equity |  |  | 76 |  |  | 6 |  |  | 339 |  |  | 415 |  |  | 447
Consumer |  |  | — |  |  | — |  |  | 26 |  |  | 26 |  |  | 51
Total impaired loans |  | $ | 1,399 |  | $ | 57 |  | $ | 6,060 |  | $ | 7,459 |  | $ | 11,063

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

‎

17

The following tables present the activity in the ALL for the three month periods ended March 31, 2021 and 2020:

(in thousands) |  | Commercial ‎Real Estate |  | Acquisition ‎and ‎Development |  | Commercial ‎and ‎Industrial |  | Residential ‎Mortgage |  | Consumer |  | Unallocated |  | Total
ALL balance at January 1, 2021 |  | $ | 5,543 |  | $ | 2,339 |  | $ | 2,584 |  | $ | 5,150 |  | $ | 370 |  | $ | 500 |  | $ | 16,486
Charge-offs |  |  | — |  |  | (81) |  |  | — |  |  | (82) |  |  | (80) |  |  | — |  |  | (243)
Recoveries |  |  | — |  |  | 101 |  |  | 36 |  |  | 17 |  |  | 47 |  |  | — |  |  | 201
Provision |  |  | (139) |  |  | 64 |  |  | 211 |  |  | (57) |  |  | 31 |  |  | — |  |  | 110
ALL balance at March 31, 2021 |  | $ | 5,404 |  | $ | 2,423 |  | $ | 2,831 |  | $ | 5,028 |  | $ | 368 |  | $ | 500 |  | $ | 16,554
ALL balance at January 1, 2020 |  | $ | 2,882 |  | $ | 3,674 |  | $ | 1,341 |  | $ | 3,828 |  | $ | 312 |  | $ | 500 |  | $ | 12,537
Charge-offs |  |  | — |  |  | (15) |  |  | (101) |  |  | (98) |  |  | (132) |  |  | — |  |  | (346)
Recoveries |  |  | 66 |  |  | 14 |  |  | 15 |  |  | 26 |  |  | 46 |  |  | — |  |  | 167
Provision |  |  | 868 |  |  | 390 |  |  | 427 |  |  | 830 |  |  | 139 |  |  | — |  |  | 2,654
ALL balance at March 31, 2020 |  | $ | 3,816 |  | $ | 4,063 |  | $ | 1,682 |  | $ | 4,586 |  | $ | 365 |  | $ | 500 |  | $ | 15,012

The ALL is based on estimates, and actual losses may vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an 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 by class and related interest income recognized for the periods indicated:

|  | Three months ended |  | Three months ended
|  | March 31, 2021 |  | March 31, 2020
(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 |  | $ | 2,406 |  | $ | 3 |  | $ | — |  | $ | 141 |  | $ | 2 |  | $ | —
All other CRE |  |  | 3,182 |  |  | 35 |  |  | — |  |  | 3,124 |  |  | 37 |  |  | —
Acquisition and development |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential construction |  |  | 263 |  |  | 3 |  |  | — |  |  | 288 |  |  | 3 |  |  | —
All other A&D |  |  | 596 |  |  | 3 |  |  | — |  |  | 8,328 |  |  | 3 |  |  | 1
Commercial and industrial |  |  | — |  |  | — |  |  | — |  |  | 15 |  |  | — |  |  | —
Residential mortgage |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage – term |  |  | 2,784 |  |  | 20 |  |  | 5 |  |  | 2,497 |  |  | 22 |  |  | —
Residential mortgage – home equity |  |  | 446 |  |  | — |  |  | — |  |  | 828 |  |  | — |  |  | —
Consumer |  |  | 25 |  |  | — |  |  | — |  |  | 4 |  |  | — |  |  | —
Total |  | $ | 9,702 |  | $ | 64 |  | $ | 5 |  | $ | 15,225 |  | $ | 67 |  | $ | 1

The Bank modifies loan terms in the normal course of business. Among other reasons, modifications might be made in an effort to retain the loan relationship, to remain competitive in the current interest rate environment and/or to re-amortize or extend the loan’s term to better match the loan’s payment stream with the borrower’s cash flow. 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 obligations 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.

Section 4013 of the CARES Act allows financial institutions to suspend application of certain current TDRs accounting guidance under ASC 310-40 for loan modifications related to the COVID-19 pandemic made between March 1, 2020 and the earlier of January 1, 2022 or 60 days after the end of the COVID-19 national emergency, provided certain criteria are met. This relief can be applied to loan modifications for borrowers that defer or delay the payment of principal or interest, or change the interest rate on the loan and that were not more than 30 days past due as of December 31, 2019. 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., up to nine months) or mandated by a federal or state government in response to the COVID-19 pandemic, the borrower is not experiencing financial difficulty under ASC 310-40. The Corporation continues to prudently work with borrowers negatively impacted by the COVID-19 pandemic while managing credit risks and recognizing appropriate allowance for credit losses on its loan portfolio. See Note 3 to the financial statements included elsewhere in this report for additional information.

18

There were 14 loans totaling $3.9 million and 14 loans totaling $4.0 million that were classified as TDRs at March 31, 2021 and December 31, 2020, respectively.

During the three month periods ended March 31, 2021 and 2020, there were no new TDRs and no modifications on existing TDRs, no r were there any payment defaults under existing TDRs. The Bank had no significant commitments to lend additional funds to TDR borrowers.

Note 7 - Other Real Estate Owned, net

The following table presents the components of other real estate owned (“OREO”) at March 31, 2021 and December 31, 2020:

(in thousands) |  | March 31, ‎2021 |  | December 31, ‎2020
Commercial real estate |  | $ | 945 |  | $ | 945
Acquisition and development |  |  | 6,588 |  |  | 8,441
Residential mortgage |  |  | — |  |  | —
Total OREO, net |  | $ | 7,533 |  | $ | 9,386

The following table presents the activity in the OREO valuation allowance for the three month periods ended March 31, 2021 and 2020:

|  | Three Months Ended
|  | March 31,
(in thousands) |  | 2021 |  | 2020
Balance beginning of period |  | $ | 1,010 |  | $ | 1,790
Fair value write-down |  |  | 4 |  |  | 26
Sales of OREO |  |  | (10) |  |  | (36)
Balance at end of period |  | $ | 1,004 |  | $ | 1,780

The following table presents the components of OREO (income)/expenses, net, for the three month periods ended March 31, 2021 and 2020:

|  | Three Months Ended
|  | March 31,
(in thousands) |  | 2021 |  | 2020
Gains on sale of real estate, net |  | $ | (491) |  | $ | (10)
Fair value write-down, net |  |  | 4 |  |  | 26
Expenses, net |  |  | 123 |  |  | 34
Rental and other income |  |  | (48) |  |  | (50)
Total OREO (income)/expense, net |  | $ | (412) |  | $ | —

Note 8 – Fair Value of Financial Instruments

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.

T he 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.

19

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.

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. T he valuation techniques used by the Corporation to measure, on a recurring basis and on a non-recurring basis, the fair value of assets as of March 31, 2021 are discussed in the paragraphs that follow.

Investments – The fair value of investments is determined using a market approach. As of March 31, 2021, the U.S. Government agencies, residential and commercial mortgage-backed securities, collateralized mortgage obligations, and state and political subdivisions bonds, excluding the tax increment financing (“TIF”) 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 the Corporation has historically transacted both purchases and sales of investment securities. The TIF bonds are classified as Level 3 within the valuation hierarchy as they are not openly traded.

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 March 31, 2021, the Corporation owned nine trust preferred securities with an amortized cost of $18.6 million and a fair value of $13.6 million. At March 31, 2021, the market for these securities is not active and the markets for similar securities are also not active. Recent developments in the credit markets have had an negative impact on the market for CDOs. Specifically, as COVID-19 developed, which led to deteriorating performance of credit instruments, investors became less willing to buy a range of structured credit products. The result was massive spread-widening across a wide range of credit instruments, and for CDO bonds in particular. At present, it is no longer economically feasible to form new CDOs or restructure, as the market for CDO bonds has effectively disappeared. The market values for these securities or any securities other than those issued or guaranteed by the U.S. Department of the Treasury are 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 March 31, 2021, (b) 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 (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 as well as the fair value determinations for its CDO portfolio. Management believes that the valuations are adequately reflected at March 31, 2021.

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.

At March 31, 2021, there has been minimal impact on the trust preferred bonds, although there has been a significant effect on several asset classes in the equity and fixed income markets related to COVID-19. A review of assumptions, as they relate to the impact of COVID-19, will be on-going through the remainder of the year.

20

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 a partial charge-off. 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 is 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.

‎

21

For Level 3 assets and liabilities measured at fair value on a recurring and non-recurring basis as of March 31, 2021 and December 31, 2020, the significant unobservable inputs used in the fair value measurements were as follows:

(in thousands) |  | Fair Value at ‎March 31, ‎2021 |  | Valuation ‎Technique |  | Significant ‎Unobservable ‎Inputs |  | Significant ‎Unobservable ‎Input Value
Recurring: |  |  |  |  |  |  |  |  |
Investment Securities – available for sale |  | $ | 13,649 |  | Discounted ‎Cash Flow |  | Discount Rate |  | LIBOR+ 5.25%
Non-recurring: |  |  |  |  |  |  |  |  |
Impaired Loans |  | $ | 2,470 |  | Market Comparable ‎Properties |  | Marketability ‎Discount |  | 10.0% - 15.0% (1) ‎(weighted avg 10.9%)
Other Real Estate Owned |  | $ | 430 |  | Market Comparable ‎Properties |  | Marketability ‎Discount |  | 15.0%
(in thousands) |  | Fair Value at ‎December 31, ‎2020 |  | Valuation ‎Technique |  | Significant ‎Unobservable ‎Inputs |  | Significant ‎Unobservable ‎Input Value
Recurring: |  |  |  |  |  |  |  |  |
Investment Securities – available for sale |  | $ | 13,260 |  | Discounted ‎Cash Flow |  | Discount ‎Rate |  | LIBOR+ 5.25%
Non-recurring: |  |  |  |  |  |  |  |  |
Impaired Loans |  | $ | 1,465 |  | Market Comparable ‎Properties |  | Marketability ‎Discount |  | 10.0% - 15.0% (1) ‎(weighted avg 12.5%)
Other Real Estate Owned |  | $ | 913 |  | Market Comparable ‎Properties |  | Marketability ‎Discount |  | 15.0%

NOTE:

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

‎

22

For assets measured at fair value on a recurring and non-recurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2021 and December 31, 2020 were as follows:

|  |  |  |  | Fair Value Measurements ‎at March 31, 2021 Using
|  | Assets/(liabilities) ‎Measured at ‎Fair Value |  | Quoted ‎Prices in ‎Active Markets ‎for Identical ‎Assets |  | Significant ‎Other ‎Observable ‎Inputs |  | Significant ‎Unobservable ‎Inputs
(in thousands) |  | 03/31/21 |  | (Level 1) |  | (Level 2) |  | (Level 3)
Recurring: |  |  |  |  |  |  |  |  |  |  |  |
Investment securities available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |
U.S. government agencies |  | $ | 61,036 |  |  |  |  | $ | 61,036 |  |  |
Residential mortgage-backed agencies |  | $ | 21,822 |  |  |  |  | $ | 21,822 |  |  |
Commercial mortgage-backed agencies |  | $ | 32,757 |  |  |  |  | $ | 32,757 |  |  |
Collateralized mortgage obligations |  | $ | 64,899 |  |  |  |  | $ | 64,899 |  |  |
Obligations of states and political subdivisions |  | $ | 9,843 |  |  |  |  | $ | 9,843 |  |  |
Collateralized debt obligations |  | $ | 13,649 |  |  |  |  |  |  |  | $ | 13,649
Financial derivatives |  | $ | (788) |  |  |  |  | $ | (788) |  |  |
Non-recurring: |  |  |  |  |  |  |  |  |  |  |  |
Impaired loans |  | $ | 2,470 |  |  |  |  |  |  |  | $ | 2,470
Other real estate owned |  | $ | 430 |  |  |  |  |  |  |  | $ | 430

|  |  |  |  | Fair Value Measurements ‎at December 31, 2020 Using
|  | Assets/(liabilities) ‎Measured at ‎Fair Value |  | Quoted ‎Prices in ‎Active Markets ‎for Identical ‎Assets |  | Significant ‎Other ‎Observable ‎Inputs |  | Significant ‎Unobservable ‎Inputs
(in thousands) |  | 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 derivatives |  | $ | (1,320) |  |  |  |  | $ | (1,320) |  |  |
Non-recurring: |  |  |  |  |  |  |  |  |  |  |  |
Impaired loans |  | $ | 1,465 |  |  |  |  |  |  |  | $ | 1,465
Other real estate owned |  | $ | 913 |  |  |  |  |  |  |  | $ | 913

There were no transfers of assets between any of the fair value hierarchy for the three month periods ended March 31, 2021 or 2020.

‎

23

The following tables show a reconciliation of the beginning and ending balances for fair valued assets measured on a recurring basis using Level 3 significant unobservable inputs for the three month periods ended March 31, 2021 and 2020:

|  | Fair Value Measurements ‎Using Significant Unobservable Inputs ‎(Level 3)
(in thousands) |  | Investment Securities ‎Available for Sale
Beginning balance January 1, 2021 |  | $ | 13,260
Total losses realized/unrealized: |  |  |
Included in other comprehensive loss |  |  | 389
Ending balance March 31, 2021 |  | $ | 13,649

|  | Fair Value Measurements ‎Using Significant Unobservable Inputs ‎(Level 3)
(in thousands) |  | Investment Securities ‎Available for Sale
Beginning balance January 1, 2020 |  | $ | 14,354
Total losses realized/unrealized: |  |  |
Included in other comprehensive loss |  |  | (1,974)
Ending balance March 31, 2020 |  | $ | 12,380

There were no gains or losses included in earnings attributable to the change in realized/unrealized gains or losses related to the assets for the three month periods ended March 31, 2021 or 2020.

The disclosed fair values may vary significantly between institutions based on the estimates and assumptions used in the various valuation methodologies. The derived fair values are subjective in nature and involve uncertainties and significant judgment. Therefore, they cannot be determined with precision. Changes in the assumptions could significantly impact the derived estimates 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.

‎

24

The following tables present fair value information about financial instruments, whether or not recognized in the Consolidated Statement of Financial Condition, for which it is practicable to estimate that value. The actual carrying amounts and estimated fair values of the Corporation’s financial instruments that are included in the Consolidated Statement of Financial Condition are as follows:

|  | March 31, 2021 |  | 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 |  | $ | 189,744 |  | $ | 189,744 |  | $ | 189,744 |  |  |  |  |  |
Interest bearing deposits in banks |  |  | 3,273 |  |  | 3,273 |  |  | 3,273 |  |  |  |  |  |
Investment securities - AFS |  |  | 204,006 |  |  | 204,006 |  |  |  |  | $ | 190,357 |  | $ | 13,649
Investment securities - HTM |  |  | 69,357 |  |  | 77,612 |  |  |  |  |  | 49,831 |  |  | 27,781
Restricted bank stock |  |  | 3,654 |  |  | 3,654 |  |  |  |  |  | 3,654 |  |  |
Loans, net |  |  | 1,179,441 |  |  | 1,161,197 |  |  |  |  |  |  |  |  | 1,161,197
Accrued interest receivable |  |  | 5,993 |  |  | 5,993 |  |  |  |  |  | 639 |  |  | 5,354
Financial Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits - non-maturity |  |  | 1,242,479 |  |  | 1,242,479 |  |  |  |  |  | 1,242,479 |  |  |
Deposits - time deposits |  |  | 225,784 |  |  | 228,025 |  |  |  |  |  | 228,025 |  |  |
Financial derivatives |  |  | 788 |  |  | 788 |  |  |  |  |  | 788 |  |  |
Short-term borrowed funds |  |  | 51,454 |  |  | 51,454 |  |  |  |  |  | 51,454 |  |  |
Long-term borrowed funds |  |  | 100,929 |  |  | 103,052 |  |  |  |  |  | 103,052 |  |  |
Accrued interest payable |  |  | 364 |  |  | 364 |  |  |  |  |  | 364 |  |  |

|  | 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 |  |  |  |  |  | 814 |  |  | 5,427
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 |  |  | 391 |  |  | 391 |  |  |  |  |  | 391 |  |  |

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25

Note 9 – Accumulated Other Comprehensive Loss

The following table presents the changes in each component of accumulated other comprehensive loss for the 12 months ended December 31, 2020, the three months ended March 31, 2021:

(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, 2020 |  | $ | (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) |  |  | 584 |  |  | — |  |  | 1,049 |  |  | 138 |  |  | 1,160
Balance - December 31, 2020 |  | $ | (3,277) |  | $ | (25) |  | $ | (315) |  | $ | (954) |  | $ | (22,630) |  | $ | (1,662) |  | $ | (28,863)
Other comprehensive ‎ income/(loss) before ‎ reclassifications |  |  | 266 |  |  | (5,202) |  |  | — |  |  | 405 |  |  | (139) |  |  | — |  |  | (4,670)
Amounts reclassified from ‎ accumulated other ‎ comprehensive loss |  |  | (37) |  |  | — |  |  | 45 |  |  | — |  |  | 272 |  |  | 55 |  |  | 335
Balance - March 31, 2021 |  | $ | (3,048) |  | $ | (5,227) |  | $ | (270) |  | $ | (549) |  | $ | (22,497) |  | $ | (1,607) |  | $ | (33,198)

The following tables present the components of other comprehensive income/(loss) for the three month periods ended

March 31, 2021 and 2020:

Components of Other Comprehensive Loss ‎(in thousands) |  | Before ‎Tax ‎Amount |  | Tax ‎(Expense) ‎Benefit |  | Net
For the three months ended March 31, 2021 |  |  |  |  |  |  |  |  |
Available for sale (AFS) securities with OTTI: |  |  |  |  |  |  |  |  |
Unrealized holding gains |  | $ | 363 |  | $ | (97) |  | $ | 266
Less: accretable yield recognized in income |  |  | 50 |  |  | (13) |  |  | 37
Net unrealized gains on investments with OTTI |  |  | 313 |  |  | (84) |  |  | 229
Available for sale securities – all other: |  |  |  |  |  |  |  |  |
Unrealized holding losses |  |  | (7,105) |  |  | 1,903 |  |  | (5,202)
Less: gains recognized in income |  |  | — |  |  | — |  |  | —
Net unrealized losses on all other AFS securities |  |  | (7,105) |  |  | 1,903 |  |  | (5,202)
Held to maturity securities: |  |  |  |  |  |  |  |  |
Less: gains recognized in income |  |  | — |  |  | — |  |  | —
Less: amortization recognized in income |  |  | (61) |  |  | 16 |  |  | (45)
Net unrealized gains on HTM securities |  |  | 61 |  |  | (16) |  |  | 45
Cash flow hedges: |  |  |  |  |  |  |  |  |
Unrealized holding gains |  |  | 532 |  |  | (127) |  |  | 405
Pension Plan: |  |  |  |  |  |  |  |  |
Unrealized net actuarial loss |  |  | (190) |  |  | 51 |  |  | (139)
Less: amortization of unrecognized loss |  |  | (372) |  |  | 100 |  |  | (272)
Net pension plan liability adjustment |  |  | 182 |  |  | (49) |  |  | 133
SERP: |  |  |  |  |  |  |  |  |
Unrealized net actuarial loss |  |  | — |  |  | — |  |  | —
Less: amortization of unrecognized loss |  |  | (75) |  |  | 19 |  |  | (56)
Less: amortization of prior service costs |  |  | 1 |  |  | — |  |  | 1
Net SERP liability adjustment |  |  | 74 |  |  | (19) |  |  | 55
Other comprehensive loss |  | $ | (5,943) |  | $ | 1,608 |  | $ | (4,335)

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26

Components of Other Comprehensive Loss ‎(in thousands) |  | Before ‎Tax ‎Amount |  | Tax ‎(Expense) ‎Benefit |  | Net
For the three months ended March 31, 2020 |  |  |  |  |  |  |  |  |
Available for sale (AFS) securities with OTTI: |  |  |  |  |  |  |  |  |
Unrealized holding losses |  | $ | (1,623) |  | $ | 435 |  | $ | (1,188)
Less: accretable yield recognized in income |  |  | 50 |  |  | (13) |  |  | 37
Net unrealized losses on investments with OTTI |  |  | (1,673) |  |  | 448 |  |  | (1,225)
Available for sale securities – all other: |  |  |  |  |  |  |  |  |
Unrealized holding gains |  |  | 1,890 |  |  | (506) |  |  | 1,384
Less: gains recognized in income |  |  | — |  |  | — |  |  | —
Net unrealized gains on all other AFS securities |  |  | 1,890 |  |  | (506) |  |  | 1,384
Held to maturity securities: |  |  |  |  |  |  |  |  |
Unrealized holding gains |  |  | — |  |  | — |  |  | —
Less: amortization recognized in income |  |  | (72) |  |  | 19 |  |  | (53)
Net unrealized gains on HTM securities |  |  | 72 |  |  | (19) |  |  | 53
Cash flow hedges: |  |  |  |  |  |  |  |  |
Unrealized holding losses |  |  | (1,315) |  |  | 352 |  |  | (963)
Pension Plan: |  |  |  |  |  |  |  |  |
Unrealized net actuarial loss |  |  | (7,070) |  |  | 1,893 |  |  | (5,177)
Less: amortization of unrecognized loss |  |  | (358) |  |  | 96 |  |  | (262)
Net pension plan liability adjustment |  |  | (6,712) |  |  | 1,797 |  |  | (4,915)
SERP: |  |  |  |  |  |  |  |  |
Unrealized net actuarial loss |  |  | — |  |  | — |  |  | —
Less: amortization of unrecognized loss |  |  | (47) |  |  | 12 |  |  | (35)
Less: amortization of prior service costs |  |  | 1 |  |  | — |  |  | 1
Net SERP liability adjustment |  |  | 46 |  |  | (12) |  |  | 34
Other comprehensive loss |  | $ | (7,692) |  | $ | 2,060 |  | $ | (5,632)

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The following table presents the details of amounts reclassified from accumulated other comprehensive loss for the three month periods ended March 31, 2021 and 2020:

Amounts Reclassified from |  | Three Months Ended |  |
Accumulated Other Comprehensive Loss |  | March 31, |  | Affected Line Item in the Statement
(in thousands) |  | 2021 |  | 2020 |  | Where Net Income is Presented
Net unrealized gains on available for sale investment securities with OTTI: |  |  |  |  |  |  |  |
Accretable yield |  |  | 50 |  |  | 50 |  | Interest income on taxable investment securities
Taxes |  |  | (13) |  |  | (13) |  | Provision for income tax expense
|  | $ | 37 |  | $ | 37 |  | Net of tax
Net unrealized losses on held to maturity securities: |  |  |  |  |  |  |  |
Amortization |  | $ | (61) |  | $ | (72) |  | Interest income on taxable investment securities
Gains on calls |  |  | — |  |  | — |  | Net gains
Taxes |  |  | 16 |  |  | 19 |  | Provision for income tax expense
|  | $ | (45) |  | $ | (53) |  | Net of tax
Net pension plan liability adjustment: |  |  |  |  |  |  |  |
Amortization of unrecognized loss |  | $ | (372) |  | $ | (358) |  | Other Expense
Taxes |  |  | 100 |  |  | 96 |  | Provision for income tax expense
|  | $ | (272) |  | $ | (262) |  | Net of tax
Net SERP liability adjustment: |  |  |  |  |  |  |  |
Amortization of unrecognized loss |  | $ | (75) |  | $ | (47) |  | Other Expense
Amortization of prior service costs |  |  | 1 |  |  | 1 |  | Salaries and employee benefits
Taxes |  |  | 19 |  |  | 12 |  | Provision for income tax expense
|  | $ | (55) |  | $ | (34) |  | Net of tax
Total reclassifications for the period |  | $ | (335) |  | $ | (312) |  | Net of tax

Note 10 – Employee Benefit Plans

The following tables present the components of the net periodic pension plan cost for First United Corporation’s noncontributory Defined Benefit Pension Plan (the “Pension Plan”) and the Bank’s Defined Benefit Supplemental Executive Retirement Plan (“Defined Benefit SERP”) for the periods indicated:

Pension Plan |  | Three Months Ended
|  | March 31,
(in thousands) |  | 2021 |  | 2020
Service cost |  | $ | 39 |  | $ | 56
Interest cost |  |  | 356 |  |  | 407
Expected return on assets |  |  | (893) |  |  | (887)
Amortization of net actuarial loss |  |  | 372 |  |  | 358
Net pension credit included in employee benefits ‎ and other expense |  | $ | (126) |  | $ | (66)

Defined Benefit SERP |  | Three Months Ended
|  | March 31,
(in thousands) |  | 2021 |  | 2020
Service cost |  | $ | 35 |  | $ | 31
Interest cost |  |  | 60 |  |  | 67
Amortization of recognized loss |  |  | 75 |  |  | 47
Amortization of prior service cost |  |  | (1) |  |  | (1)
Net Defined Benefit SERP expense included in ‎ employee benefits and other expense |  | $ | 169 |  | $ | 144

The service cost component of net periodic benefit cost is included in salaries and benefits and all other components of net periodic benefit cost are included in other expense in the Consolidated Statement of Operations for the Pension Plan and the Defined Benefit SERP.

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The Pension Plan is a noncontributory defined benefit pension plan that covers our employees who were hired prior to the freeze and others who were grandfathered into the 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 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 their (a) ages, at their closest birthday plus (b) 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 are managed through discretionary contributions to the First United Corporation 401(k) Profit Sharing Plan (the “401(k) Plan”).

The Bank established the Defined Benefit SERP in 2001 as an unfunded supplemental executive retirement plan. 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 Bank Owned Life Insurance (“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 the 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.

The Corporation will assess the need for future annual contributions to the pension plan based upon its funded status and an evaluation of the future benefits to be provided thereunder. No contributions were made to the Pension Plan during the first three months of 2021 and a contribution of $1.0 million was made during the first three months of 2020. The Corporation expects to fund the annual projected benefit payments for the Defined Benefit SERP from operations.

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: (a) Normal Retirement (as defined in the Contribution Agreement); (b) 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); (c) Separation from Service due to a Disability (as defined in the Contribution Agreement); (d) with respect to a particular award of Employer Contribution Credits, the participant’s completion of 2 consecutive Years of Service (as defined in the Contribution Agreement) immediately following the Plan Year for which such award was made; or (e) 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 (1) refraining from engaging in Competitive Employment (as defined in the Contribution Agreement) for three years following his or her Separation from Service, (2) refraining from injurious disclosure of confidential information concerning the Corporation, and (3) 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 (2) 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. In January 2020, the Board of Directors of First United Corporation approved discretionary contributions to four participants totaling $126,058. The Corporation recorded $15,757 and $12,007 of related compensation expense for the first three months of 2021 and 2020, respectively, related to these contributions. In January 2021, the Board of Directors approved discretionary contributions to three participants totaling $101,257. The Corporation recorded $12,657 of related compensation expense for the first quarter of 2021, related to these contributions. Each discretionary contribution has a two year vesting period.

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Note 11 - Equity Compensation Plan Information

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

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

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. In July 2020, a total of 916 fully vested shares of common stock were issued to a new director, which had a grant date fair market value of $11.22 per share. Director stock compensation expense was $70,216 for the three months ended March 31, 2021 and $66,983 for the three months ended March 31, 2020.

Restricted Stock Units

On March 26, 2020, pursuant to the Corporation’s Long Term Incentive Plan (the "LTIP"), which is a sub-plan of the Equity Plan, the Compensation Committee of the Corporation’s Board of Directors (the "Committee") granted RSUs to the Corporation's principal executive officer, its principal financial officer, and certain of its other executive officers. An RSU contemplates the issuance of shares of common stock of the Corporation if and when the RSU vests.

The RSUs granted to each of the foregoing officers consist of (a) a performance vesting award for a three year performance period ending December 31, 2021, (b) a performance vesting award for a three year performance period ending December 31, 2022, and (c) a time-vesting award that will vest ratably over a three year period beginning on March 26, 2021. Target performance levels were set based on the annual budget which supports the Company’s long-term objective of achieving high performance as compared to peers. Threshold performance is the minimum level of acceptable performance as defined by the Committee and maximum performance represented a level potentially achievable under ideal circumstances. Achievement of the threshold performance level would result in each executive participant earning a payout at 50% of his or her respective target award opportunity. Achievement of the target performance level would result in the executive participant earning the target award and achievement at or above the maximum performance level would result in the executive participant earning 150% of the target opportunity. Actual results for any goal that falls between performance levels would be interpolated to calculate a proportionate award. For the performance period ending December 31, 2021, the RSUs' performance goal is based on earnings per share for the year ending December 31, 2021. For the performance period ending December 31, 2022, the RSUs' performance goals are based on earnings per share for the year ending December 31, 2022 and growth in tangible book value per share during the performance period. The threshold, target and maximum performance levels for these grants 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 the Corporation or one of its subsidiaries on the applicable vesting date, except that a grantee whose employment terminates prior to such vesting date due to death, disability or retirement will be entitled to a pro-rated portion of the shares subject to the RSUs, assuming that, in the case of performance-vesting RSUs, the performance goals had been met at their "target" levels.

In the first quarter of 2020, RSUs relating to 19,934 performance vested shares and 5,070 time vested 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. On March 26, 2021, 1,690 of the 5,070 time vested shares were issued to participants. There have not been any new plans granted in 2021. Stock compensation expense was $26,127 for the first three months of 2021 and $31,242 for the three months ended March 31, 2020. Unrecognized compensation expense at March 31, 2021 related to unvested units was $162,427.

Note 12 – Derivative Financial Instruments

As a part of managing interest rate risk, the Bank entered into interest rate swap agreements to modify the re-pricing characteristics of certain interest-bearing liabilities. The Corporation has designated these 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 loss.

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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 September 17, 2019, a five year $5.0 million contract that matured on March 17, 2021, a seven year $5.0 million contract that matures on March 17, 2023 and a 10 year $15.0 million contract that matures on March 17, 2026. As of March 31, 2021, $20.0 million notional amount remains.

The fair value of the interest rate swap contracts was $(788) thousand and $(1.3) million at March 31, 2021 and December 31, 2020, respectively.

For the three months ended March 31, 2021, the Corporation recorded an increase in the value of the derivatives of $532 thousand and the related deferred tax of $127 thousand in net accumulated other comprehensive loss to reflect the effective portion of cash flow hedges. ASC Subtopic 815-30 requires the net accumulated other comprehensive loss to be reclassified to earnings if the hedge becomes ineffective or is terminated. There was no hedge ineffectiveness recorded for the three months ended March 31, 2021. The Corporation does not expect any material losses relating to these hedges to be reclassified into earnings within the next 12 months.

Interest rate swap agreements are entered into with counterparties that meet established credit standards and the Corporation believes that the credit risk inherent in these contracts is not significant as of March 31, 2021.

The table below discloses the impact of derivative financial instruments on the Corporation’s Consolidated Financial Statements for the three month periods ended March 31, 2021 and 2020.

Derivative in Cash Flow Hedging Relationships |  |  |  |  |  |  |  |  |
(in thousands) |  | Amount of gain or (loss) recognized in OCI on derivative (effective portion) |  | Amount of gain or (loss) reclassified from accumulated OCI into income (effective portion) (a) |  | Amount of gain or (loss) recognized in income or derivative (ineffective portion and amount excluded from effectiveness testing) (b)
Interest rate contracts: |  |  |  |  |  |  |  |  |
Three months ended: |  |  |  |  |  |  |  |  |
March 31, 2021 |  | $ | 405 |  | $ | — |  | $ | —
March 31, 2020 |  |  | (963) |  |  | — |  |  | —

Notes:

(a) Reported as interest expense

(b) Reported as other income

Note 13 – 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

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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 three month periods ended March 31, 2021 and March 31, 2020:

|  | Three Months Ended
|  | March 31,
(in thousands) |  | 2021 |  | 2020
Noninterest income |  |  |  |  |  |
In-scope of Topic 606: |  |  |  |  |  |
Service charges on deposit accounts |  | $ | 405 |  | $ | 615
Other service charges |  |  | 211 |  |  | 290
Trust department |  |  | 2,241 |  |  | 1,753
Debit card income |  |  | 810 |  |  | 634
Brokerage commissions |  |  | 268 |  |  | 277
Noninterest income (in-scope of Topic 606) |  |  | 3,935 |  |  | 3,569
Noninterest income (out-of-scope of Topic 606) |  |  | 807 |  |  | 439
Total Noninterest Income |  | $ | 4,742 |  | $ | 4,008

Note 14 – Assets and Liabilities Subject to Enforceable Master Netting Arrangements

Interest Rate 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 Assets or 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 and investment securities, are pledged by the Corporation as the counterparty with net liability positions in accordance with contract thresholds. See Note 12 to the Consolidated Financial Statements for more information.

Securities Sold Under Agreements to Repurchase (“Repurchase Agreements”)

The Bank enters into agreements under which it sells interests in U.S. government agency securities to certain customers subject to an obligation to repurchase, and on the part of the customers to resell, such interests. Under these 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 Financial 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 be in default (i.e. fails to repurchase the U.S. securities on the

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maturity date of the agreement). The investment security collateral, maintained at 102% of the borrowing, is held by a third party financial institution in the counterparty’s custodial account.

The following table presents the assets and liabilities subject to an enforceable master netting arrangement or repurchase agreements at March 31, 2021 and December 31, 2020.

|  |  |  |  |  |  |  |  |  |  | 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
March 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest Rate Swap Agreements |  | $ | 788 |  | $ | — |  | $ | 788 |  | $ | (788) |  | $ | 2,000 |  | $ | —
Repurchase Agreements |  | $ | 51,454 |  | $ | — |  | $ | 51,454 |  | $ | (51,454) |  | $ | — |  | $ | —
December 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest Rate Swap Agreements |  | $ | 1,320 |  | $ | — |  | $ | 1,320 |  | $ | (1,320) |  | $ | — |  | $ | —
Repurchase Agreements |  | $ | 49,160 |  | $ | — |  | $ | 49,160 |  | $ | (49,160) |  | $ | — |  | $ | —

Note 15 – 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.

Management has formed a focus group consisting of multiple members from areas, including credit, finance, loan servicing, reporting, and information systems. The Corporation is completing its data and model validation analyses, with parallel processing of our existing allowance for loan losses model with the CECL model to follow. The Corporation is currently evaluating the provisions of ASU No. 2016-13 to determine the potential impact the new standard will have on the 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, long term debt and interest rate swaps, but believes that its adoption will not have a material impact on the Corporation’s financial condition or results of operations.

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

INTRODUCTION

The following discussion and analysis is intended as a review of material changes in and significant factors affecting the financial condition and results of operations of First United Corporation and its consolidated subsidiaries for the periods indicated. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and the notes thereto contained in Item 1 of Part I of this report, as well as the audited consolidated financial statements and related notes included in First United Corporation’s Annual Report on Form 10-K for the year ended December 31, 2020.

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

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements do not represent historical facts, but are statements about management's beliefs, plans and objectives about the future, as well as its assumptions and judgments concerning such beliefs, plans and objectives. These statements are evidenced by terms such as "anticipate," "estimate," "should," "expect," "believe," "intend," and similar expressions. Although these statements reflect management's good faith beliefs and projections, they are not guarantees of future performance and they may not prove true. The beliefs, plans and objectives on which forward-looking statements are based involve risks and uncertainties that could cause actual results to differ materially from those addressed in the forward-looking statements. For a discussion of these risks and uncertainties, see the section of the periodic reports that First United Corporation files with the Securities and Exchange Commission entitled "Risk Factors", including the risk factor set forth in First United Corporation’s Annual Report on Form 10-K, as amended, for the year ended December 31, 2020 entitled, “The outbreak of the recent coronavirus (‘COVID-19’), or an outbreak of another highly infectious or contagious disease, could adversely affect the Corporation’s business, financial condition and results of operations.” and any updates thereto that might be contained in subsequent reports filed by First United Corporation. The risks and uncertainties associated with the COVID-19 pandemic and its impact on the Corporation will depend on, among other things, the length of time that the pandemic continues; the duration of the potential imposition of further restrictions on travel in the future; the effect of the pandemic on the global, national, and local economies and on the businesses of our borrowers and their ability to make payments on their obligations; the remedial actions and stimulus measures adopted by federal, state, and local governments; and the inability of employees to work due to illness, quarantine, or government mandates.

FIRST UNITED CORPORATION

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

(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. In addition, the Bank owns 99.9% of the limited partnership interests in Liberty Mews Limited Partnership; a Maryland limited partnership formed for the purpose of acquiring, developing and operating low-income housing units in Garrett County, Maryland, and 99.9% of the membership interests in MCC FUBT Fund, LC, an Ohio limited liability company formed for the purpose of acquiring, developing and operating low-income housing units in Allegany County, Maryland.

At March 31, 2021, the Corporation’s total assets were $1.8 billion, net loans were $1.2 billion, and deposits were $1.5 billion. Shareholders’ equity at March 31, 2021 was $129.2 million.

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

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COVID-19

Congress, the President, and the Board of Governors of the Federal Reserve System (the “Federal Reserve”) have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), a $2 trillion legislative package, was signed into law at the end of March 2020. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. Section 4013 of the CARES Act, “Temporary Relief from Troubled Debt Restructurings,” provides banks the option to temporarily suspend certain requirements under U.S. GAAP related to trouble debt restructurings (TDR) for a limited period of time to account for the effects of COVID-19. Additionally, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act was enacted on December 27, 2020, providing for a second round of PPP loans (“PPP-2”). Also, the Consolidated Appropriations Act (CAA) passed on December 27, 2020. Section 541 of the CAA extends the provisions in Section 4013 of the CARES Act to January 1, 2022. The Federal Reserve also took actions to mitigate the economic impact of the COVID-19 pandemic, including cutting the federal funds rate 150 basis points and targeting a 0 to 25 basis point rate. In addition to the general impact of the COVID-19 pandemic, certain provisions of the CARES Act as well as other legislative and regulatory relief efforts are expected to have a material impact on the Company’s operations.

The Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the Economic Aid Act) amended the PPP by extending the authority of the SBA to guarantee loans and the ability of PPP lenders to disburse PPP loans until March 31, 2021. The PPP Extension Act of 2021, which was enacted on March 30, 2021, extends the PPP application deadline to May 31, 2021 and provides the SBA additional time to process applications through June 30, 2021.”

During the first quarter of 2021, we continued to assist our business customers with the Paycheck Protection Program (“PPP”) loan forgiveness process, as well as originating additional PPP loans. We continued to be diligent in protecting our associates and customers from the effects of the pandemic, delaying opening our lobbies until the first of April, as we allowed time for more of our communities to be vaccinated. Most of our sales and support employees continued to work remotely as we continue to monitor our market areas, maintaining travel protocols and utilizing safety precautions while continuing to provide full banking services to our customers.

Paycheck Protection Program

The Company continues to actively participate in the SBA’s PPP program. On January 19, 2021, the Small Business Administration (the “SBA”) implemented an additional PPP loan program. The Company originated $59.8 million in loans during the first quarter of 2021 related to this new program, consisting of 675 loans with an average loan size of $89 thousand. An additional 149 loans, totaling $5.3 million, were funded through April 24, 2021.

During the second and third quarters of 2020, a total of $148.5 million in PPP loans were originated under the initial program, consisting of 1,174 loans with an average loan size of $162 thousand, with $34.5 million, or 290 loans, forgiven in 2020, resulting in a remaining balance at December 31, 2020 of $114.0 million. During the first quarter of 2021, a total of 389 loans, with an aggregate principal balance of $28.7 million, were forgiven, resulting in a remaining balance of $85.3 million at March 31, 2021. An additional 136 loans, with an aggregate principal balance of $15.6 million, were forgiven through April 24, 2021. Of the 1,174 loans originated in 2020, 815 have been forgiven totaling $78.8 million through April 24, 2021, representing 69.4% of the number of 2020 loans originated and 53.1% of 2020 originated principal balances.

COVID Modifications

While the COVID-19 pandemic has had an impact on most industries, some have been more affected than others. In accordance with Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act and related regulatory pronouncements, we have not accounted for modifications of loans affected by the pandemic as troubled debt restructurings (“TDRs”) nor have we designated them as past due or nonaccrual.

As of April 24, 2021, there were 12 loans totaling $5.7 million in total loan modifications, comprised of five commercial loans totaling $5.0 million; three mortgage loans totaling $0.5 million; and four consumer loans totaling $0.2 million. Two commercial loans in the hospitality sector represent the majority of the commercial loan modifications.

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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 March 31, 2021, the Corporation had approximately $130.0 million in unsecured lines of credit with its correspondent banks, $1.0 million with the Federal Reserve Discount Window, and approximately $120.2 million of secured borrowings with the Federal Home Loan Bank of Atlanta (“FHLB”). Additionally, the Corporation has access to the brokered certificates of deposit market.

The Corporation is eligible to access the Federal Reserve Paycheck Protection Program Liquidity Facility (“PPPLF”), a source providing funding using SBA PPP loans as collateral at 100% value if and 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.

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SELECTED FINANCIAL DATA

The following table sets forth certain selected financial data for the three month periods ended March 31, 2021 and 2020 and is qualified in its entirety by the detailed information and unaudited financial statements, including the notes thereto, included elsewhere in this quarterly report.

|  | As of or for the three months ended
|  | March 31,
|  | 2021 |  | 2020
Per Share Data |  |  |  |  |  |
Basic net income per common share (1) - as reported |  | $ | 0.49 |  | $ | 0.25
Basic net income per common share (1) - non-GAAP |  |  | 0.86 |  |  | 0.25
Diluted net income per common share (1) - as reported |  | $ | 0.49 |  | $ | 0.25
Diluted net income per common share (1) - non-GAAP |  |  | 0.86 |  |  | 0.25
Basic book value per common share (1) - as reported |  | $ | 18.46 |  | $ | 17.01
Basic book value per common share (1) - non-GAAP |  |  | 18.82 |  |  | 17.01
Diluted book value per common share (1) - as reported |  | $ | 18.45 |  | $ | 16.95
Diluted book value per common share (1) - non-GAAP |  |  | 18.81 |  |  | 16.95
Significant Ratios: |  |  |  |  |  |
Return on Average Assets (1) - as reported |  |  | 0.79% |  |  | 0.49%
Expenses, net of income tax |  |  | 0.59% |  |  | —
Adjusted Return on Average Assets (1) (non-GAAP) |  |  | 1.38% |  |  | 0.49%
Return on Average Equity (1) - as reported |  |  | 10.58% |  |  | 5.62%
Expenses |  |  | 5.41% |  |  | —
Income tax effect of adjustment |  |  | 2.37% |  |  | —
Adjusted Return on Average Equity (1) (non-GAAP) |  |  | 18.36% |  |  | 5.62%
Average Equity to Average Assets |  |  | 7.45% |  |  | 8.69%
Capital Ratios: |  |  |  |  |  |
Consolidated Total Capital (to risk weighted assets) - as reported |  |  | 16.24% |  |  | 16.08%
Consolidated Total Capital (to risk weighted assets) - (non-GAAP) |  |  | 16.46% |  |  | 16.08%
Consolidated Tier 1 Capital (to risk weighted assets) - as reported |  |  | 14.99% |  |  | 14.83%
Consolidated Tier 1 Capital (to risk weighted assets) - (non-GAAP) |  |  | 15.21% |  |  | 14.83%
Consolidated Common Equity Tier 1 Capital (to risk weighted assets) - as reported |  |  | 12.76% |  |  | 12.61%
Consolidated Common Equity Tier 1 Capital (to risk weighted assets) - (non-GAAP) |  |  | 12.97% |  |  | 12.61%
Consolidated Tier 1 Capital (to average assets) - as reported |  |  | 10.22% |  |  | 10.36%
Consolidated Tier 1 Capital (to average assets) - (non-GAAP) |  |  | 10.37% |  |  | 10.36%
(1) See reconciliation of this non-GAAP financial measure provided elsewhere herein. |  |  |  |  |  |

Note: (a) Annualized

RESULTS OF OPERATIONS

Overview

Consolidated net income was $3.4 million, inclusive of litigation settlement expenses of $3.3 million, for the quarter ended March 31, 2021 compared to $1.8 million for the quarter ended March 31, 2020. Basic and diluted net income per share for the first quarter of 2021 were both $0.49, compared to basic and diluted net income per share of $0.25 for the same period of 2020, a 96.0% increase.

The increase in earnings was primarily due to an increase in net interest income of $0.3 million, an increase in other operating income, including gains, of $1.3 million, and a decrease in provision expense of $2.5 million, partially offset by an increase in other operating expenses of $1.9 million, inclusive of the $3.3 million in litigation settlement expenses. Other operating income, including

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net gains, increased $1.3 million for the quarter ended March 31, 2021 when compared to the quarter ended March 31, 2020. This increase was due to gains on the sale of mortgages to the secondary market. Trust and brokerage income were strong despite market volatility early in 2021. The gain on sale of properties in the OREO portfolio of $0.4 million resulted in a net credit to OREO expenses in the first quarter of 2021. 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 income decreased due to the receipt of death claim benefits in 2020. The net interest margin, on a fully-taxable equivalent (“FTE”) basis, declined for the quarter ended March 31, 2021 to 3.11% compared to 3.69% for the same period of 2020.

The provision for loan losses was $0.1 million for the three month period ended March 31, 2021 and $2.7 million for the three month period ended March 31, 2020. Net charge-offs of $42 thousand were recorded for the first three months of 2021, compared to net charge offs of $0.2 million for first three months of 2020. The higher provision expense recorded in 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. The ratio of the ALL to loans outstanding, including PPP loan balances, was 1.38% at March 31, 2021 compared to 1.42% at March 31, 2020 and 1.41% at December 31, 2020. The ratio of ALL to loans outstanding, on a non-GAAP basis, excluding PPP loan balances of $145.2 million, was 1.57% at March 31, 2021.

Net interest income, on a non-GAAP, FTE basis, increased $0.4 million (3.0%) during the quarter ended March 31, 2021 when compared with the quarter ended March 31, 2020, driven by a $0.9 million (33.1%) decrease in interest expense, partially offset by a decrease in interest income of $0.5 million. The net interest margin, on a fully-taxable equivalent (“FTE”) basis, declined for the quarter ended March 31, 2021 to 3.11% compared to 3.69% for the same period of 2020.

The decrease in interest income was driven by a slight decrease in interest and fees on loans and reduced income on the investment portfolio. While the average balance of the investment portfolio increased by $59.4 million, 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 108 basis points. The increase in the average balance of investments is due to a strategic decision in December 2020 to invest $70.0 million of excess cash into the investment portfolio. Significantly higher cash levels invested at an average yield on Fed Funds of 0.07% for the first quarter of 2021, compared to 1.24% for the first quarter of 2020, also negatively impacted the margin for the first quarter of 2021. The increase in average balance of loans of $156.9 million, primarily driven by PPP loans, offset the declining yield in the portfolio leading to slightly reduced interest and fees on loans when comparing the first quarter of 2021 to the first quarter of 2020. The average balances of PPP loans of approximately $142.5 million generated $1.2 million of interest and fees but had a negative impact on the margin of approximately three basis points. The average loan yield was also negatively impacted by the low-rate environment, which resulted in loan production and loans repricing at lower rates. These factors resulted in a decrease of approximately 64 basis points in average loan yield when compared with the quarter ended March 31, 2020.

The decrease in interest expense of $0.9 million, despite an increase in average interest-bearing liabilities of $149.9 million, was a direct result of a reduction in the cost of deposits of 34 basis points, a 5 basis point decrease in the cost of our short-term borrowings and a 67 basis point decrease in the cost of long-term borrowings. The decrease in the rate on long-term borrowings is primarily due to the restructuring of three long-term Federal Home Loan Bank advances late in the fourth quarter of 2020 that resulted in a reduced weighted average rate of 80 basis points on the $70.0 million portfolio. The average balance on our interest-bearing money market accounts increased $86.5 million, while the rate on these accounts decreased by 55 basis points. Average growth of $39.1 million in our non-interest-bearing accounts benefited our overall cost of deposits.

Other operating income, including net gains, increased $1.3 million for the quarter ended March 31, 2021 when compared to the quarter ended March 31, 2020. Gains on the sale of mortgages to the secondary market, which we have utilized in lieu of retaining long-term fixed rate loans in our portfolio, increased $0.4 million related to continued refinancing activity. Trust and brokerage income increased $0.5 million quarter-over-quarter due to growth in new client relationships and assets under management, despite market volatility early in 2021. Debit card income increased $0.2 million for the quarter ended March 31, 2021 when compared with the same period of 2020 as we continue to grow our deposit relationships and our customers increase use of our electronic services. Other income increased $0.4 million, due primarily to the receipt of insurance proceeds related to litigation claims. Service charge income, primarily NSF income, decreased $0.2 million as the consumer and business overdraft activity declined due to reduced consumer spending and increased cash balances resulting from the receipt of government stimulus payments and PPP funding.

Other operating expenses increased $1.9 million, inclusive of litigation settlement expenses, for the quarter ended March 31, 2021 when compared with the same period of 2020. Salaries and benefits decreased $0.9 million when compared to the first quarter of 2020, primarily due to reductions of $0.2 million in life and health insurance costs, a $1.0 million offset in salary expense from deferred loan origination costs primarily attributable to PPP loans and $0.1 million of reduced executive equity compensation due to a timing difference in long-term incentive grants. These decreases were offset by an increase of $0.2 million in salaries, incentives and related payroll costs and $0.2 million in 401(k) plan expenses. Federal Deposit Insurance Corporation premiums increased slightly by $0.1 million due to credits received on quarterly assessments in 2020. Equipment, occupancy and technology expenses remained stable when compared with the first quarter of 2020 as we began to realize cost savings from our core processor related to a new contract negotiated in the fourth quarter of 2020. OREO expenses were a net credit in the first quarter of 2021 due to $0.5 million in gains attributable to

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the sale of OREO properties. Professional services increased $0.4 million as a result of increased legal and professional and investor relations expenses due to costs related to the 2021 proxy season and litigation.

Non-GAAP Financial Measures

The Corporation believes that non-GAAP measures are meaningful because they reflect adjustments commonly made by management, investors, regulators and analysts to evaluate performance trends and the adequacy of common equity. This non-GAAP disclosure has limitations as an analytical tool, should not be viewed as a substitute for performance and financial condition measures determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of results as reported under GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies.

The following table presents a reconciliation of net income and basic and diluted earnings per share (as reported) to adjusted net income and adjusted basic and diluted earnings per share excluding settlement expense:

|  | Three months ended March 31,
|  | 2021 |  | 2020
(in thousands, except for per share amount) |  |  |  |  |  |
Net income - as reported |  | $ | 3,430 |  | $ | 1,755
Adjustments: |  |  |  |  |  |
Settlement Expense |  |  | 3,300 |  |  | —
Income tax effect of adjustment |  |  | (735) |  |  | —
Adjusted net income (non-GAAP) |  | $ | 5,995 |  | $ | 1,755
Basic and Diluted earnings per share - as reported |  | $ | 0.49 |  | $ | 0.25
Adjustments: |  |  |  |  |  |
Settlement Expense |  |  | 0.47 |  |  | —
Income tax effect of adjustment |  |  | (0.10) |  |  | —
Adjusted basic and diluted earnings per share (non-GAAP) |  | $ | 0.86 |  | $ | 0.25

The following table presents a reconciliation of basic and diluted book value per share (as reported) to adjusted basic and diluted book value per share excluding settlement expense:

|  | Three months ended March 31,
|  | 2021 |  | 2020
(in thousands, except for per share amount) |  |  |  |  |  |
Basic book value per share |  |  |  |  |  |
Equity |  |  | 129,189 |  |  | 118,549
Outstanding shares |  |  | 6,999 |  |  | 6,967
Basic book value per share - as reported |  | $ | 18.46 |  | $ | 17.01
Adjustments: |  |  |  |  |  |
Equity without net settlement expenses |  |  | 131,754 |  |  | 118,549
Outstanding shares |  |  | 6,999 |  |  | 6,967
Adjusted basic book value per share (non-GAAP) |  | $ | 18.82 |  | $ | 17.01
Diluted book value per share |  |  |  |  |  |
Equity |  |  | 129,189 |  |  | 118,549
Outstanding shares |  |  | 7,002 |  |  | 6,992
Diluted book value per share - as reported |  | $ | 18.45 |  | $ | 16.95
Adjustments: |  |  |  |  |  |
Equity without net settlement expenses |  |  | 131,754 |  |  | 118,549
Outstanding shares |  |  | 7,002 |  |  | 6,992
Adjusted diluted book value per share (non-GAAP) |  | $ | 18.81 |  | $ | 16.95

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The following table presents a reconciliation of capital ratios (as reported) to adjusted ratios excluding settlement expense:

|  | March 31, 2021 |  | December 31, 2020
(in thousands) |  |  |  |  |  |
Retained Earnings - as reported |  | $ | 132,072 |  | $ | 129,691
Adjustments: |  |  |  |  |  |
Settlement Expense |  |  | 3,300 |  |  | —
Income tax effect of adjustment |  |  | (735) |  |  | —
Adjusted Retained Earnings (non-GAAP) |  | $ | 134,637 |  | $ | 129,691
Total Capital - as reported |  | $ | 196,168 |  | $ | 193,391
Adjustments: |  |  |  |  |  |
Retained Earnings adjustment |  |  | 2,565 |  |  | —
Changes to capital due to retained earnings adjustment |  |  | 265 |  |  | —
Total Capital (non-GAAP) |  | $ | 198,998 |  | $ | 193,391
Average Assets used for calculation |  | $ | 1,772,533 |  | $ | 1,720,809
Consolidated Tier 1 Capital (to average assets) - as reported |  |  | 10.22% |  |  | 10.36%
Consolidated Tier 1 Capital (to average assets) - non-GAAP |  |  | 10.37% |  |  | 10.36%
Total risk weighted assets used for calculation |  | $ | 1,208,706 |  | $ | 1,202,877
Consolidated Total Capital (to risk weighted assets) - as reported |  |  | 16.24% |  |  | 16.08%
Consolidated Total Capital (to risk weighted assets) - (non-GAAP) |  |  | 16.46% |  |  | 16.08%
Consolidated Tier 1 Capital (to risk weighted assets) - as reported |  |  | 14.99% |  |  | 14.83%
Consolidated Tier 1 Capital (to risk weighted assets) - (non-GAAP) |  |  | 15.21% |  |  | 14.83%
Consolidated Common Equity Tier 1 Capital (to risk weighted assets) - as reported |  |  | 12.76% |  |  | 12.61%
Consolidated Common Equity Tier 1 Capital (to risk weighted assets) - (non-GAAP) |  |  | 12.97% |  |  | 12.61%

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 the three months ended March 31, 2021 and 2020.

|  | GAAP |  |  | Non-GAAP - FTE
| Three Months Ended |  |  | Three Months Ended
(dollars in thousands) |  | 2021 |  | 2020 |  |  | 2021 |  | 2020
Interest income | $ | 14,062 | $ | 14,616 |  | $ | 14,301 | $ | 14,839
Interest expense |  | 1,826 |  | 2,729 |  |  | 1,826 |  | 2,729
Net interest income | $ | 12,236 | $ | 11,887 |  | $ | 12,475 | $ | 12,110
Net interest margin % |  | 3.05% |  | 3.66% |  |  | 3.11% |  | 3.69%

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The following table sets forth the average balances, net interest income and expense, and average yields and rates of our interest-earning assets and interest-bearing liabilities for the three month periods ended March 31, 2021 and 2020:

|  | Three Months Ended
|  | March 31,
|  | 2021 |  | 2020
(dollars in thousands) |  | Average ‎Balance |  | Interest |  | Average ‎Yield/Rate |  | Average ‎Balance |  | Interest |  | Average ‎Yield/Rate
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans |  | $ | 1,202,677 |  | $ | 12,754 |  | 4.30% |  | $ | 1,045,820 |  | $ | 12,856 |  | 4.94%
Investment Securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable |  |  | 255,853 |  |  | 990 |  | 1.57% |  |  | 197,115 |  |  | 1,308 |  | 2.67%
Non taxable |  |  | 26,075 |  |  | 492 |  | 7.65% |  |  | 25,417 |  |  | 466 |  | 7.37%
Total |  |  | 281,928 |  |  | 1,482 |  | 2.13% |  |  | 222,532 |  |  | 1,774 |  | 3.21%
Federal funds sold |  |  | 135,458 |  |  | 24 |  | 0.07% |  |  | 45,118 |  |  | 139 |  | 1.24%
Interest-bearing deposits with other banks |  |  | 2,668 |  |  | 1 |  | 0.15% |  |  | 643 |  |  | 6 |  | 3.75%
Other interest earning assets |  |  | 4,459 |  |  | 40 |  | 3.64% |  |  | 4,416 |  |  | 64 |  | 5.83%
Total earning assets |  |  | 1,627,190 |  |  | 14,301 |  | 3.56% |  |  | 1,318,529 |  |  | 14,839 |  | 4.53%
Allowance for loan losses |  |  | (16,404) |  |  |  |  |  |  |  | (12,715) |  |  |  |  |
Non-earning assets |  |  | 154,347 |  |  |  |  |  |  |  | 138,642 |  |  |  |  |
Total Assets |  | $ | 1,765,133 |  |  |  |  |  |  | $ | 1,444,456 |  |  |  |  |
Liabilities and Shareholders’ Equity |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing demand deposits |  | $ | 202,530 |  | $ | 172 |  | 0.34% |  | $ | 163,433 |  | $ | 184 |  | 0.45%
Interest-bearing money markets |  |  | 358,038 |  |  | 170 |  | 0.19% |  |  | 271,581 |  |  | 503 |  | 0.74%
Savings deposits |  |  | 202,968 |  |  | 25 |  | 0.05% |  |  | 161,067 |  |  | 62 |  | 0.15%
Time deposits: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Less than $100k |  |  | 107,997 |  |  | 389 |  | 1.46% |  |  | 109,419 |  |  | 416 |  | 1.53%
$100k or more |  |  | 119,551 |  |  | 390 |  | 1.32% |  |  | 140,732 |  |  | 705 |  | 2.01%
Short-term borrowings |  |  | 50,301 |  |  | 24 |  | 0.19% |  |  | 45,278 |  |  | 28 |  | 0.25%
Long-term borrowings |  |  | 100,929 |  |  | 656 |  | 2.64% |  |  | 100,929 |  |  | 831 |  | 3.31%
Total interest-bearing liabilities |  |  | 1,142,314 |  |  | 1,826 |  | 0.65% |  |  | 992,439 |  |  | 2,729 |  | 1.11%
Non-interest-bearing deposits |  |  | 465,476 |  |  |  |  |  |  |  | 289,634 |  |  |  |  |
Other liabilities |  |  | 25,802 |  |  |  |  |  |  |  | 36,866 |  |  |  |  |
Shareholders’ Equity |  |  | 131,541 |  |  |  |  |  |  |  | 125,517 |  |  |  |  |
Total Liabilities and Shareholders’ Equity |  | $ | 1,765,133 |  |  |  |  |  |  | $ | 1,444,456 |  |  |  |  |
Net interest income and spread |  |  |  |  | $ | 12,475 |  | 2.91% |  |  |  |  | $ | 12,110 |  | 3.42%
Net interest margin |  |  |  |  |  |  |  | 3.11% |  |  |  |  |  |  |  | 3.69%

Note:

(1)The above table reflects the average rates earned or paid stated on an FTE basis assuming a 21% tax rate for 2021 and 2020. Non-GAAP interest income on a fully taxable equivalent was $239 and $223, respectively.

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

(3)The average yields on investments are based on amortized cost.

Net interest income, on a non-GAAP, FTE basis, increased $0.4 million (3.0%) during the quarter ended March 31, 2021 when compared with the quarter ended March 31, 2020, driven by a $0.9 million (33.1%) decrease in interest expense, partially offset by a decrease in interest income of $0.5 million. The net interest margin, on a fully-taxable equivalent (“FTE”) basis, declined for the quarter ended March 31, 2021 to 3.11% compared to 3.69% for the same period of 2020.

The decrease in interest income was driven by a slight decrease in interest and fees on loans and reduced income on the investment portfolio. While the average balance of the investment portfolio increased by $59.4 million, 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 108 basis points. The increase in the average balance of investments is due to a strategic decision in December 2020 to invest $70.0 million of excess cash into the investment portfolio. Significantly higher cash levels invested at an average yield on Fed Funds of 0.07% for the first quarter of 2021, compared to 1.24% for the first quarter of 2020, also negatively impacted the margin for the first quarter of 2021. The increase in average balance of loans of $156.9 million, primarily driven by PPP loans, offset the declining yield in the portfolio leading to slightly reduced interest and fees on loans when comparing the first quarter of 2021 to the first quarter of 2020. The average balances of PPP loans of approximately $142.5 million generated $1.2 million of interest and fees but had a negative impact on the margin of approximately three basis points. The average loan yield was also negatively impacted by the low-rate environment, which

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resulted in loan production and loans repricing at lower rates. These factors resulted in a decrease of approximately 64 basis points in average loan yield when compared with the quarter ended March 31, 2020.

The decrease in interest expense of $0.9 million, despite an increase in average interest-bearing liabilities of $149.9 million, was a direct result of a reduction in the cost of deposits of 34 basis points, a 5 basis point decrease in the cost of our short-term borrowings and a 67 basis point decrease in the cost of long-term borrowings. The decrease in the rate on long-term borrowings is primarily due to the restructuring of three long-term Federal Home Loan Bank advances late in the fourth quarter of 2020 that resulted in a reduced weighted average rate of 80 basis points on the $70.0 million portfolio. The average balance on our interest-bearing money market accounts increased $86.5 million, while the rate on these accounts decreased by 55 basis points. Average growth of $39.1 million in our non-interest-bearing accounts benefited our overall cost of deposits.

I

The following table sets forth an analysis of volume and rate changes in interest income and interest expense for our average interest-earning assets and average interest-bearing liabilities for the three month periods ended March 31, 2021 and 2020:

|  | For the Three months ended March 31, 2021 compared to the Three months ended March 31, 2020
(in thousands and tax equivalent basis) |  | Volume |  | Rate |  | Net
Interest Income: |  |  |  |  |  |  |  |  |
Loans |  | $ | 1,937 |  | $ | (2,039) |  | $ | (102)
Taxable Investments |  |  | 392 |  |  | (710) |  |  | (318)
Non-taxable Investments |  |  | 12 |  |  | 14 |  |  | 26
Federal funds sold |  |  | 280 |  |  | (395) |  |  | (115)
Interest-bearing deposits |  |  | 19 |  |  | (24) |  |  | (5)
Other interest earning assets |  |  | 1 |  |  | (25) |  |  | (24)
Total interest income |  |  | 2,641 |  |  | (3,179) |  |  | (538)
Interest Expense: |  |  |  |  |  |  |  |  |
Interest-bearing demand deposits |  |  | 44 |  |  | (56) |  |  | (12)
Interest-bearing money markets |  |  | 160 |  |  | (493) |  |  | (333)
Savings deposits |  |  | 16 |  |  | (53) |  |  | (37)
Time deposits less than $100K |  |  | (5) |  |  | (22) |  |  | (27)
Time deposits $100K or more |  |  | (106) |  |  | (209) |  |  | (315)
Short-term borrowings |  |  | 3 |  |  | (7) |  |  | (4)
Long-term borrowings |  |  | — |  |  | (175) |  |  | (175)
Total interest expense |  |  | 112 |  |  | (1,015) |  |  | (903)
Net interest income |  | $ | 2,529 |  | $ | (2,164) |  | $ | 365

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 $0.1 million for the quarter ended March 31, 2021 and $2.7 million for the quarter ended March 31, 2020. Net charge-offs of $42 thousand were recorded for the first three months of 2021, compared to net charge offs of $0.2 million for first three months of 2020. The higher provision expense recorded in 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. The ratio of the ALL to loans outstanding, including PPP loan balances, was 1.38% at March 31, 2021 compared to 1.42% at March 31, 2020 and 1.41% at December 31, 2020. The ALL to loans outstanding, on a non-GAAP basis, excluding PPP loan balances of $145.2 million, was 1.57% at March 31, 2021, and 1.55% at December 31, 2020, excluding PPP loan balances of $114.0 million. Specific allocations have been made for impaired loans where management has determined that the collateral supporting the loans is not adequate to cover the loan balance, and the qualitative factors affecting the ALL have been adjusted based on the current economic environment and the characteristics of the loan portfolio.

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Other Income

|  | Income as % of ‎Total Other Income
|  | Three Months Ended
|  | March 31,
(in thousands) |  | 2021 |  | 2020
Service charges on deposit accounts |  | $ | 405 |  | 9% |  | $ | 615 |  | 15%
Other service charges |  |  | 211 |  | 4% |  |  | 290 |  | 7%
Trust department |  |  | 2,241 |  | 47% |  |  | 1,753 |  | 44%
Debit card income |  |  | 810 |  | 17% |  |  | 634 |  | 16%
Bank owned life insurance |  |  | 286 |  | 6% |  |  | 303 |  | 8%
Brokerage commissions |  |  | 268 |  | 6% |  |  | 277 |  | 7%
Other income |  |  | 521 |  | 11% |  |  | 136 |  | 3%
|  | $ | 4,742 |  | 100% |  | $ | 4,008 |  | 100%

Other Operating Expenses

The composition of other operating expenses for the three month periods ended March 31, 2021 and 2020 is illustrated in the following table:

|  | Expense as % of ‎Total Other Operating Expenses
|  | Three Months Ended
|  | March 31,
(in thousands) |  | 2021 |  | 2020
Salaries and employee benefits |  | $ | 4,988 |  | 38% |  | $ | 5,923 |  | 54%
FDIC premiums |  |  | 183 |  | 1% |  |  | 43 |  | 0%
Equipment |  |  | 851 |  | 6% |  |  | 926 |  | 8%
Occupancy |  |  | 725 |  | 6% |  |  | 747 |  | 7%
Data processing |  |  | 726 |  | 6% |  |  | 1,052 |  | 10%
Marketing |  |  | 146 |  | 1% |  |  | 130 |  | 1%
Professional services |  |  | 1,170 |  | 9% |  |  | 723 |  | 7%
Contract labor |  |  | 148 |  | 1% |  |  | 151 |  | 1%
Line rentals |  |  | 215 |  | 2% |  |  | 217 |  | 2%
Other real estate owned |  |  | (412) |  | -3% |  |  | — |  | 0%
Investor relations |  |  | 124 |  | 1% |  |  | 93 |  | 1%
Settlement expense |  |  | 3,300 |  | 26% |  |  | — |  | 0%
Other |  |  | 763 |  | 6% |  |  | 1,000 |  | 9%
|  | $ | 12,927 |  | 100% |  | $ | 11,005 |  | 100%

Provision for Income Taxes

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

The effective income tax rate as a percentage of income increased to 24.3% at March 31, 2021 from 22.9% at March 31, 20 20 primarily due to a reduction in tax exempt income and the reduction in low income housing tax credits that expire in June 2021.

FINANCIAL CONDITION

Balance Sheet Overview

Total assets at March 31, 2021 increased by $48.4 million to $1.8 billion from December 31, 2020. During the first quarter of 2021, cash and interest-bearing deposits in other banks increased by $43.6 million, the investment portfolio decreased by $21.8 million

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and gross loans increased by $31.5 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, PPP loan forgiveness, and continued refinancing of balances in our mortgage portfolio. The decrease in the securities portfolio was a result of calls due to the continued low-rate environment. OREO balances decreased due to the sale of a parcel of real estate securing a large commercial participation loan that moved to OREO in the fourth quarter of 2020.

Total liabilities increased by $50.3 million when compared with liabilities at December 31, 2020. This increase was primarily attributable to the strong deposit growth of $45.9 million, inclusive of the deposit balances related to the PPP loans at March 31, 2021. Deposit growth was due to increased relationship balances attributable to growth in core relationships and customer preference for insured products given the volatile economic environment. Our Treasury Management overnight investment sweep increased slightly due to growth in existing customer balances. Total shareholders’ equity decreased by $1.9 million during the first quarter of 2021, as the quarter’s earnings were offset by an increase of $4.3 million in accumulated other comprehensive loss.

Loan Portfolio

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

(dollars in thousands) |  | March 31, 2021 |  | December 31, 2020
Commercial real estate |  | $ | 365,731 |  | 30% |  | $ | 369,176 |  | 32%
Acquisition and development |  |  | 123,625 |  | 11% |  |  | 116,961 |  | 10%
Commercial and industrial |  |  | 299,178 |  | 25% |  |  | 266,745 |  | 23%
Residential mortgage |  |  | 374,327 |  | 31% |  |  | 379,170 |  | 32%
Consumer |  |  | 36,464 |  | 3% |  |  | 35,760 |  | 3%
Total Loans |  | $ | 1,199,325 |  | 100% |  | $ | 1,167,812 |  | 100%

Outstanding loans remained stable at $1.2 billion at March 31, 2021 and December 31, 2020. The $31.5 million of growth was primarily attributable to the participation in the PPP and core commercial loan growth, partially offset by a decline in our mortgage loan portfolio. Commercial real estate (“CRE”) loans decreased $3.4 million. Acquisition and development (“A&D”) loans increased by $6.7 million and commercial and industrial (“C&I”) loans increased by $32.4 million, as newly originated PPP loans and growth in portfolio loans was slightly offset by PPP loan forgiveness. The growth in the commercial portfolios was offset by a decline in residential mortgage loans of $4.8 million, as refinancing activity continued during the first quarter. Given the current low interest rate environment, customers prefer longer-term fixed-rate loans. We continue to utilize the secondary market rather than hold these longer-term fixed rate mortgage loans in the portfolio. The consumer loan portfolio increased slightly by $0.7 million during the first quarter of 2021.

Commercial loan production for the first quarter of 2021 was approximately $50.0 million, and SBA loan production was approximately $7.0 million, exclusive of PPP loan originations. Commercial construction funding continues to ramp up as projects are entering their larger draw periods contributing to current year growth. At March 31, 2021, unfunded, committed commercial construction loans totaled approximately $25.0 million. Commercial amortization and payoffs were approximately $38.0 million through March 31, 2021, exclusive of PPP.

Consumer mortgage loan production was approximately $27.0 million for the first quarter of 2021. The production and pipeline mix of in-house, portfolio loans and investor loans remained strong at March 31, 2021, with those loans totaling $22.0 million, consisting of $13.0 million in portfolio loans and $9.0 million in investor loans.

Non-accrual loans totaled $7.9 million at March 31, 2021 compared to $3.3 million at December 31, 2020. The increase in non-accrual balances at March 31, 2021 was due to the movement of two hospitality loans totaling approximately $4.0 million in the first quarter of 2021. These loans suffered reduced cash flows due to the impact of the pandemic, have received modifications and were classified as substandard at December 31, 2020. It is anticipated that these loans will return to payment status in the near term.

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Risk Elements of Loan Portfolio

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

(dollars in thousands) |  | March 31, ‎2021 |  | % of ‎Applicable ‎Portfolio |  | December 31, ‎2020 |  | % of ‎Applicable ‎Portfolio
Non-accrual loans: |  |  |  |  |  |  |  |  |  |
Commercial real estate |  | $ | 5,448 |  | 1.49% |  | $ | 898 |  | 0.20%
Acquisition and development |  |  | 408 |  | 0.33% |  |  | 366 |  | 0.30%
Commercial and industrial |  |  | — |  | 0.00% |  |  | — |  | 0.00%
Residential mortgage |  |  | 2,012 |  | 0.54% |  |  | 2,048 |  | 0.50%
Consumer |  |  | 23 |  | 0.06% |  |  | 27 |  | 0.10%
Total non-accrual loans |  | $ | 7,891 |  | 0.66% |  | $ | 3,339 |  | 0.29%
Accruing Loans Past Due 90 days or more: |  |  |  |  |  |  |  |  |  |
Acquisition and development |  |  | — |  |  |  |  | 10 |  |
Residential mortgage |  |  | 2 |  |  |  |  | 710 |  |
Consumer |  |  | 4 |  |  |  |  | 4 |  |
Total loans past due 90 days or more |  | $ | 6 |  |  |  | $ | 724 |  |
Total non-accrual and accruing loans past due ‎ 90 days or more |  | $ | 7,897 |  |  |  | $ | 4,063 |  |
Restructured Loans (TDRs): |  |  |  |  |  |  |  |  |  |
Performing |  | $ | 3,597 |  |  |  | $ | 3,657 |  |
Non-accrual (included above) |  |  | 295 |  |  |  |  | 301 |  |
Total TDRs |  | $ | 3,892 |  |  |  | $ | 3,958 |  |
Other real estate owned |  | $ | 7,533 |  |  |  | $ | 9,386 |  |
Impaired loans without a valuation allowance |  | $ | 9,378 |  |  |  | $ | 6,060 |  |
Impaired loans with a valuation allowance |  |  | 2,565 |  |  |  |  | 1,399 |  |
Total impaired loans |  | $ | 11,943 |  |  |  | $ | 7,459 |  |
Valuation allowance related to impaired loans |  | $ | 52 |  |  |  | $ | 57 |  |

Performing loans considered to be impaired (including performing troubled debt restructurings, or TDRs), as defined and identified by management, amounted to $7.9 million at March 31, 2021 and $4.1 million at December 31, 2020. 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.

Loans that have been modified in reliance on Section 4013 of the U.S. Government’s Coronavirus Aid, Relief, and Economic Security Act and the guidance issued thereunder are not treated as TDRs. Information about these loans can be found in Notes 3 and 6 to the consolidated financial statements presented in Item 1 of Part I of this report.

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The following table presents the details of impaired loans that are troubled debt restructurings (“TDRs”) by class at March 31, 2021 and December 31, 2020:

|  | March 31, 2021 |  | December 31, 2020
(dollars in thousands) |  | Number of ‎Contracts |  | Recorded ‎Investment |  | Number of ‎Contracts |  | Recorded ‎Investment
Performing |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |
Non owner-occupied |  | 2 |  | $ | 221 |  | 2 |  | $ | 224
All other CRE |  | 1 |  |  | 2,176 |  | 1 |  |  | 2,208
Acquisition and development |  |  |  |  |  |  |  |  |  |
1-4 family residential construction |  | 1 |  |  | 259 |  | 1 |  |  | 266
All other A&D |  | 1 |  |  | 208 |  | 1 |  |  | 210
Commercial and industrial |  | — |  |  | — |  | — |  |  | —
Residential mortgage |  |  |  |  |  |  |  |  |  |
Residential mortgage – term |  | 7 |  |  | 733 |  | 7 |  |  | 749
Residential mortgage – home equity |  | — |  |  | — |  | — |  |  | —
Consumer |  | — |  |  | — |  | — |  |  | —
Total performing |  | 12 |  | $ | 3,597 |  | 12 |  | $ | 3,657
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 |  | 2 |  |  | 295 |  | 2 |  |  | 301
Residential mortgage – home equity |  | — |  |  | — |  | — |  |  | —
Consumer |  | — |  |  | — |  | — |  |  | —
Total non-accrual |  | 2 |  |  | 295 |  | 2 |  |  | 301
Total TDRs |  | 14 |  | $ | 3,892 |  | 14 |  | $ | 3,958

The level of TDRs remained stable at $3.9 million at March 31, 2021 when compared to $4.0 million at December 31, 2020, with a slight reduction due to payments made during the first three months of 2021. There were no new TDRs during the first three months of 2021.

Allowance and Provision for Loan Losses

The ALL is maintained to absorb probable incurred 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.

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The following table presents a summary of the activity in the ALL for the three months ended March 31:

(dollars in thousands) |  | 2021 |  | 2020
Balance, January 1 |  | $ | 16,486 |  | $ | 12,537
Charge-offs: |  |  |  |  |  |
Acquisition and development |  |  | (81) |  |  | (15)
Commercial and industrial |  |  | — |  |  | (101)
Residential mortgage |  |  | (82) |  |  | (98)
Consumer |  |  | (80) |  |  | (132)
Total charge-offs |  |  | (243) |  |  | (346)
Recoveries: |  |  |  |  |  |
Commercial real estate |  |  | — |  |  | 66
Acquisition and development |  |  | 101 |  |  | 14
Commercial and industrial |  |  | 36 |  |  | 15
Residential mortgage |  |  | 17 |  |  | 26
Consumer |  |  | 47 |  |  | 46
Total recoveries |  |  | 201 |  |  | 167
Net credit charge-offs |  |  | (42) |  |  | (179)
Provision for loan losses |  |  | 110 |  |  | 2,654
Balance at end of period |  | $ | 16,554 |  | $ | 15,012
Allowance for loan losses to gross loans outstanding (as %) |  |  | 1.38% |  |  | 1.42%
Net credit charge-offs to average loans outstanding during the period, annualized (as %) |  |  | (0.01)% |  |  | (0.07)%

The ALL remained stable at $16.6 million at March 31, 2021 compared to $16.5 million at December 31, 2020, The ratio of the ALL to loans outstanding, including PPP loan balances, was 1.38% at March 31, 2021 compared to 1.42% at March 31, 2020 and 1.41% at December 31, 2020. The ALL to loans outstanding, on a non-GAAP basis, excluding PPP loan balances of $145.2 million, was 1.57% at March 31, 2021, and 1.55% at December 31, 2020, excluding PPP loan balances of $114.0 million.

The ratio of net charge offs to average loans for the three months ended March 31, 2021 was an annualized 0.01%, compared to 0.07% for the three months ended March 31, 2020. The CRE portfolio did not have any charge offs or recoveries in the first three months of 2021, compared to an annualized net recovery rate of 0.08% as of March 31, 2020. The A&D loans had an annualized net recovery rate of 0.07% as of March 31, 2021, compared to a net charge-off rate of 0.00% as of March 31, 2020. The C&I portfolio had net recoveries to average loans of 0.05% as of March 31, 2021, compared to net charge-offs of 0.28% as of March 31, 2020. The residential mortgage ratios were a net charge-off rate of 0.07% as of March 31, 2021 and March 31, 2020, and the consumer loan ratios were net charge-off rates of 0.37% and 0.95% as of March 31, 2021 and March 31, 2020, respectively. Our special assets team continues to aggressively collect on charged-off loans.

Management believes that the ALL at March 31, 2021 was 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 Commercial real estate loan portfolio and obtains new appraisals on specific loans under defined parameters to assist in the determination of the periodic provision for loan losses.

Investment Securities

At March 31, 2021, the total amortized cost basis of the available-for-sale investment portfolio was $214.4 million, compared to a fair value of $204.0 million. Unrealized gains and losses on securities available-for-sale are reflected in accumulated other comprehensive loss, a component of shareholders’ equity. The amortized cost basis of the held to maturity portfolio was $69.4 million, compared to a fair value of $77.6 million.

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

|  | March 31, 2021 |  | December 31, 2020
|  | Amortized |  | Fair Value |  | FV as % |  | Amortized |  | Fair Value |  | FV as %
(dollars in thousands) |  | Cost |  | (FV) |  | of Total |  | Cost |  | (FV) |  | of Total
Securities Available-for-Sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government agencies |  | $ | 63,646 |  | $ | 61,036 |  | 30% |  | $ | 75,856 |  | $ | 76,433 |  | 34%
Residential mortgage-backed agencies |  |  | 22,606 |  |  | 21,822 |  | 11% |  |  | 22,999 |  |  | 22,899 |  | 10%
Commercial mortgage-backed agencies |  |  | 33,257 |  |  | 32,757 |  | 15% |  |  | 32,549 |  |  | 33,042 |  | 14%
Collateralized mortgage obligations |  |  | 66,866 |  |  | 64,899 |  | 32% |  |  | 70,372 |  |  | 70,637 |  | 31%
Obligations of state and political subdivisions |  |  | 9,433 |  |  | 9,843 |  | 5% |  |  | 10,144 |  |  | 10,614 |  | 5%
Collateralized debt obligations |  |  | 18,556 |  |  | 13,649 |  | 7% |  |  | 18,544 |  |  | 13,260 |  | 6%
Total available for sale |  | $ | 214,364 |  | $ | 204,006 |  | 100% |  | $ | 230,464 |  | $ | 226,885 |  | 100%
Securities Held to Maturity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed agencies |  | $ | 38,470 |  | $ | 39,064 |  | 50% |  | $ | 34,597 |  | $ | 35,732 |  | 46%
Commercial mortgage-backed agencies |  |  | 9,795 |  |  | 10,228 |  | 13% |  |  | 11,716 |  |  | 12,303 |  | 16%
Collateralized mortgage obligations |  |  | 490 |  |  | 498 |  | 1% |  |  | 1,348 |  |  | 1,406 |  | 2%
Obligations of state and political subdivisions |  |  | 20,602 |  |  | 27,781 |  | 36% |  |  | 20,602 |  |  | 28,171 |  | 36%
Total held to maturity |  | $ | 69,357 |  | $ | 77,571 |  | 100% |  | $ | 68,263 |  | $ | 77,612 |  | 100%

Total fair value of investment securities available-for-sale decreased by $22.9 million since December 31, 2020. At March 31, 2021, the securities classified as available-for-sale included a net unrealized loss of $10.4 million, which represents the difference between the fair value and amortized cost of securities in the portfolio.

As discussed in Note 8 to the consolidated financial statements presented elsewhere in this report, the Corporation measures fair market values based on the fair value hierarchy established in ASC Topic 820, Fair Value Measurements and Disclosures. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Level 3 p rices 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 $190.4 million of the available-for-sale portfolio was valued using Level 2 pricing and had net unrealized losses of $5.5 million at March 31, 2021. The remaining $13.6 million of the securities available-for-sale represents the entire collateralized debt obligation (“CDO”) portfolio, which was valued using significant unobservable inputs (Level 3 assets). The $4.9 million in net unrealized losses associated with this portfolio relates to nine pooled trust preferred securities that comprise the CDO portfolio. Net unrealized losses of $3.5 million represent non-credit related OTTI charges on seven of the securities, while $1.4 million of unrealized losses relates to two securities which have had no credit related OTTI.

The following table provides a summary of the trust preferred securities in the CDO portfolio and the credit status of these securities as of March 31, 2021:

Level 3 Investment Securities Available for Sale
(dollars in thousands)
Investment Description |  | First United Level 3 Investments |  | Security Credit Status
Deal |  | Class |  | Amortized ‎Cost |  | Fair ‎Market ‎Value |  | Unrealized ‎Gain/ ‎(Loss) |  | Lower ‎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 | $ | 1,216 | $ | (678) |  | C |  | 676,565 |  | 14.82% |  | 268,049 |  | 21,123 |  | 7.88% |  | 40 / 56
Preferred Term Security XVIII |  | C |  | 2,717 |  | 1,825 |  | (892) |  | C |  | 676,565 |  | 14.82% |  | 268,049 |  | 21,123 |  | 7.88% |  | 40 / 56
Preferred Term Security XIX* |  | C |  | 1,840 |  | 1,495 |  | (345) |  | C |  | 700,535 |  | 6.57% |  | 431,662 |  | 26,028 |  | 6.03% |  | 49 / 54
Preferred Term Security XIX* |  | C |  | 1,101 |  | 897 |  | (204) |  | C |  | 700,535 |  | 6.57% |  | 431,662 |  | 26,028 |  | 6.03% |  | 49 / 54
Preferred Term Security XIX* |  | C |  | 2,551 |  | 2,094 |  | (457) |  | C |  | 700,535 |  | 6.57% |  | 431,662 |  | 26,028 |  | 6.03% |  | 49 / 54
Preferred Term Security XIX* |  | C |  | 1,102 |  | 897 |  | (205) |  | C |  | 700,535 |  | 6.57% |  | 431,662 |  | 26,028 |  | 6.03% |  | 49 / 54
Preferred Term Security XXII* |  | C-1 |  | 1,589 |  | 1,182 |  | (407) |  | C |  | 1,386,600 |  | 10.31% |  | 644,548 |  | 72,765 |  | 11.29% |  | 58 / 72
Preferred Term Security XXII* |  | C-1 |  | 3,971 |  | 2,955 |  | (1,016) |  | C |  | 1,386,600 |  | 10.31% |  | 644,548 |  | 72,765 |  | 11.29% |  | 58 / 72
Preferred Term Security XXIII |  | C-1 |  | 1,791 |  | 1,088 |  | (703) |  | C |  | 1,467,000 |  | 14.52% |  | 663,365 |  | 72,322 |  | 10.90% |  | 71 / 85
Total Level 3 Securities Available for Sale | $ | 18,556 | $ | 13,649 | $ | (4,907) |  |  |  |  |  |  |  |  |  |  |  |  |  |

*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 allow their issuers to defer dividend payments for up to 20 quarters. Some of the issuers of the trust preferred securities in our investment portfolio have defaulted and/or deferred payments ranging from 6.57% to 14.82% of the total collateral balances underlying the securities. The securities were designed to

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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 (a) the Corporation has the intent to sell the security and (b) 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 (1) the length of time and the extent to which the fair value has been less than cost, (2) adverse conditions specifically related to the security, an industry, or a geographic area, (3) the historic and implied volatility of the security, (4) changes in the rating of a security by a rating agency, (5) recoveries or additional declines in fair value subsequent to the balance sheet date, (6) failure of the issuer of the security to make scheduled interest payments, and (7) 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 March 31, 2021 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, or any securities other than those issued or guaranteed by the U.S. Department of the Treasury (the “Treasury”), 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 March 31, 2021, (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 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 March 31, 2021.

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 securities had credit-related OTTI during the first three months of 2021. Additionally, there has been no change in the performing collateral, no decline in the percentage of deferrals/defaults to original collateral, and increases in collateral support for each of the positions held by the Corporation.

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Deposits

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

(dollars in thousands) |  | March 31, 2021 |  | December 31, 2020
Non-interest bearing demand deposits: |  |  |  |  |  |  |  |  |  |
Retail |  | $ | 485,311 |  | 33% |  | $ | 420,427 |  | 30%
Interest-bearing deposits: |  |  |  |  |  |  |  |  |  |
Demand |  |  | 207,118 |  | 14% |  |  | 201,571 |  | 14%
Money Market: |  |  |  |  |  |  |  |  |  |
Retail |  |  | 335,431 |  | 23% |  |  | 376,096 |  | 26%
Savings deposits |  |  | 214,619 |  | 15% |  |  | 196,046 |  | 14%
Time deposits less than $100,000: |  |  |  |  |  |  |  |  |  |
Retail |  |  | 87,102 |  | 6% |  |  | 88,728 |  | 6%
Time deposits $100,000 or more: |  |  |  |  |  |  |  |  |  |
Retail |  |  | 138,682 |  | 9% |  |  | 139,498 |  | 10%
Brokered |  |  | — |  | 0% |  |  | — |  | 0%
Total Deposits |  | $ | 1,468,263 |  | 100% |  | $ | 1,422,366 |  | 100%

Total deposits at March 31, 2021 increased by $45.9 million when compared with deposits at December 31, 2020. During the first quarter of 2021, non-interest-bearing deposits increased by $64.9 million. This growth was driven by retail and commercial account growth as well as deposits from newly originated PPP loans. Traditional savings accounts increased by $18.6 million, as we continued to see significant growth in our Prime Saver product. Total demand deposits increased by $5.5 million and total money market accounts decreased by $40.7 million. The decline in money market balances was due primarily to management’s decision to move wealth management money market funds to off balance sheet products prior to quarter end due to our increasing cash balances. Time deposits less than $100,000 decreased by $1.6 million and time deposits greater than $100,000 decreased by $0.8 million as we continue to lower pricing on single-service relationships.

Borrowed Funds

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

(in thousands) |  | March 31, ‎2021 |  | December 31, ‎2020
Securities sold under agreements to repurchase |  | $ | 51,454 |  | $ | 49,160
Total short-term borrowings |  |  | 51,454 |  |  | 49,160
FHLB advances |  | $ | 70,000 |  | $ | 70,000
Junior subordinated debt |  |  | 30,929 |  |  | 30,929
Total long-term borrowings |  | $ | 100,929 |  | $ | 100,929

Total short-term borrowings increased by $2.3 million during the first three months of 2021. This increase is due to the increase in o ur Treasury Management overnight investment sweep as we saw growth in balances from our existing municipality accounts. Long-term borrowings remained constant during the first three months of 2021.

Liquidity Management

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

Reliability and stability of core deposits;

Cash flow structure and pledging status of investments; and

Potential for unexpected loan demand.

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

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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:

1.Unsecured Fed Funds lines of credit with upstream correspondent banks (M&T Bank, Pacific Coast Banker’s Bank, PNC Financial Services, Atlantic Community Bankers Bank, Community Bankers Bank and Zions National Bank).

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

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

4.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.

5.One Way Buy CDARS/ICS funding – a form of brokered deposits that has become a viable supplement to brokered deposits obtained directly.

6.Federal Reserve PPPLF – provides funding and uses SBA PPP loans as collateral at 100% value

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 March 31, 2021, 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.

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We evaluate the effect of a change in interest rates of +/-100 basis points to +/-400 basis points on both NII and Net Portfolio Value (“NPV”) / Economic Value of Equity (“EVE”). We concentrate on NII rather than net income as long as NII remains the significant contributor to net income.

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

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

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

Based on the simulation analysis performed at March 31, 2021 and December 31, 2020, management estimated the following changes in net interest income, assuming the indicated rate changes:

(Dollars in thousands) |  | March 31, ‎2021 |  | December 31, ‎2020
+400 basis points |  | $ | 5,317 |  | $ | 5,124
+300 basis points |  | $ | 4,126 |  | $ | 4,067
+200 basis points |  | $ | 2,863 |  | $ | 2,897
+100 basis points |  | $ | 1,371 |  | $ | 1,527
-100 basis points |  | $ | (2,275) |  | $ | (2,174)

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

Management believes that no material changes in our market risks, our procedures used to evaluate and mitigate those risks, or our actual or simulated sensitivity positions have occurred since December 31, 2020. Our NII simulation analysis as of December 31, 2020 is included in Item 7 of Part II Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2020 under the heading “Market Risk and Interest Sensitivity.

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

Capital Resources

We require capital to fund loans, satisfy our obligations under the Bank’s letters of credit, meet the deposit withdrawal demands of the Bank’s customers, and satisfy our other monetary obligations. To the extent that deposits are not adequate to fund our capital requirements, we can rely on the funding sources identified above under the heading “Liquidity Management”. At March 31, 2021, the Bank had $130.0 million available through unsecured lines of credit with correspondent banks, $1.0 million available through a secured line of credit with the Fed Discount Window and approximately $120.2 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 First United 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

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letters of credit. Based on capital ratios at March 31, 2021, both the Bank and First United Corporation are considered to be well-capitalized.

The following table presents our capital ratios as of the dates indicated:

|  | March 31, ‎2021 |  | December 31, ‎2020 |  | Required for ‎Capital ‎Adequacy ‎Purposes |  | Required ‎to be Well ‎Capitalized
Total Capital (to risk-weighted assets) |  |  |  |  |  |  |  |
Consolidated |  | 16.24% |  | 16.08% |  | 8.00% |  | 10.00%
First United Bank & Trust |  | 15.62% |  | 15.50% |  | 8.00% |  | 10.00%
Tier 1 Capital (to risk-weighted assets) |  |  |  |  |  |  |  |
Consolidated |  | 14.99% |  | 14.83% |  | 6.00% |  | 8.00%
First United Bank & Trust |  | 14.37% |  | 14.25% |  | 6.00% |  | 8.00%
Common Equity Tier 1 Capital (to risk-weighted assets) |  |  |  |  |  |  |  |
Consolidated |  | 12.76% |  | 12.61% |  | 4.50% |  | 6.50%
First United Bank & Trust |  | 14.37% |  | 14.25% |  | 4.50% |  | 6.50%
Tier 1 Capital (to average assets) |  |  |  |  |  |  |  |
Consolidated |  | 10.22% |  | 10.36% |  | 4.00% |  | 5.00%
First United Bank & Trust |  | 9.62% |  | 9.81% |  | 4.00% |  | 5.00%

Contractual Obligations, Commitments and Off-Balance Sheet Arrangements

Contractual Obligations

The Corporation enters into contractual obligations in the normal course of business. Among these obligations are FHLB advances and junior subordinated debentures, operating lease agreements for banking and subsidiaries’ offices and for data processing and telecommunications equipment. Comparing March 31, 2021 to December 31, 2020, short-term borrowings increased $2.3 million, primarily due to the increase in our Treasury Management overnight investment sweep accounts as we saw growth in balances from our existing municipality accounts.

Commitments

Loan commitments are made to accommodate the financial needs of our customers. Letters of credit commit us to make payments on behalf of customers when certain specified future events occur. The credit risks inherent in loan commitments and letters of credit are essentially the same as those involved in extending loans to customers, and these arrangements are subject to our normal credit policies. We are not a party to any other off-balance sheet arrangements.

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

(in thousands) |  | March 31, ‎2021 |  | December 31, ‎2020
Residential Mortgage - home equity |  | $ | 60,851 |  | $ | 59,615
Residential Mortgage - construction |  |  | 15,212 |  |  | 12,220
Commercial |  |  | 127,638 |  |  | 125,294
Consumer - personal credit lines |  |  | 4,545 |  |  | 4,314
Standby letters of credit |  |  | 18,668 |  |  | 17,675
Total |  | $ | 226,914 |  | $ | 219,118

The increase of $7.8 million in commitments at March 31, 2021, compared to December 31, 2020 was due to continued demand for consumer and commercial construction funding during the first three months of 2021. Management will continue to monitor these balances.
‎

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

The information required by this item is included in Item 2 of Part I of this report under the caption “Market Risk and Interest Sensitivity” and in Item 7 of Part II of First United Corporation’s Annual Report on Form 10-K for the year ended December 31, 2020 under the heading “Market Risk and Interest Sensitivity” both of which are incorporated in this Item 3 by reference.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 with the SEC, such as this Quarterly Report, is recorded, processed, summarized and reported within the periods specified in those rules and forms, and that such information is accumulated and communicated to our management, including First United Corporation’s principal executive officer (“PEO”) and its principal financial officer (“PFO”), as appropriate, to allow for timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

An evaluation of the effectiveness of these disclosure controls as of March 31, 2021 was carried out under the supervision and with the participation of management, including the PEO and the PFO. Based on that evaluation, management, including the PEO and the PFO, has concluded that our disclosure controls and procedures are, in fact, effective at the reasonable assurance level.

During the quarter ended March 31, 2021, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Part II. OTHER INFORMATION

Item 1. Legal Proceedings

On April 16, 2021, the Corporation entered into a Cooperation and Settlement Agreement (the “Cooperation Agreement”) with Driver Opportunity Partners I LP (“Driver Partners”) and certain of its affiliates (collectively, “Driver”) pursuant to which, among other things, (a) the Corporation agreed to voluntarily dismiss with prejudice its declaratory relief action against Driver, originally filed in the Circuit Court for Garrett Country, Maryland and then pending before the United States District Court for the District of Maryland (the “District Court”) and captioned First United Corp. v. Driver Opportunity Partners I LP, et al., No. 1:20-cv-2592-RDB; (b) Driver Partners agreed to voluntarily dismiss with prejudice (1) its lawsuit filed in the District Court captioned Driver Opportunity Partners I LP v. First United Corp., et al., No. 1:20-cv-2575 RDB and (2) its lawsuit in the District Court captioned Driver Opportunity Partners I, LP v. First United Corp., et al., No. 1:21-cv-0788 RDB; (c) Driver agreed to a general release of claims with respect to the Corporation and its affiliates and representatives; and (d) the Corporation agreed to pay to Driver, in settlement of the litigation instituted by Driver Partners and in exchange for the general release of claims given by the Driver Parties, the sum of $3,300,000 (the “Settlement Amount”). Information regarding the material terms of the Cooperation Agreement was discussed in Item 1.01 of the Corporation’s Current Report on Form 8-K filed with the SEC on April 19, 2021 under the heading, “Cooperation and Settlement Agreement”, which discussion is incorporated herein by reference.

Also, on April 16, 2021 (the “Effective Date”), First United Corporation (the “Corporation”) entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Driver Opportunity Partners I LP (“Driver Partners”) under which, pursuant to the Corporation’s stock repurchase program authorized by the Corporation’s Board of Directors on January 27, 2021, the Corporation agreed to repurchase from Driver Partners 360,737 shares of the common stock, par value $0.01 per share, of the Corporation at a purchase price of $18.00 per share.

From time to time, the Corporation is a party to various legal actions normally associated with a financial institution. In management's opinion, none of the actions that are currently pending is likely to have a material effect on the Corporation’s financial condition or results of operations.

Item 1A. Risk Factors

The risks and uncertainties to which our financial condition and operations are subject are discussed in detail in Item 1A of Part I of First United Corporation’s Annual Report on Form 10-K for the year ended December 31, 2020. Management does not believe that any material changes in our risk factors have occurred since they were last disclosed except as follows.

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

None.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

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Item 6. Exhibits

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

Exhibit |  | Description
31.1 |  | Certifications of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith)
31.2 |  | Certifications of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith)
32 |  | Certification of the Principal Executive Officer and the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act (furnished herewith)
101.INS |  | 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)
104 |  | The cover page of First United Corporation’s Quarterly Report on Form 10Q for the quarter ended March 31, 2021 formatted in Inline XBRL, included within the Exhibit 101 attachments (filed herewith).

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

| FIRST UNITED CORPORATION
Date: May 14, 2021 | /s/ Carissa L. Rodeheaver
| Carissa L. Rodeheaver, CPA
| Chairman of the Board, President and Chief Executive Officer
| (Principal Executive Officer)
Date: May 14, 2021 | /s/ Tonya K. Sturm
| Tonya K. Sturm, Senior Vice President,
| Chief Financial Officer
| (Principal Financial Officer and Principal Accounting Officer)

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