Edgar Filing: FIRST UNITED CORP/MD/

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For quarterly period ended September 30, 2015

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		(I. R. S. Employer Identification No.)
incorporation or organization)

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)

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 þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes þ No ¨

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

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company þ

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 6,254,620 shares of common stock, par value $.01 per share, as of October 31, 2015.

INDEX TO QUARTERLY REPORT

FIRST UNITED CORPORATION

PART I. FINANCIAL INFORMATION		3

Item 1.	Financial Statements (unaudited)	3

	Consolidated Statement of Financial Condition – September 30, 2015 and December 31, 2014	3

	Consolidated Statement of Operations - for the three and nine months ended September 30, 2015 and 2014	4

	Consolidated Statement of Comprehensive Income – for the three and nine months ended September 30, 2015 and 2014	6

	Consolidated Statement of Changes in Shareholders’ Equity - for the nine months ended September 30, 2015 and year ended December 31, 2014	7

	Consolidated Statement of Cash Flows - for the nine months ended September 30, 2015 and 2014	8

	Notes to Consolidated Financial Statements	9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	54

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	77

Item 4.	Controls and Procedures	77

PART II. OTHER INFORMATION		78

Item 1.	Legal Proceedings	78

Item 1A.	Risk Factors	78

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	78

Item 3.	Defaults upon Senior Securities	78

Item 4.	Mine Safety Disclosures	78

Item 5.	Other Information	78

Item 6.	Exhibits	78

SIGNATURES		78

EXHIBIT INDEX		79

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FIRST UNITED CORPORATION

Consolidated Statement of Financial Condition

(In thousands, except per share and percentage data)

	September 30,			December 31,
	2015			2014
	(Unaudited)
Assets
Cash and due from banks	$	61,406		$	27,554
Interest bearing deposits in banks		3,383			7,897
Cash and cash equivalents		64,789			35,451
Investment securities – available-for-sale (at fair value)		185,519			221,117
Investment securities – held to maturity (fair value $108,759 at September 30, 2015 and $110,771 at December 31, 2014)		106,732			109,449
Restricted investment in bank stock, at cost		5,904			7,524
Loans		843,092			839,991
Allowance for loan losses		(12,211	)		(12,065	)
Net loans		830,881			827,926
Premises and equipment, net		25,013			25,629
Goodwill and other intangible assets, net		11,004			11,004
Bank owned life insurance		39,853			33,504
Deferred tax assets		23,928			25,907
Other real estate owned		7,477			12,932
Accrued interest receivable and other assets		19,215			21,853
Total Assets	$	1,320,315		$	1,332,296

Liabilities and Shareholders’ Equity
Liabilities:
Non-interest bearing deposits	$	214,975		$	201,188
Interest bearing deposits		781,366			780,135
Total deposits		996,341			981,323

Short-term borrowings		38,460			39,801
Long-term borrowings		147,555			182,606
Accrued interest payable and other liabilities		23,367			19,567
Total Liabilities		1,205,723			1,223,297

Shareholders’ Equity:
Preferred stock – no par value; Authorized 2,000 shares of which 30 shares of Series A, $1,000 per share liquidation preference, 5% cumulative increasing to 9% cumulative on February 15, 2014, were issued and outstanding on September 30, 2015 and December 31, 2014		30,000			30,000
Common Stock – par value $.01 per share; Authorized 25,000 shares; issued and outstanding 6,255 shares at September 30, 2015 and 6,228 at December 31, 2014		63			62
Surplus		21,939			21,795
Retained earnings		79,841			77,375
Accumulated other comprehensive loss		(17,251	)		(20,233	)
Total Shareholders’ Equity		114,592			108,999
Total Liabilities and Shareholders’ Equity	$	1,320,315		$	1,332,296

See accompanying notes to the consolidated financial statements

FIRST UNITED CORPORATION

Consolidated Statement of Operations

(In thousands, except per share data)

	Nine months ended
	September 30,
	2015			2014
	(Unaudited)
Interest income
Interest and fees on loans	$	27,549		$	28,144
Interest on investment securities
Taxable		5,365			5,323
Exempt from federal income tax		970			1,175
Total investment income		6,335			6,498
Other		268			276
Total interest income		34,152			34,918
Interest expense
Interest on deposits		3,018			3,489
Interest on short-term borrowings		42			46
Interest on long-term borrowings		4,213			4,699
Total interest expense		7,273			8,234
Net interest income		26,879			26,684
Provision for loan losses		626			1,629
Net interest income after provision for loan losses		26,253			25,055
Other operating income
Net gains – other		100			1,127
Total net gains		100			1,127
Service charges		2,177			2,213
Trust department		4,225			3,922
Debit card income		1,586			1,516
Bank owned life insurance		849			737
Brokerage commissions		706			607
Other		308			309
Total other income		9,851			9,304
Total other operating income		9,951			10,431
Other operating expenses
Salaries and employee benefits		15,703			14,613
FDIC premiums		1,404			1,360
Equipment		1,905			1,931
Occupancy		1,867			1,868
Data processing		2,580			2,379
Professional Services		1,145			1,092
Other real estate owned		976			2,128
Other		4,782			5,202
Total other operating expenses		30,362			30,573
Income before income tax expense		5,842			4,913
Provision for income tax expense		1,351			975
Net Income		4,491			3,938
Accumulated preferred stock dividends and discount accretion		(2,025	)		(1,925	)
Net Income Available to Common Shareholders	$	2,466		$	2,013
Basic and diluted net income per common share	$	0.39		$	0.32
Weighted average number of basic and diluted shares outstanding		6,247			6,220

See accompanying notes to the consolidated financial statements

FIRST UNITED CORPORATION

Consolidated Statement of Operations

(In thousands, except per share data)

	Three Months Ended
	September 30,
	2015			2014
	(Unaudited)
Interest income
Interest and fees on loans	$	9,311		$	9,447
Interest on investment securities
Taxable		1,755			1,579
Exempt from federal income tax		302			371
Total investment income		2,057			1,950
Other		93			100
Total interest income		11,461			11,497
Interest expense
Interest on deposits		960			1,154
Interest on short-term borrowings		14			16
Interest on long-term borrowings		1,277			1,502
Total interest expense		2,251			2,672
Net interest income		9,210			8,825
Provision for loan losses		500			688
Net interest income after provision for loan losses		8,710			8,137
Other operating income
Net gains– other		95			166
Total net gains		95			166
Service charges		792			747
Trust department		1,455			1,354
Debit card income		578			529
Bank owned life insurance		294			249
Brokerage commissions		238			201
Other		90			88
Total other income		3,447			3,168
Total other operating income		3,542			3,334
Other operating expenses
Salaries and employee benefits		5,445			4,910
FDIC premiums		474			478
Equipment		634			625
Occupancy		617			592
Data processing		871			803
Professional Services		240			239
Other real estate owned		(71	)		514
Other		1,500			1,747
Total other operating expenses		9,710			9,908
Income before income tax expense		2,542			1,563
Provision for income tax expense		594			223
Net Income		1,948			1,340
Accumulated preferred stock dividends and discount accretion		(675	)		(675	)
Net Income Available to Common Shareholders	$	1,273		$	665
Basic and diluted net income per common share	$	0.20		$	0.10
Weighted average number of basic and diluted shares outstanding		6,255			6,228

See accompanying notes to the consolidated financial statements

FIRST UNITED CORPORATION

Consolidated Statement of Comprehensive Income

(In thousands)

	Nine months ended
	September 30,
	2015			2014
Comprehensive Income (in thousands)	(Unaudited)
Net Income	$	4,491		$	3,938

Other comprehensive income/(loss), net of tax and reclassification adjustments:
Net unrealized gains on investments with OTTI		3,729			3,388

Net unrealized gains on all other AFS securities		1,394			8,255

Net unrealized gains/(losses) on HTM securities		225			(2,315	)

Net unrealized gains on cash flow hedges		55			137

Net unrealized losses on pension		(2,452	)		(650	)

Net unrealized gains on SERP		31			1

Other comprehensive income, net of tax		2,982			8,816

Comprehensive income	$	7,473		$	12,754

See accompanying notes to the consolidated financial statements

FIRST UNITED CORPORATION

Consolidated Statement of Comprehensive Income

(In thousands)

	Three months ended
	September 30,
	2015			2014
Comprehensive Income (in thousands)	(Unaudited)
Net Income	$	1,948		$	1,340

Other comprehensive income/(loss), net of tax and reclassification adjustments:
Net unrealized gains on investments with OTTI		913			346

Net unrealized gains/(losses) on all other AFS securities		727			(87	)

Net unrealized gains on HTM securities		64			57

Net unrealized gains on cash flow hedges		20			26

Net unrealized losses on pension		(1,616	)		(687	)

Net unrealized gains on SERP		10			0

Other comprehensive income/(loss), net of tax		118			(345	)

Comprehensive income	$	2,066		$	995

See accompanying notes to the consolidated financial statements

FIRST UNITED CORPORATION

Consolidated Statement of Changes in Shareholders’ Equity

(In thousands)

	Preferred Stock		Common Stock		Surplus		Retained Earnings			Accumulated Other Comprehensive Income/(Loss)			Total Shareholders' Equity
	(Unaudited)
Balance at January 1, 2014	$	29,994	$	62	$	21,661	$	74,379		$	(24,213	)	$	101,883

Net income								5,597						5,597
Other comprehensive income											3,980			3,980
Stock based compensation						134								134
Preferred stock discount accretion		6						(6	)					0
Preferred stock dividends paid								(2,595	)					(2,595	)

Balance at December 31, 2014		30,000		62		21,795		77,375			(20,233	)		108,999

Net income								4,491						4,491
Other comprehensive income											2,982			2,982
Stock based compensation				1		144								145
Preferred stock dividends paid								(2,025	)					(2,025	)

Balance at September 30, 2015	$	30,000	$	63	$	21,939	$	79,841		$	(17,251	)	$	114,592

See accompanying notes to the consolidated financial statements

FIRST UNITED CORPORATION

Consolidated Statement of Cash Flows

(In thousands)

	Nine months ended
	September 30,
	2015			2014
	(Unaudited)
Operating activities
Net income	$	4,491		$	3,938
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		626			1,629
Depreciation		1,307			1,471
Stock compensation		144			95
(Gain)/loss on sales of other real estate owned		(718	)		921
Write-downs of other real estate owned		1,202			885
Gain on loan sales		(40	)		(37	)
Loss on disposal of fixed assets		2			3
Net amortization of investment securities discounts and premiums- AFS		436			152
Net amortization of investment securities discounts and premiums- HTM		78			19
(Gains)/losses on sales of investment securities – available-for-sale		(62	)		7
Gain on sales of investment securities – held for trading		0			(1,100	)
Amortization of deferred loan fees		(408	)		(363	)
Decrease in accrued interest receivable and other assets		2,638			2,229
Decrease/(increase) in deferred tax benefit		377			(4	)
Decrease in accrued interest payable and other liabilities		(137	)		(5,685	)
Earnings on bank owned life insurance		(849	)		(737	)
Net cash provided by operating activities		9,087			3,423

Investing activities
Proceeds from maturities/calls of investment securities available-for-sale		38,713			122,291
Proceeds from maturities/calls of investment securities held-to-maturity		6,348			3,275
Proceeds from sales of investment securities available-for-sale		52,672			56,838
Proceeds from sales of investment securities held for trading		0			1,100
Purchases of investment securities available-for-sale		(47,640	)		(153,924	)
Purchases of investment securities held-to-maturity		(3,709	)		(2,421	)
Proceeds from sales of other real estate owned		5,870			5,667
Proceeds from loan sales		4,935			4,312
Proceeds from disposal of fixed assets		6			0
Purchase of BOLI policy		(5,500	)		0
Net decrease in FHLB stock		1,620			389
Net increase in loans		(8,967	)		(23,782	)
Purchases of premises and equipment		(699	)		(570	)
Net cash provided by investing activities		43,649			13,175

Financing activities
Net increase/(decrease) in deposits		15,018			(4,370	)
Preferred stock dividends paid		(2,025	)		(8,420	)
Common stock grants		1			0
Net (decrease)/increase in short-term borrowings		(1,341	)		4,318
Payments on long-term borrowings		(35,051	)		(49	)
Net cash used in financing activities		(23,398	)		(8,521	)
Increase in cash and cash equivalents		29,338			8,077
Cash and cash equivalents at beginning of the year		35,451			43,063
Cash and cash equivalents at end of period	$	64,789		$	51,140

Supplemental information
Interest paid	$	7,533		$	14,995
Non-cash investing activities:
Transfers from loans to other real estate owned	$	899		$	2,030
Security sold September 30, settled in October	$	0		$	618
Transfers from securities available for sale to held-to-maturity	$	0		$	103,934

See accompanying notes to the consolidated financial statements

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. Operating results for the nine- and three-month periods ended September 30, 2015 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, 2014. For purposes of comparability, certain prior period amounts have been reclassified to conform to the 2015 presentation. Such reclassifications had no impact on net income or equity.

Subsequent Events –

On October 30, 2015, First United Corporation and its bank subsidiary, First United Bank & Trust (collectively, “First United”), were notified by the Financial Industry Regulatory Authority (“FINRA”) that a FINRA arbitration panel had awarded $11.5 million in compensatory damages to First United in a proceeding that First United brought against FTN Financial Securities Corp. (“FTN”) and two of its representatives. First United alleged, among other things, that, in recommending and selling certain trust preferred securities to First United, FTN committed fraud, breached its fiduciary duty to First United, breached its contract with First United and violated rules concerning suitability and other regulatory standards. FTN paid the $11.5 million award amount to First United on November 5, 2015.

First United Corporation has evaluated events and transactions occurring subsequent to the statement of financial condition date of September 30, 2015 for items that should potentially be recognized or disclosed in these financial statements as prescribed by ASC Topic 855, Subsequent Events.

As used in these notes to consolidated financial statements, First United Corporation and its consolidated subsidiaries are sometimes collectively referred to as the “Corporation”.

Note 2 – Earnings Per Common Share

Basic earnings per common share is derived by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period and does not include the effect of any potentially dilutive common stock equivalents. Diluted earnings per share is derived by dividing net income available to common shareholders by the weighted-average number of shares outstanding, adjusted for the dilutive effect of outstanding common stock equivalents.

The following tables set forth the calculation of basic and diluted earnings per common share for the nine- and three-month periods ended September 30, 2015 and 2014:

	Nine months ended September 30,
	2015							2014
				Average		Per Share					Average		Per Share
(in thousands, except for per share amount)	Income			Shares		Amount		Income			Shares		Amount
Basic and Diluted Earnings Per Share:
Net income	$	4,491						$	3,938
Preferred stock dividends		(2,025	)						(1,919	)
Discount accretion on preferred stock		0							(6	)

Net income available to common shareholders	$	2,466			6,247	$	0.39	$	2,013			6,220	$	0.32

	Three months ended September 30,
	2015							2014
				Average		Per Share					Average		Per Share
(in thousands, except for per share amount)	Income			Shares		Amount		Income			Shares		Amount
Basic and Diluted Earnings Per Share:
Net income	$	1,948						$	1,340
Preferred stock dividends deferred		(675	)						(675	)
Discount accretion on preferred stock		0							0

Net income available to common shareholders	$	1,273			6,255	$	0.20	$	665			6,228	$	0.10

Note 3 – Net Gains

The following table summarizes the gain/(loss) activity for the nine- and three-month periods ended September 30, 2015 and 2014:

	Nine months ended						Three months ended
	September 30,						September 30,
(in thousands)	2015			2014			2015			2014
Net gains – other:
Available-for-sale securities:
Realized gains	$	373		$	427		$	217		$	222
Realized losses		(311	)		(434	)		(138	)		(75	)
Held-for-trading:
Realized gains		0			1,100			0			0
Gain on sale of consumer loans		40			37			16			19
Loss on disposal of fixed assets		(2	)		(3	)		0			0
Net gains – other	$	100		$	1,127		$	95		$	166

Note 4 – Cash and Cash Equivalents

Cash and due from banks, which represents vault cash in the retail offices and invested cash balances at the Federal Reserve and other correspondent banks, is carried at cost which approximates fair value.

	September 30,		December 31,
(in thousands)	2015		2014
Cash and due from banks, weighted average interest rate of 0.10% (at September 30, 2015)	$	61,406	$	27,554

Interest bearing deposits in banks, which represent funds invested at a correspondent bank, are carried at cost which approximates fair value and, as of September 30, 2015 and December 31, 2014, consisted of daily funds invested at the Federal Home Loan Bank (“FHLB”) of Atlanta, First Tennessee Bank (“FTN”), and Merchants and Traders (“M&T”).

	September 30,		December 31,
(in thousands)	2015		2014
FHLB daily investments, interest rate of 0.005% (at September 30, 2015)	$	1,521	$	983
FTN daily investments, interest rate of 0.07% (at September 30, 2015)		850		850
M&T daily investments, interest rate of 0.15% (at September 30, 2015)		1,012		6,064
	$	3,383	$	7,897

Note 5 – Investments

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

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

The following table shows a comparison of amortized cost and fair values of investment securities at September 30, 2015 and December 31, 2014:

(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		OTTI in AOCI
September 30, 2015
Available for Sale:
U.S. government agencies	$	34,096	$	125	$	0	$	34,221	$	0
Residential mortgage-backed agencies		14,495		162		163		14,494		0
Commercial mortgage-backed agencies		45,162		669		26		45,805		0
Collateralized mortgage obligations		10,172		92		47		10,217		0
Obligations of states and political subdivisions		48,065		1,081		292		48,854		0
Collateralized debt obligations		35,636		3,631		7,339		31,928		(60	)
Total available for sale	$	187,626	$	5,760	$	7,867	$	185,519	$	(60	)

Held to Maturity:
U.S. government agencies	$	24,658	$	784	$	0	$	25,442	$	0
Residential mortgage-backed agencies		54,869		689		83		55,475		0
Commercial mortgage-backed agencies		18,148		565		0		18,713		0
Collateralized mortgage obligations		6,432		0		34		6,398		0
Obligations of states and political subdivisions		2,625		106		0		2,731		0
Total held to maturity	$	106,732	$	2,144	$	117	$	108,759	$	0

December 31, 2014
Available for Sale:
U.S. treasuries	$	29,607	$	0	$	11	$	29,596	$	0
U.S. government agencies		39,077		117		253		38,941		0
Residential mortgage-backed agencies		45,175		510		412		45,273		0
Commercial mortgage-backed agencies		26,007		53		103		25,957		0
Collateralized mortgage obligations		8,611		96		0		8,707		0
Obligations of states and political subdivisions		46,151		1,413		260		47,304		0
Collateralized debt obligations		37,117		1,155		12,933		25,339		6,143
Total available for sale	$	231,745	$	3,344	$	13,972	$	221,117	$	6,143
Held to Maturity:
U.S. government agencies	$	24,520	$	514	$	0	$	25,034	$	0
Residential mortgage-backed agencies		58,400		613		5		59,008		0
Commercial mortgage-backed agencies		16,425		312		0		16,737		0
Collateralized mortgage obligations		7,379		5		0		7,384		0
Obligations of states and political subdivisions		2,725		0		117		2,608		0
Total held to maturity	$	109,449	$	1,444	$	122	$	110,771	$	0

Proceeds from sales of available for sale securities and the realized gains and losses are as follows:

	Nine months ended				Three months ended
	September 30,				September 30,
(in thousands)	2015		2014		2015		2014
Proceeds	$	52,672	$	56,838	$	28,005	$	616
Realized gains		373		1,527		217		222
Realized losses		311		434		138		75

The following table shows the Corporation’s investment securities with gross unrealized losses and fair values at September 30, 2015 and December 31, 2014, 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		Fair Value		Unrealized Losses
September 30, 2015
Available for Sale:
Residential mortgage-backed agencies	$	0	$	0	$	8,110	$	163
Commercial mortgage-backed agencies		5,733		26		0		0
Collateralized mortgage obligations		5,560		47		0		0
Obligations of states and political subdivisions		18,168		151		4,320		141
Collateralized debt obligations		0		0		22,976		7,339
Total available for sale	$	29,461	$	224	$	35,406	$	7,643

Held to Maturity:
Residential mortgage-backed agencies	$	7,838	$	83	$	0	$	0
Collateralized mortgage obligations		6,398		34		0		0
Total held to maturity	$	14,236	$	117	$	0	$	0

December 31, 2014
Available for Sale:
U.S. treasuries	$	27,096	$	11	$	0	$	0
U.S. government agencies		0	$	0	$	18,819	$	253
Residential mortgage-backed agencies		0		0		17,918		412
Commercial mortgage-backed agencies		12,298		97		973		6
Obligations of states and political subdivisions		0		0		8,981		260
Collateralized debt obligations		0		0		20,290		12,933
Total available for sale	$	39,394	$	108	$	66,981	$	13,864
Held to Maturity:
Residential mortgage-backed agencies		3,850		5		0		0
Obligations of states and political subdivisions		0		0		2,608		117
Total held to maturity	$	3,850	$	5	$	2,608	$	117

Management systematically evaluates securities for impairment on a quarterly basis. 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 its anticipated recovery. If neither applies, then declines in the fair values of securities below their cost that are considered other-than-temporary declines are split into two components. The first is the loss attributable to declining credit quality. Credit losses are recognized in earnings as realized losses in the period in which the impairment determination is made. The second component consists of all other losses, which are recognized in other comprehensive loss. In estimating other-than-temporary impairment (“OTTI”) losses, management considers (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). Further discussion about the evaluation of securities for impairment can be found in Item 2 of Part I of this report under the heading “Investment Securities”.

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. Based on management’s review of the assumptions and results of the third-party review, it believes that the valuations are adequate at September 30, 2015.

U.S. Government Agencies – Available for Sale – There were no U.S. government agencies in an unrealized loss position as of September 30, 2015.

Residential Mortgage-Backed Agencies – Available for Sale - There were no residential mortgage-backed agencies in an unrealized loss position for less than 12 months as of September 30, 2015. There was one residential mortgage-backed agency security in an unrealized loss position for 12 months or more. The security is of the highest investment grade and the Corporation does not intend to sell it, and it is not more likely than not that the Corporation will be required to sell the security before recovery of its amortized cost basis, which may be at maturity. Accordingly, management does not consider this investment to be other-than-temporarily impaired at September 30, 2015.

Commercial Mortgage-Backed Agencies – Available for Sale – There were two commercial mortgage-backed agencies in an unrealized loss position for less than 12 months as of September 30, 2015. The securities are of the highest investment grade and the Corporation does not intend to sell them, and it is not more likely than not that the Corporation will be required to sell them before recovery of their amortized cost basis, which may be at maturity. Accordingly, management does not consider these investments to be other-than-temporarily impaired at September 30, 2015. There were no commercial mortgage-backed agency securities in an unrealized loss position for 12 months or more.

Collateralized Mortgage Obligations – Available for Sale – There was one collateralized mortgage obligation in an unrealized loss position for less than 12 months as of September 30, 2015. The security is of the highest investment grade and the Corporation does not intend to sell it, and it is not more likely than not that the Corporation will be required to sell it before recovery of its amortized cost basis, which may be at maturity. Accordingly, management does not consider this investment to be other-than-temporarily impaired at September 30, 2015. There were no collateralized mortgage obligations in an unrealized loss position for 12 months or more.

Obligations of State and Political Subdivisions – Available for Sale – There were 10 obligations of state and political subdivisions that have been in an unrealized loss position for less than 12 months at September 30, 2015. There was one security that has been in an unrealized loss position for 12 months or more. These investments are of investment grade as determined by the major rating agencies and management reviews the ratings of the underlying issuers and performs an in-depth credit analysis on the securities. Management believes that this portfolio is well-diversified throughout the United States, and all bonds continue to perform according to their contractual terms. The Corporation does not intend to sell these investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity. Accordingly, management does not consider these investments to be other-than-temporarily impaired at September 30, 2015.

Collateralized Debt Obligations – Available for Sale - The $7.3 million in unrealized losses greater than 12 months at September 30, 2015 relates to 12 pooled trust preferred securities that are included in the CDO portfolio. 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 non-cash OTTI charges during the first nine months of 2015. The unrealized losses on the remaining securities in the portfolio are primarily attributable to continued depression in market interest rates, marketability, liquidity and the current economic environment.

U.S. Government Agencies – Held to Maturity – There were no U.S. government agencies in an unrealized loss position as of September 30, 2015.

Residential Mortgage-Backed Agencies – Held to Maturity - Five residential mortgage-backed agencies have been in an unrealized loss position for less than 12 months as of September 30, 2015. The securities are of the highest investment grade and the Corporation has the intent and ability to hold the investments to maturity. Accordingly, management does not consider these investments to be other-than-temporarily impaired at September 30, 2015. There were no residential mortgage-backed agencies in an unrealized loss position for 12 months or more.

Commercial Mortgage-Backed Agencies – Held to Maturity - There were no commercial mortgage-backed agencies in the Held to Maturity portfolio as of September 30, 2015 in a loss position.

Collateralized Mortgage Obligations – Held to Maturity – There was one collateralized mortgage obligations in an unrealized loss position for less than 12 months as of September 30, 2015. The security is of the highest investment grade and the Corporation has the intent and ability to hold the investment to maturity. Accordingly, management does not consider this investment to be other-than-temporarily impaired at September 30, 2015. There were no collateralized mortgage obligations in an unrealized loss position for 12 months or more.

Obligations of State and Political Subdivisions – Held to Maturity – There were no obligations of state and political subdivisions in the Held to Maturity portfolio as of September 30, 2015 in a loss position.

The following tables present a cumulative roll-forward of the amount of non-cash OTTI charges related to credit losses which have been recognized in earnings for the trust preferred securities in the CDO portfolio held and not intended to be sold for the nine- and three-month periods ended September 30, 2015 and 2014:

	Nine months ended September 30,
(in thousands)	2015			2014
Balance of credit-related OTTI at January 1	$	12,583		$	13,422
Reduction for increases in cash flows expected to be collected		(479	)		(501	)
Balance of credit-related OTTI at September 30	$	12,104		$	12,921

	Three months ended September 30,
(in thousands)	2015			2014
Balance of credit-related OTTI at July 1	$	12,243		$	13,091
Reduction for increases in cash flows expected to be collected		(139	)		(170	)
Balance of credit-related OTTI at September 30	$	12,104		$	12,921

The amortized cost and estimated fair value of securities by contractual maturity at September 30, 2015 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.

	September 30, 2015
(in thousands)	Amortized Cost		Fair Value
Contractual Maturity
Available for sale:
Due after one year through five years	$	37,604	$	37,899
Due after five years through ten years		14,765		15,355
Due after ten years		65,428		61,749
		117,797		115,003

Residential mortgage-backed agencies	$	14,495	$	14,494
Commercial mortgage-backed agencies		45,162		45,805
Collateralized mortgage obligations		10,172		10,217
	$	187,626	$	185,519
Held to Maturity:
Due after five years through ten years	$	15,571	$	16,100
Due after ten years		11,712		12,073
		27,283		28,173

Residential mortgage-backed agencies	$	54,869	$	55,475
Commercial mortgage-backed agencies		18,148		18,713
Collateralized mortgage obligations		6,432		6,398
	$	106,732	$	108,759

Note 6 - Restricted Investment in Bank Stock

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

Management evaluates the restricted stock for impairment in accordance with ASC Industry Topic 942, Financial Services – Depository and Lending-(ASC Section 942-325-35). Management’s evaluation of potential impairment is based on management’s assessment of the ultimate recoverability of the cost of the restricted stock rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability is influenced by criteria such as (a) the significance of the decline in net assets of the issuing bank as compared to the capital stock amount for that bank and the length of time this situation has persisted, (b) commitments by the issuing bank to make payments required by law or regulation and the level of such payments in relation to the operating performance of that bank, and (c) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the issuing bank. Management has evaluated the restricted stock for impairment and believes that no impairment charge is necessary as of September 30, 2015.

The Corporation recognizes dividends received on its restricted stock investments on a cash basis. For the nine months ended September 30, 2015, dividends of $234,445 were recognized in earnings. For the comparable period of 2014, dividends of $212,665 were recognized in earnings. For the three months ended September 30, 2015 and 2014, dividends of $78,777 and $68,329, respectively, were recognized in earnings.

Note 7 – Loans and Related Allowance for Loan Losses

The following table summarizes the primary segments of the loan portfolio as of September 30, 2015 and December 31, 2014:

(in thousands)	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Residential Mortgage		Consumer		Total
September 30, 2015

Individually evaluated for impairment	$	12,484	$	5,690	$	1,031	$	4,820	$	0	$	24,025
Collectively evaluated for impairment	$	253,449	$	93,066	$	73,749	$	374,127	$	24,676	$	819,067
Total loans	$	265,933	$	98,756	$	74,780	$	378,947	$	24,676	$	843,092

December 31, 2014

Individually evaluated for impairment	$	11,949	$	6,553	$	1,861	$	4,418	$	0	$	24,781
Collectively evaluated for impairment	$	244,115	$	92,748	$	91,394	$	363,223	$	23,730	$	815,210
Total loans	$	256,064	$	99,301	$	93,255	$	367,641	$	23,730	$	839,991

The segments of the Bank’s loan portfolio are disaggregated to a level that allows management to monitor risk and performance. The commercial real estate (“CRE”) loan segment is then segregated into two classes. Non-owner occupied CRE loans, which include loans secured by non-owner occupied, non-farm, and nonresidential properties, generally have a greater risk profile than all other CRE loans, which include loans secured by farmland, multifamily structures and owner-occupied commercial structures. The acquisition and development (“A&D”) loan segment is segregated into two classes. One-to-four family residential construction loans are generally made to individuals for the acquisition of and/or construction on a lot or lots on which a residential dwelling is to be built. All other A&D loans are generally made to developers or investors for the purpose of acquiring, developing and constructing residential or commercial structures. A&D loans have a higher risk profile because the ultimate buyer, once development is completed, is generally not known at the time of the loan is made. The commercial and industrial (“C&I”) loan segment consists of loans made for the purpose of financing the activities of commercial customers. The residential mortgage loan segment is segregated into two classes. Amortizing term loans are primarily first lien loans. Home equity lines of credit are generally second lien loans. The consumer loan segment consists primarily of installment loans (direct and indirect) and overdraft lines of credit connected with customer deposit accounts.

Management uses a 10-point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a substandard classification. Loans in the substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are considered Substandard. The portion of a specific allocation of the allowance for loan losses that management believes is associated with a pending event that could trigger loss in the short-term will be classified in the Doubtful category. Any portion of a loan that has been charged off is placed in the Loss category.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. The Bank’s Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in the commercial segments at origination and on an ongoing basis. The Bank’s experienced Credit Quality and Loan Review Department performs an annual review of all commercial relationships of $500,000 or greater. Confirmation of the appropriate risk grade is included as part of the review process on an ongoing basis. The Credit Quality and Loan Review Department continually reviews and assesses loans within the portfolio. In addition, the Bank engages an external consultant to conduct loan reviews on at least an annual basis. Generally, the external consultant reviews commercial relationships greater than $1,000,000 and/or criticized non-consumer loans greater than $500,000. Detailed reviews, including plans for resolution, are performed on loans classified as Substandard on a quarterly basis. Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.

The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention and Substandard within the internal risk rating system as of September 30, 2015 and December 31, 2014:

(in thousands)	Pass		Special Mention		Substandard		Total
September 30, 2015
Commercial real estate
Non owner-occupied	$	125,412	$	11,669	$	10,462	$	147,543
All other CRE		99,712		565		18,113		118,390
Acquisition and development
1-4 family residential construction		15,752		0		700		16,452
All other A&D		75,595		76		6,633		82,304
Commercial and industrial		71,292		252		3,236		74,780
Residential mortgage
Residential mortgage - term		291,679		238		10,350		302,267
Residential mortgage - home equity		74,901		49		1,730		76,680
Consumer		24,659		0		17		24,676
Total	$	779,002	$	12,849	$	51,241	$	843,092

December 31, 2014
Commercial real estate
Non owner-occupied	$	115,276	$	10,884	$	11,273	$	137,433
All other CRE		90,740		8,618		19,273		118,631
Acquisition and development
1-4 family residential construction		12,920		0		790		13,710
All other A&D		72,323		1,356		11,912		85,591
Commercial and industrial		88,579		884		3,792		93,255
Residential mortgage
Residential mortgage - term		280,113		379		10,934		291,426
Residential mortgage - home equity		74,698		90		1,427		76,215
Consumer		23,658		0		72		23,730
Total	$	758,307	$	22,211	$	59,473	$	839,991

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. A loan is considered to be past due when a payment remains unpaid 30 days past its contractual due date. For all loan segments, the accrual of interest is discontinued when principal or interest is delinquent for 90 days or more unless the loan is well-secured and in the process of collection. All non-accrual loans are considered to be impaired. Interest payments received on non-accrual loans are applied as a reduction of the loan principal balance. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. The Corporation’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.

The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and non-accrual loans as of September 30, 2015 and December 31, 2014:

(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
September 30, 2015
Commercial real estate
Non owner-occupied	$	145,975	$	69	$	0	$	0	$	69	$	1,499	$	147,543
All other CRE		112,969		179		187		148		514		4,907		118,390
Acquisition and development
1-4 family residential construction		16,452		0		0		0		0		0		16,452
All other A&D		79,110		0		252		0		252		2,942		82,304
Commercial and industrial		74,532		79		0		0		79		169		74,780
Residential mortgage
Residential mortgage - term		297,653		438		1,638		509		2,585		2,029		302,267
Residential mortgage - home equity		75,374		798		278		0		1,076		230		76,680
Consumer		24,446		178		52		0		230		0		24,676
Total	$	826,511	$	1,741	$	2,407	$	657	$	4,805	$	11,776	$	843,092

December 31, 2014
Commercial real estate
Non owner-occupied	$	135,994	$	104	$	183	$	0	$	287	$	1,152	$	137,433
All other CRE		112,825		1,196		0		0		1,196		4,610		118,631
Acquisition and development
1-4 family residential construction		13,710		0		0		0		0		0		13,710
All other A&D		81,702		239		40		1		280		3,609		85,591
Commercial and industrial		93,060		0		20		4		24		171		93,255
Residential mortgage
Residential mortgage - term		279,340		8,654		1,350		416		10,420		1,666		291,426
Residential mortgage - home equity		74,913		577		313		69		959		343		76,215
Consumer		23,316		287		88		39		414		0		23,730
Total	$	814,860	$	11,057	$	1,994	$	529	$	13,580	$	11,551	$	839,991

Non-accrual loans which have been subject to a partial charge-off totaled $5.1 million at September 30, 2015, compared to $4.6 million at December 31, 2014. Loans secured by 1-4 family residential real estate properties in the process of foreclosure were $2.4 million at September 30, 2015 and $1.9 million at December 31, 2014.

An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.

The Bank’s methodology for determining the ALL is based on the requirements of ASC Section 310-10-35, Receivables-Overall-Subsequent Measurement, for loans individually evaluated for impairment and ASC Subtopic 450-20, Contingencies-Loss Contingencies, for loans collectively evaluated for impairment, as well as the Interagency Policy Statement on the Allowance for Loan and Lease Losses and other bank regulatory guidance. The total of the two components represents the allocated portion of the Bank’s ALL. In the second quarter of 2015, management determined that it would be prudent to establish an unallocated portion of the ALL to protect the Bank from other risks associated with the loan portfolio that may not be specifically identifiable.

The following table summarizes the primary segments of the ALL, as of September 30, 2015 and December 31, 2014 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
September 30, 2015

Individually evaluated for impairment	$	29	$	1,607	$	0	$	84	$	0	$	0	$	1,720
Collectively evaluated for impairment	$	2,552	$	2,881	$	734	$	3,608	$	216	$	500	$	10,491
Total ALL	$	2,581	$	4,488	$	734	$	3,692	$	216	$	500	$	12,211

December 31, 2014

Individually evaluated for impairment	$	36	$	1,141	$	0	$	59	$	0	$	0	$	1,236
Collectively evaluated for impairment	$	2,388	$	2,771	$	1,680	$	3,803	$	187	$	0	$	10,829
Total ALL	$	2,424	$	3,912	$	1,680	$	3,862	$	187	$	0	$	12,065

Management evaluates individual loans in all of the commercial segments for possible impairment if the loan (a) is greater than $500,000 or (b) is part of a relationship that is greater than $750,000 and is either (i) in nonaccrual status or (ii) risk-rated Substandard and greater than 60 days past due. Loans are considered to be impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Bank does not separately evaluate individual consumer and residential mortgage loans for impairment, unless such loans are part of a larger relationship that is impaired; otherwise, loans in these segments are considered impaired when they are classified as non-accrual.

Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using one of three methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less selling costs. The method is selected on a loan-by-loan basis, with management primarily utilizing the fair value of collateral method. If the fair value of the collateral less selling costs method is utilized for collateral securing loans in the commercial segments, then an updated external appraisal is ordered on the collateral supporting the loan if the loan balance is greater than $500,000 and the existing appraisal is greater than 18 months old. If an updated appraisal has not been received and reviewed in time for the determination of estimated fair value at quarter (or year) end, or if the appraisal is found to be deficient following the Corporation’s internal appraisal review process and re-ordered, then the estimated fair value of the collateral is determined by adjusting the existing appraisal by the appropriate percentage from an internally prepared appraisal discount grid. This grid considers the age of a third party appraisal and the geographic region where the collateral is located. The discount rates in the appraisal discount grid are updated periodically to reflect the most current knowledge that management has available, including the results of current appraisals. A specific allocation of the ALL is recorded if there is any deficiency in collateral value determined by comparing the estimated fair value to the recorded investment of the loan. When updated appraisals are received and reviewed, adjustments are made to the specific allocation as needed.

The evaluation of the need and amount of a specific allocation of the ALL and whether a loan can be removed from impairment status is made on a quarterly basis.

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of September 30, 2015 and December 31, 2014:

	Impaired Loans with Specific Allowance				Impaired Loans with No Specific Allowance		Total Impaired Loans
(in thousands)	Recorded Investment		Related Allowances		Recorded Investment		Recorded Investment		Unpaid Principal Balance
September 30, 2015
Commercial real estate
Non owner-occupied	$	137	$	29	$	4,445	$	4,582	$	4,592
All other CRE		0		0		7,902		7,902		8,401
Acquisition and development
1-4 family residential construction		700		68		0		700		746
All other A&D		4,419		1,539		571		4,990		8,756
Commercial and industrial		0		0		1,031		1,031		3,298
Residential mortgage
Residential mortgage - term		298		84		4,245		4,543		4,967
Residential mortgage – home equity		0		0		277		277		298
Consumer		0		0		0		0		0
Total impaired loans	$	5,554	$	1,720	$	18,471	$	24,025	$	31,058

December 31, 2014
Commercial real estate
Non owner-occupied	$	143	$	35	$	4,353	$	4,496	$	4,543
All other CRE		0		0		7,453		7,453		7,944
Acquisition and development
1-4 family residential construction		790		105		0		790		836
All other A&D		3,615		1,037		2,148		5,763		9,590
Commercial and industrial		0		0		1,861		1,861		2,723
Residential mortgage
Residential mortgage - term		296		59		3,779		4,075		4,485
Residential mortgage – home equity		0		0		343		343		363
Consumer		0		0		0		0		0
Total impaired loans	$	4,844	$	1,236	$	19,937	$	24,781	$	30,484

Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative factors.

The classes described above, which are based on the Federal call code assigned to each loan, provide the starting point for the ALL analysis. Management tracks the historical net charge-off activity (full and partial charge-offs, net of full and partial recoveries) at the call code level. A historical charge-off factor is calculated utilizing a defined number of consecutive historical quarters. Consumer pools currently utilize a rolling 12 quarters, while Commercial pools currently utilize a rolling eight quarters.

“Pass” rated credits are segregated from “Criticized” credits for the application of qualitative factors. “Pass” pools for commercial and residential real estate are further segmented based upon the geographic location of the underlying collateral. There are seven geographic regions utilized – six that represent the Bank’s lending footprint and a seventh for all out-of-market credits. Different economic environments and resultant credit risks exist in each region that are acknowledged in the assignment of qualitative factors. Loans in the criticized pools, which possess certain qualities or characteristics that may lead to collection and loss issues, are closely monitored by management and subject to additional qualitative factors.

Management supplements the historical charge-off factor with a number of additional qualitative factors that are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors, which are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources, are: (a) national and local economic trends and conditions; (b) levels of and trends in delinquency rates and non-accrual loans; (c) trends in volumes and terms of loans; (d) effects of changes in lending policies; (e) experience, ability, and depth of lending staff; (f) value of underlying collateral; and (g) concentrations of credit from a loan type, industry and/or geographic standpoint.

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL. Residential mortgage and consumer loans are charged off after they are 120 days contractually past due. All other loans are charged off based on an evaluation of the facts and circumstances of each individual loan. When the Bank believes that its ability to collect is solely dependent on the liquidation of the collateral, a full or partial charge-off is recorded promptly to bring the recorded investment to an amount that the Bank believes is supported by an ability to collect on the collateral. The circumstances that may impact the Bank’s decision to charge-off all or a portion of a loan include default or non-payment by the borrower, scheduled foreclosure actions, and/or prioritization of the Bank’s claim in bankruptcy. There may be circumstances where, due to pending events, the Bank will place a specific allocation of the ALL on a loan for which a partial charge-off has been previously recognized. This specific allocation may be either charged off or removed depending upon the outcome of the pending event. Full or partial charge-offs are not recovered until full principal and interest on the loan have been collected, even if a subsequent appraisal supports a higher value. Loans with partial charge-offs generally remain in non-accrual status. Both full and partial charge-offs reduce the recorded investment of the loan and the ALL and are considered to be charge-offs for purposes of all credit loss metrics and trends, including the historical rolling charge-off rates used in the determination of the ALL. At September 30, 2015, $.5 million of the ALL was considered to be unallocated.

The following tables present the activity in the ALL for the nine- and three-month periods ended September 30, 2015 and 2014:

(in thousands)	Commercial Real Estate			Acquisition and Development			Commercial and Industrial			Residential Mortgage			Consumer			Unallocated		Total
ALL balance at January 1, 2015	$	2,424		$	3,912		$	1,680		$	3,862		$	187		$	0	$	12,065
Charge-offs		(295	)		(256	)		0			(200	)		(247	)		0		(998	)
Recoveries		66			100			24			162			166			0		518
Provision		386			732			(970	)		(132	)		110			500		626
ALL balance at September 30, 2015	$	2,581		$	4,488		$	734		$	3,692		$	216		$	500	$	12,211

ALL balance at January 1, 2014	$	4,052		$	4,172		$	766		$	4,320		$	284		$	0	$	13,594
Charge-offs		(85	)		(2,423	)		(213	)		(682	)		(380	)		0		(3,783	)
Recoveries		11			104			22			183			308			0		628
Provision		(1,386	)		1,857			1,016			158			(16	)		0		1,629
ALL balance at September 30, 2014	$	2,592		$	3,710		$	1,591		$	3,979		$	196		$	0	$	12,068

(in thousands)	Commercial Real Estate			Acquisition and Development			Commercial and Industrial			Residential Mortgage			Consumer			Unallocated		Total
ALL balance at July 1, 2015	$	2,566		$	3,806		$	1,007		$	3,707		$	223		$	500	$	11,809
Charge-offs		(8	)		0			0			(164	)		(73	)		0		(245	)
Recoveries		1			59			4			29			54			0		147
Provision		22			623			(277	)		120			12			0		500
ALL balance at September 30, 2015	$	2,581		$	4,488		$	734		$	3,692		$	216		$	500	$	12,211

ALL balance at July 1, 2014	$	2,839		$	3,642		$	1,553		$	4,178		$	251		$	0	$	12,463
Charge-offs		(64	)		(903	)		(5	)		(116	)		(117	)		0		(1,205	)
Recoveries		1			33			15			27			46			0		122
Provision		(184	)		938			28			(110	)		16			0		688
ALL balance at September 30, 2014	$	2,592		$	3,710		$	1,591		$	3,979		$	196		$	0	$	12,068

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 tables present the average recorded investment in impaired loans by class and related interest income recognized for the periods indicated:

	Nine months ended						Nine months ended
	September 30, 2015						September 30, 2014
(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	$	4,314	$	117	$	0	$	1,890	$	28	$	0
All other CRE		7,626		89		8		9,497		116		67
Acquisition and development
1-4 family residential construction		745		26		0		1,690		34		0
All other A&D		5,311		94		0		8,108		129		0
Commercial and industrial		1,471		60		18		2,065		70		2
Residential mortgage
Residential mortgage - term		4,245		124		4		6,552		154		55
Residential mortgage – home equity		349		0		2		640		4		4
Consumer		7		0		0		11		0		0
Total	$	24,068	$	510	$	32	$	30,453	$	535	$	128

	Three months ended						Three months ended
	September 30, 2015						September 30, 2014
(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	$	4,607	$	39	$	0	$	2,591	$	17	$	0
All other CRE		7,935		34		0		8,506		35		23
Acquisition and development
1-4 family residential construction		701		8		0		1,016		9		0
All other A&D		5,091		31		0		7,540		33		0
Commercial and industrial		1,253		13		0		1,905		21		0
Residential mortgage
Residential mortgage - term		4,400		42		2		6,225		47		3
Residential mortgage – home equity		321		0		0		597		0		3
Consumer		0		0		0		0		0		0
Total	$	24,308	$	167	$	2	$	28,380	$	162	$	29

In the normal course of business, the Bank modifies loan terms for various reasons. These reasons may include as a retention strategy, remaining competitive in the current interest rate environment, and re-amortizing or extending a loan term to better match the loan’s payment stream with the borrower’s cash flows. A modified loan is considered to be a troubled debt restructuring (“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.

When the Bank restructures a loan to a troubled borrower, the loan terms (i.e., interest rate, payment amount, amortization period, and/or maturity date) are modified in such a way as to enable the borrower to cover the modified debt service payments based on current financials and cash flow adequacy. If a borrower’s hardship is thought to be temporary, then modified terms are only offered for that time period. Where possible, the Bank obtains additional collateral and/or secondary payment sources at the time of the restructure in order to put the Bank in the best possible position if the borrower is not able to meet the modified terms. To date, the Bank has not forgiven any principal as a restructuring concession. The Bank will not offer modified terms if it believes that modifying the loan terms will only delay an inevitable permanent default.

All loans designated as TDRs are considered impaired loans and may be in either accruing or non-accruing status. The Bank’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition. Accordingly, the accrual of interest is discontinued when principal or interest is delinquent for 90 days or more unless the loan is well-secured and in the process of collection. If the loan was accruing at the time of the modification, then it continues to be in accruing status subsequent to the modification. Non-accrual TDRs may return to accruing status when there has been sufficient payment performance for a period of at least six months. TDRs are considered to be in payment default if, subsequent to modification, the loans are transferred to non-accrual status or to foreclosure. Loans may be removed from being reported as a TDR in the calendar year following the modification if the interest rate at the time of modification was consistent with the interest rate for a loan with comparable credit risk and the loan has performed according to its modified terms for at least six months.

The volume and type of TDR activity is considered in the assessment of the local economic trends’ qualitative factor used in the determination of the ALL for loans that are evaluated collectively for impairment.

The following tables present the volume and recorded investment at the time of modification of TDRs by class and type of modification that occurred during the periods indicated:

	Temporary Rate Modification				Extension of Maturity				Modification of Payment and Other Terms
(in thousands)	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Nine months ended September 30, 2015
Commercial real estate
Non owner-occupied		0	$	0		1	$	3,097		1	$	136
All other CRE		0		0		1		237		5		3,847
Acquisition and development
1-4 family residential construction		0		0		0		0		1		700
All other A&D		0		0		3		372		1		1,746
Commercial and industrial		0		0		1		930		0		0
Residential mortgage
Residential mortgage – term		1		156		2		599		1		116
Residential mortgage – home equity		0		0		0		0		0		0
Consumer		0		0		0		0		0		0
Total		1	$	156		8	$	5,235		9	$	6,545

	Temporary Rate Modification				Extension of Maturity				Modification of Payment and Other Terms
(in thousands)	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Three months ended September 30, 2015
Commercial real estate
Non owner-occupied		0	$	0		0	$	0		0	$	0
All other CRE		0		0		0		0		0		0
Acquisition and development
1-4 family residential construction		0		0		0		0		1		700
All other A&D		0		0		0		0		1		1,746
Commercial and industrial		0		0		0		0		0		0
Residential mortgage
Residential mortgage – term		1		156		0		0		0		0
Residential mortgage – home equity		0		0		0		0		0		0
Consumer		0		0		0		0		0		0
Total		1	$	156		0	$	0		2	$	2,446

During the nine months ended September 30, 2015, there were eight new TDRs. In addition, 10 existing TDRs which had reached their original modification maturity were re-modified. A $5,744 reduction of the ALL resulted from a change to the impairment evaluation of two loans from evaluated collectively to being evaluated individually. The remaining six new TDRs were impaired at the time of modification, resulting in no impact to the ALL as a result of the modifications and there was no impact to the recorded investment relating to the transfer of these loans.

During the quarter ended June 30, 2015, one residential mortgage loan totaling $70,000 that was modified as a TDR within the previous 12 months was transferred to non-accrual, and is considered a payment default. There were no payment defaults in the quarters ended September 30, 2015 or March 31, 2015.

	Temporary Rate Modification				Extension of Maturity				Modification of Payment and Other Terms
(in thousands)	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Nine Months Ended September 30, 2014
Commercial real estate
Non owner-occupied		0	$	0		2	$	277		0	$	0
All other CRE		0		0		0		0		4		2,627
Acquisition and development
1-4 family residential construction		0		0		0		0		0		0
All other A&D		0		0		0		0		0		0
Commercial and industrial		0		0		0		0		0		0
Residential mortgage
Residential mortgage – term		1		90		0		0		0		0
Residential mortgage – home equity		0		0		0		0		0		0
Consumer		0		0		0		0		0		0
Total		1	$	90		2	$	277		4	$	2,627

	Temporary Rate								Modification of Payment
	Modification				Extension of Maturity				and Other Terms
	Number of		Recorded		Number of		Recorded		Number of		Recorded
(in thousands)	Contracts		Investment		Contracts		Investment		Contracts		Investment
Three Months Ended September 30, 2014
Commercial real estate
Non owner-occupied		0	$	0		0	$	0		0	$	0
All other CRE		0		0		0		0		0		0
Acquisition and development
1-4 family residential construction		0		0		0		0		0		0
All other A&D		0		0		0		0		0		0
Commercial and industrial		0		0		0		0		0		0
Residential mortgage
Residential mortgage – term		0		0		0		0		0		0
Residential mortgage – home equity		0		0		0		0		0		0
Consumer		0		0		0		0		0		0
Total		0	$	0		0	$	0		0	$	0

During the nine months ended September 30, 2014, there were two new TDRs. In addition, five existing TDRs which had reached their original modification maturity were re-modified. A $1,055 reduction of the ALL resulted from a change to the impairment evaluation of one loan, from evaluated collectively to being evaluated individually. The remaining new TDR was impaired at the time of modification, resulting in no impact to the ALL as a result of the modifications and there was no impact to the recorded investment relating to the transfer of these loans.

During the nine months ended September 30, 2014, three A&D loans totaling $1.7 million, a $.2 million C&I loan and a $.4 million owner-occupied CRE loan that were modified as TDRs within the previous 12 months were transferred to non-accrual, and are considered payment defaults.

Note 8 - Other Real Estate Owned

The following table presents the components of Other Real Estate Owned (“OREO”) at September 30, 2015 and December 31, 2014:

(in thousands)	September 30, 2015		December 31, 2014
Commercial real estate	$	1,728	$	1,772
Acquisition and development		4,746		9,263
Residential mortgage		1,003		1,897
Total OREO	$	7,477	$	12,932

The following table presents the activity in the OREO valuation allowance for the nine- and three-month periods ended September 30, 2015 and 2014:

	For the Nine Months Ended						For the Three Months Ended
	September 30,						September 30,
(in thousands)	2015			2014			2015			2014
Balance beginning of period	$	3,440		$	4,047		$	3,843		$	3,742
Fair value write-down		1,202			885			350			442
Sales of OREO		(831	)		(1,155	)		(382	)		(407	)
Balance at end of period	$	3,811		$	3,777		$	3,811		$	3,777

The following table presents the components of OREO expenses, net, for the nine- and three-month periods ended September 30, 2015 and 2014:

	For the Nine Months Ended						For the Three Months Ended
	September 30,						September 30,
(in thousands)	2015			2014			2015			2014
(Gains)/losses on real estate, net	$	(718	)	$	921		$	(640	)	$	(49	)
Fair value write-down, net		1,202			885			350			442
Expenses, net		704			594			248			237
Rental and other income		(212	)		(272	)		(29	)		(116	)
Total OREO expense/(income), net	$	976		$	2,128		$	(71	)	$	514

Note 9 – Fair Value of Financial Instruments

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

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

The Corporation measures fair values based on the fair value hierarchy established in ASC Paragraph 820-10-35-37. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of inputs that may be used to measure fair value under the hierarchy are as follows:

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

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

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

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

Management believes that the Corporation’s valuation techniques are appropriate and consistent with the techniques used by other market participants. However, the use of different methodologies and assumptions could result in a different estimate of fair values at the reporting date. The valuation techniques used by the Corporation to measure, on a recurring and non-recurring basis, the fair value of assets as of September 30, 2015 are discussed in the paragraphs that follow.

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

The fair value of investments is determined using a market approach. As of September 30, 2015, the U.S. Government agencies, residential and commercial mortgage-backed securities, collateralized mortgage obligations, and state and political subdivisions 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 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 September 30, 2015, the Corporation owned 16 pooled trust preferred securities with an amortized cost of $35.6 million and a fair value of $31.9 million. The market for these securities at September 30, 2015 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 few CDOs have been issued since 2007. There are currently very few market participants who are willing to effect transactions in these securities. The market values for these securities or any securities other than those issued or guaranteed by the U.S. Department of the Treasury (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 September 30, 2015, (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 relies on 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 September 30, 2015.

The approach used by the third party to determine fair value involves several steps, including detailed credit and structural evaluation of each piece of collateral in each bond, 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. Therefore, adjustments to the baseline discount rate are also made to reflect the additional leverage found in structured instruments.

Derivative financial instruments (Cash flow hedge) – The Corporation’s open derivative positions are interest rate swaps that are classified as Level 3 within the valuation hierarchy. 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, based upon the guidance of the loan impairment subsection of the Receivables Topic, ASC Section 310-10-35, under which the Corporation has measured impairment generally based on the fair value of the loan’s collateral. Fair value consists of the loan balance less its valuation allowance and is generally determined based on independent third-party appraisals of the collateral or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values based upon the lowest level of input that is significant to the fair value measurements.

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

For Level 3 assets and liabilities measured at fair value on a recurring and non-recurring basis as of September 30, 2015 and December 31, 2014, the significant unobservable inputs used in the fair value measurements were as follows:

(in thousands)	Fair Value at September 30, 2015			Valuation Technique	Significant Unobservable Inputs	Significant Unobservable Input Value
Recurring:

Investment Securities – available for sale	$	31,928		Discounted Cash Flow	Discount Rate	Range of Libor+ 5.50% to 9.50%

Cash Flow Hedge	$	(107	)	Discounted Cash Flow	Reuters Third Party Market Quote	99.9% (weighted avg 99.9%)

Non-recurring:

Impaired Loans	$	5,985		Market Comparable Properties	Marketability Discount	3% -15% ⁽¹⁾(weighted avg 11.6%)

Other Real Estate Owned	$	2,278		Market Comparable Properties	Marketability Discount	10.0% -15.0%⁽¹⁾(weighted avg 12.3%)

(in thousands)	Fair Value at December 31, 2014			Valuation Technique	Significant Unobservable Inputs	Significant Unobservable Input Value
Recurring:

Investment Securities – available for sale	$	25,339		Discounted Cash Flow	Discount Rate	Range of Libor+ 5% to 12%

Cash Flow Hedge	$	(199	)	Discounted Cash Flow	Reuters Third Party Market Quote	99.9% (weighted avg 99.9%)

Non-recurring:

Impaired Loans	$	9,122		Market Comparable Properties	Marketability Discount	10% ⁽¹⁾(weighted avg 10%)

Other Real Estate Owned	$	2,511		Market Comparable Properties	Marketability Discount	10% -15% ⁽¹⁾(weighted avg 11%)

NOTE:

(1)

Range would include discounts taken since appraisal and estimated values

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 September 30, 2015 and December 31, 2014 are as follows:

				Fair Value Measurements at September 30, 2015 Using
	Assets Measured at Fair Value			Quoted Prices in Active Markets for Identical Assets	Significant Other Observable Inputs		Significant Unobservable Inputs
(in thousands)	9/30/2015			(Level 1)	(Level 2)		(Level 3)
Recurring:
Investment securities available-for-sale:
U.S. government agencies	$	34,221			$	34,221
Residential mortgage-backed agencies	$	14,494			$	14,494
Commercial mortgage-backed agencies	$	45,805			$	45,805
Collateralized mortgage obligations	$	10,217			$	10,217
Obligations of states and political subdivisions	$	48,854			$	48,854
Collateralized debt obligations	$	31,928					$	31,928
Financial Derivative	$	(107	)				$	(107	)
Non-recurring:
Impaired loans	$	5,985					$	5,985
Other real estate owned	$	2,278					$	2,278

				Fair Value Measurements at December 31, 2014 Using
	Assets Measured at Fair Value			Quoted Prices in Active Markets for Identical Assets	Significant Other Observable Inputs		Significant Unobservable Inputs
(in thousands)	12/31/2014			(Level 1)	(Level 2)		(Level 3)
Recurring:
Investment securities available-for-sale:
U.S. treasuries	$	29,596			$	29,596
U.S. government agencies	$	38,941			$	38,941
Residential mortgage-backed agencies	$	45,273			$	45,273
Commercial mortgage-backed agencies	$	25,957			$	25,957
Collateralized mortgage obligations	$	8,707			$	8,707
Obligations of states and political subdivisions	$	47,304			$	47,304
Collateralized debt obligations	$	25,339					$	25,339
Financial Derivative	$	(199	)				$	(199	)
Non-recurring:
Impaired loans	$	9,122					$	9,122
Other real estate owned	$	2,511					$	2,511

There were no transfers of assets between any of the fair value hierarchy for the nine-month periods ended September 30, 2015 and 2014.

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 nine- and three-month periods ended September 30, 2015 and 2014:

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
(In thousands)	Investment Securities Available for Sale		Cash Flow Hedge
Beginning balance January 1, 2015	$	25,339	$	(199	)
Total gains realized/unrealized:
Included in other comprehensive income		6,589		92
Ending balance September 30, 2015	$	31,928	$	(107	)

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
(in thousands)	Investment Securities Available for Sale		Cash Flow Hedge
Beginning balance January 1, 2014	$	17,538	$	(457	)
Total gains realized/unrealized:
Included in other comprehensive income		6,868		229
Ending balance September 30, 2014	$	24,406	$	(228	)

	Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
(in thousands)	Investment Securities Available for Sale		Cash Flow Hedge
Beginning balance July 1, 2015	$	30,046	$	(140	)
Total gains realized/unrealized:
Included in other comprehensive income		1,882		33
Ending balance September 30, 2015	$	31,928	$	(107	)

	Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
(in thousands)	Investment Securities Available for Sale		Cash Flow Hedge
Beginning balance July 1, 2014	$	23,921	$	(272	)
Total gains realized/unrealized:
Included in other comprehensive income		485		44
Ending balance September 30, 2014	$	24,406	$	(228	)

Gains (realized and unrealized) included in earnings for the periods identified above are reported in the Consolidated Statement of Operations in Other Operating Income. 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 nine- and three- months ended September 30, 2015 and 2014.

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.

The following methods and assumptions were used by the Corporation to estimate its fair value disclosures for financial instruments:

Cash and due from banks: The carrying amounts as reported in the statement of financial condition for cash and due from banks approximate their fair values.

Interest bearing deposits in banks: The carrying amount of interest bearing deposits approximates their fair values.

Securities held to maturity: Investments in debt securities classified as held to maturity are measured subsequently at amortized cost in the statement of financial position.

Restricted investment in bank stock: The carrying value of stock issued by the FHLB of Atlanta, ACBB and CBB approximates fair value based on the redemption provisions of the stock.

Loans (excluding impaired loans with specific loss allowances): For variable-rate loans that re-price frequently or “in one year or less”, and with no significant change in credit risk, fair values are based on carrying values. Fair values for fixed-rate loans that do not re-price frequently are estimated using a discounted cash flow calculation that applies current market interest rates being offered on the various loan products.

Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings, and certain types of money market accounts, etc.) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on the various certificates of deposit to the cash flow stream.

Borrowed funds: The fair value of the Bank’s FHLB borrowings and junior subordinated debt is calculated based on the discounted value of contractual cash flows, using rates currently existing for borrowings with similar remaining maturities. The carrying amounts of federal funds purchased and securities sold under agreements to repurchase approximate their fair values.

Accrued interest: The carrying amount of accrued interest receivable and payable approximates their fair values.

Off-balance-sheet financial instruments: In the normal course of business, the Bank makes commitments to extend credit and issues standby letters of credit. The Bank expects most of these commitments to expire without being drawn upon; therefore, the commitment amounts do not necessarily represent future cash requirements. Due to the uncertainty of cash flows and difficulty in the predicting the timing of such cash flows, fair values were not estimated for these instruments.

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:

	September 30, 2015				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	$	61,406	$	61,406	$	61,406
Interest bearing deposits in banks		3,383		3,383		3,383
Investment securities - AFS		185,519		185,519			$	153,591	$	31,928
Investment securities - HTM		106,732		108,759				106,134		2,625
Restricted bank stock		5,904		5,904				5,904
Loans, net		830,881		835,132						835,132
Accrued interest receivable		3,709		3,709				3,709

Financial Liabilities:
Deposits – non-maturity		730,899		730,899				730,899
Deposits – time deposits		265,442		269,464				269,464
Short-term borrowed funds		38,460		38,460				38,460
Long-term borrowed funds		147,555		150,565				150,565
Accrued interest payable		622		622				622
Financial derivative		107		107						107
Off balance sheet financial instruments		0		0		0

	December 31, 2014				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	$	27,554	$	27,554	$	27,554
Interest bearing deposits in banks		7,897		7,897		7,897
Investment securities - AFS		221,117		221,117			$	195,778	$	25,339
Investment securities - HTM		109,449		110,771				108,163		2,608
Restricted bank stock		7,524		7,524				7,524
Loans, net		827,926		830,904						830,904
Accrued interest receivable		4,152		4,152				4,152

Financial Liabilities:
Deposits- non-maturity		689,581		689,581				689,581
Deposits- time deposits		291,742		296,713				296,713
Short-term borrowed funds		39,801		39,801				39,801
Long-term borrowed funds		182,606		187,143				187,143
Accrued interest payable		882		882				882
Financial derivative		199		199						199
Off balance sheet financial instruments		0		0		0

Loans are measured using a discounted cash flow method. The significant unobservable inputs used in the Level 3 fair value measurements of the Corporation’s loans included in the tables above are calculated based on the Corporation’s internal new volume rate.

Note 10 – 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, 2014 and the three-month periods ended March 31, 2015, June 30, 2015 and September 30, 2015:

(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, 2014	$	(7,623	)	$	(11,292	)	$	0		$	(274	)	$	(5,088	)	$	64		$	(24,213	)
Other comprehensive income/(loss) before reclassifications		4,349			8,712			(2,395	)		155			(6,513	)		(319	)		3,989
Amounts reclassified from accumulated other comprehensive loss		(405	)		25			140			0			209			22			(9	)
Balance - December 31, 2014	$	(3,679	)	$	(2,555	)	$	(2,255	)	$	(119	)	$	(11,392	)	$	(233	)	$	(20,233	)
Other comprehensive income/(loss) before reclassifications		1,670			621			0			21			(202	)		0			2,110
Amounts reclassified from accumulated other comprehensive loss		(100	)		58			70			0			112			10			150
Balance – March 31, 2015	$	(2,109	)	$	(1,876	)	$	(2,185	)	$	(98	)	$	(11,482	)	$	(223	)	$	(17,973	)
Other comprehensive income/(loss) before reclassifications		1,350			36			0			14			(856	)		0			544
Amounts reclassified from accumulated other comprehensive loss		(104	)		(48	)		91			0			110			11			60
Balance – June 30, 2015	$	(863	)	$	(1,888	)	$	(2,094	)	$	(84	)	$	(12,228	)	$	(212	)	$	(17,369	)
Other comprehensive income/(loss) before reclassifications		997			700			0			20			(1,737	)		0			(20	)
Amounts reclassified from accumulated other comprehensive loss		(84	)		27			64			0			121			10			138
Balance - September 30,2015	$	50		$	(1,161	)	$	(2,030	)	$	(64	)	$	(13,844	)	$	(202	)	$	(17,251	)

The following tables present the components of comprehensive income for the nine- and three-month periods ended September 30, 2015 and 2014:

Components of Comprehensive Income (in thousands)	Before Tax Amount			Tax (Expense) Benefit			Net
For the nine months ended September 30, 2015
Available for sale (AFS) securities with OTTI:
Unrealized holding gains	$	6,682		$	(2,665	)	$	4,017
Less: accretable yield recognized in income		479			(191	)		288
Net unrealized gains on investments with OTTI		6,203			(2,474	)		3,729

Available for sale securities – all other:
Unrealized holding gains		2,380			(949	)		1,431
Less: gains recognized in income		62			(25	)		37
Net unrealized gains on all other AFS securities		2,318			(924	)		1,394

Held to maturity securities:
Unrealized holding gains		0			0			0
Less: amortization recognized in income		(374	)		149			(225	)
Net unrealized gains on HTM securities		374			(149	)		225

Cash flow hedges:
Unrealized holding gains		92			(37	)		55

Pension Plan:
Unrealized net actuarial loss		(4,651	)		1,856			(2,795	)
Less: amortization of unrecognized loss		(576	)		229			(347	)
Less: amortization of transition asset		15			(6	)		9
Less: amortization of prior service costs		(9	)		4			(5	)
Net pension plan liability adjustment		(4,081	)		1,629			(2,452	)

SERP:
Unrealized net actuarial loss		0			0			0
Less: amortization of unrecognized loss		(37	)		15			(22	)
Less: amortization of prior service costs		(15	)		6			(9	)
Net SERP liability adjustment		52			(21	)		31
Other comprehensive income	$	4,958		$	(1,976	)	$	2,982

Components of Comprehensive Income (in thousands)	Before Tax Amount			Tax (Expense) Benefit			Net
For the nine months ended September 30, 2014
Available for sale (AFS) securities with OTTI:
Unrealized holding gains	$	6,149		$	(2,460	)	$	3,689
Less: accretable yield recognized in income		501			(200	)		301
Net unrealized gains on investments with OTTI		5,648			(2,260	)		3,388

Available for sale securities – all other:
Unrealized holding gains		13,746			(5,496	)		8,250
Less: losses recognized in income		(7	)		2			(5	)
Net unrealized gains on all other AFS securities		13,753			(5,498	)		8,255

Held to maturity securities:
Unrealized holding losses		(3,984	)		1,593			(2,391	)
Less: amortization recognized in income		(127	)		51			(76	)
Net unrealized losses on HTM securities		(3,857	)		1,542			(2,315	)

Cash flow hedges:
Unrealized holding gains		229			(92	)		137

Pension Plan:
Unrealized net actuarial loss		(1,345	)		539			(806	)
Less: amortization of unrecognized loss		(280	)		112			(168	)
Less: amortization of transition asset		30			(12	)		18
Less: amortization of prior service costs		(9	)		3			(6	)
Net pension plan liability adjustment		(1,086	)		436			(650	)

SERP:
Unrealized net actuarial loss		0			0			0
Less: amortization of unrecognized gain		13			(5	)		8
Less: amortization of prior service costs		(15	)		6			(9	)
Net SERP liability adjustment		2			(1	)		1
Other comprehensive income	$	14,689		$	(5,873	)	$	8,816

Components of Comprehensive Income (in thousands)	Before Tax Amount			Tax (Expense) Benefit			Net
For the three months ended September 30, 2015
Available for sale (AFS) securities with OTTI:
Unrealized holding gains	$	1,658		$	(661	)	$	997
Less: accretable yield recognized in income		139			(55	)		84
Net unrealized gains on investments with OTTI		1,519			(606	)		913

Available for sale securities – all other:
Unrealized holding gains		1,288			(515	)		773
Less: gains recognized in income		79			(33	)		46
Net unrealized gains on all other AFS securities		1,209			(482	)		727

Held to maturity securities:
Unrealized holding gains		0			0			0
Less: amortization recognized in income		(106	)		42			(64	)
Net unrealized gains on HTM securities		106			(42	)		64

Cash flow hedges:
Unrealized holding gains		33			(13	)		20

Pension Plan:
Unrealized net actuarial loss		(2,892	)		1,153			(1,739	)
Less: amortization of unrecognized loss		(204	)		80			(124	)
Less: amortization of transition asset		5			(2	)		3
Less: amortization of prior service costs		(3	)		1			(2	)
Net pension plan liability adjustment		(2,690	)		1,074			(1,616	)

SERP:
Unrealized net actuarial loss		0			0			0
Less: amortization of unrecognized loss		(13	)		5			(8	)
Less: amortization of prior service costs		(5	)		3			(2	)
Net SERP liability adjustment		18			(8	)		10
Other comprehensive income	$	195		$	(77	)	$	118

Components of Comprehensive Income (in thousands)	Before Tax Amount			Tax (Expense) Benefit			Net
For the three months ended September 30, 2014
Available for sale (AFS) securities with OTTI:
Unrealized holding gains	$	748		$	(300	)	$	448
Less: accretable yield recognized in income		170			(68	)		102
Net unrealized gains on investments with OTTI		578			(232	)		346

Available for sale securities – all other:
Unrealized holding gains		3			(2	)		1
Less: gains recognized in income		147			(59	)		88
Net unrealized losses on all other AFS securities		(144	)		57			(87	)

Held to maturity securities:
Unrealized holding gains		0			0			0
Less: amortization recognized in income		(95	)		38			(57	)
Net unrealized gains on HTM securities		95			(38	)		57

Cash flow hedges:
Unrealized holding gains		44			(18	)		26

Pension Plan:
Unrealized net actuarial loss		(1,233	)		494			(739	)
Less: amortization of unrecognized loss		(93	)		37			(56	)
Less: amortization of transition asset		10			(4	)		6
Less: amortization of prior service costs		(3	)		1			(2	)
Net pension plan liability adjustment		(1,147	)		460			(687	)

SERP:
Unrealized net actuarial loss		0			0			0
Less: amortization of unrecognized gain		4			(1	)		3
Less: amortization of prior service costs		(5	)		2			(3	)
Net SERP liability adjustment		1			(1	)		0
Other comprehensive loss	$	(573	)	$	228		$	(345	)

The following table presents the details of amount reclassified from accumulated other comprehensive loss for the nine- and three-month periods ended September 30, 2015 and 2014:

Amounts Reclassified From Accumulated Other Comprehensive Loss (in thousands)	For the nine months ended September 30, 2015			For the Nine months ended September 30, 2014			Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains and losses on investment securities with OTTI:
Accretable yield	$	479		$	501		Interest income on taxable investment securities
Taxes		(191	)		(200	)	Tax expense
	$	288		$	301		Net of tax
Unrealized gains and losses on available for sale investment securities - all others:
Gains/(losses) on sales	$	62		$	(7	)	Net gains/(losses) - other
Taxes		(25	)		2		Tax (expense)/benefit
	$	37		$	(5	)	Net of tax
Unrealized losses on held to maturity securities:
Amortization	$	(374	)	$	(127	)	Interest income on taxable investment securities
Taxes		149			51		Tax benefit
	$	(225	)	$	(76	)	Net of tax
Net pension plan liability adjustment:
Amortization of unrecognized loss		(576	)		(280	)	Salaries and employee benefits
Amortization of transition asset		15			30		Salaries and employee benefits
Amortization of prior service costs		(9	)		(9	)	Salaries and employee benefits
Taxes		227			103		Tax benefit
	$	(343	)	$	(156	)	Net of tax
Net SERP liability adjustment:
Amortization of unrecognized (loss)/gain		(37	)		13		Salaries and employee benefits
Amortization of prior service costs		(15	)		(15	)	Salaries and employee benefits
Taxes		21			1		Tax benefit
	$	(31	)	$	(1	)	Net of tax

Total reclassifications for the period	$	(274	)	$	63		Net of tax

Amounts Reclassified From Accumulated Other Comprehensive Loss (in thousands)	For the Three months ended September 30, 2015			For the Three months ended September 30, 2014			Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains and losses on investment securities with OTTI:
Accretable Yield	$	139		$	170		Interest income on taxable investment securities
Taxes		(55	)		(68	)	Tax expense
	$	84		$	102		Net of tax
Unrealized gains and losses on available for sale investment securities - all others:
Gains on sales	$	79		$	147		Net gains - other
Taxes		(33	)		(59	)	Tax expense
	$	46		$	88		Net of tax
Unrealized losses on held to maturity securities:
Amortization	$	(106	)	$	(95	)	Interest income on taxable investment securities
Taxes		42			38		Tax benefit
	$	(64	)	$	(57	)	Net of tax
Net pension plan liability adjustment:
Amortization of unrecognized loss		(204	)		(93	)	Salaries and employee benefits
Amortization of transition asset		5			10		Salaries and employee benefits
Amortization of prior service costs		(3	)		(3	)	Salaries and employee benefits
Taxes		79			34		Tax benefit
	$	(123	)	$	(52	)	Net of tax
Net SERP liability adjustment:
Amortization of unrecognized (loss)/gain		(13	)		4		Salaries and employee benefits
Amortization of prior service costs		(5	)		(5	)	Salaries and employee benefits
Taxes		8			1		Tax benefit
	$	(10	)	$	0		Net of tax

Total reclassifications for the period	$	(67	)	$	81		Net of tax

Note 11 – Junior Subordinated Debentures and Restrictions on Dividends

First United Corporation is the parent company to three statutory trust subsidiaries - First United Statutory Trust I and First United Statutory Trust II, both of which are Connecticut statutory trusts (“Trust I” and “Trust II”, respectively), and First United Statutory Trust III, a Delaware statutory trust (“Trust III” and, together with Trust I and Trust II, the “Trusts”). The Trusts were formed for the purposes of selling preferred securities to investors and using the proceeds to purchase junior subordinated debentures from First United Corporation (“TPS Debentures”) that would qualify as regulatory capital.

In March 2004, Trust I and Trust II issued preferred securities with an aggregate liquidation amount of $30.0 million to third-party investors and issued common equity with an aggregate liquidation amount of $.9 million to First United Corporation. Trust I and Trust II used the proceeds of these offerings to purchase an equal amount of TPS Debentures, as follows:

$20.6 million—floating rate payable quarterly based on three-month LIBOR plus 275 basis points (3.08% at September 30, 2015), maturing in 2034, became redeemable five years after issuance at First United Corporation’s option.

$10.3 million—floating rate payable quarterly based on three-month LIBOR plus 275 basis points (3.08% at September 30, 2015) maturing in 2034, became redeemable five years after issuance at First United Corporation’s option.

In December 2004, First United Corporation issued $5.0 million of junior subordinated debentures to third-party investors that were not tied to preferred securities. The debentures had a fixed rate of 5.88% for the first five years, payable quarterly, and converted to a floating rate in March 2010 based on the three month LIBOR plus 185 basis points. The debentures matured in March 2015 and were repaid.

In December 2009, Trust III issued 9.875% fixed-rate preferred securities with an aggregate liquidation amount of approximately $7.0 million to private investors and issued common securities to First United Corporation with an aggregate liquidation amount of approximately $.2 million. Trust III used the proceeds of the offering to purchase approximately $7.2 million of 9.875% fixed-rate TPS Debentures. Interest on these TPS Debentures are payable quarterly, and the TPS Debentures mature in 2040 but are redeemable five years after issuance at First United Corporation’s option.

In January 2010, Trust III issued an additional $3.5 million of 9.875% fixed-rate preferred securities to private investors and issued common securities to First United Corporation with an aggregate liquidation amount of $.1 million. Trust III used the proceeds of the offering to purchase $3.6 million of 9.875% fixed-rate TPS Debentures. Interest on these TPS Debentures is payable quarterly, and the TPS Debentures mature in 2040 but are redeemable five years after issuance at First United Corporation’s option.

The TPS Debentures issued to each of the Trusts represent the sole assets of that Trust, and payments of the TPS Debentures by First United Corporation are the only sources of cash flow for the Trust. First United Corporation has the right, without triggering a default, to defer interest on all of the TPS Debentures for up to 20 quarterly periods, in which case distributions on the preferred securities will also be deferred. Should this occur, First United Corporation may not pay dividends or distributions on, or repurchase, redeem or acquire any shares of its capital stock.

At the request of the Federal Reserve Bank of Richmond (the “Reserve Bank”) in December 2010, the Corporation’s Board of Directors elected to defer quarterly interest payments under the TPS Debentures beginning with the payments due in March 2011. The terms of the TPS Debentures permit the Corporation to elect to defer payments of interest for up to 20 consecutive quarterly periods, provided that no event of default exists under the TPS Debentures at the time of the election. An election to defer interest payments is not considered a default under the TPS Debentures. In February 2014, First United Corporation received approval from the Reserve Bank to terminate this deferral by making the quarterly interest payments due to the Trusts in March 2014 and paying all deferred interest for prior quarters and has since received approval for interest payments through December 2015.

Until further notice from the Reserve Bank, First United Corporation is required to obtain the Reserve Bank’s prior approval before making any future interest payments under the TPS Debentures. In considering a request for approval, the Reserve Bank will consider, among other things, the Corporation’s financial condition and its quarterly results of operations. In addition to this pre-approval requirement, First United Corporation’s ability to make future quarterly interest payments under the TPS Debentures will depend in large part on its receipt of dividends from the Bank, and the Bank may make dividend payments only with the prior approval of the Federal Deposit Insurance Corporation (the “FDIC”) and the Maryland Commissioner of Financial Regulation (the “Maryland Commissioner”). As a result of these limitations, no assurance can be given that First United Corporation will make the quarterly interest payments due under the TPS Debentures in any future quarter. In the event that First United Corporation and/or the Bank do not receive the approvals necessary for First United Corporation to make future quarterly interest payments, First United Corporation will have to again elect to defer interest payments.

The terms of First United Corporation’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”) call for the payment, if declared by the Corporation’s Board of Directors, of cash dividends on February 15^th, May 15^th, August 15^th and November 15^th of each year. On November 15, 2010, at the request of the Reserve Bank, the Corporation’s Board of Directors voted to suspend quarterly cash dividends on the Series A Preferred Stock beginning with the dividend payment due November 15, 2010. During the suspension, dividends of $.4 million per dividend period continued to accrue. In April 2014, the Corporation received approval from the Reserve Bank to terminate this deferral by making a $6.5 million payment to the Treasury, representing the quarterly dividend payment due in May 2014 and all unpaid dividends that accrued during the suspension period and has since received approval to make all subsequent dividend payments through November 2015.

Until further notice from the Reserve Bank, First United Corporation is required to obtain the Reserve Bank’s prior approval before making any future quarterly dividend payment on the Series A Preferred Stock. In considering a request for approval, the Reserve Bank will consider, among other things, the Corporation’s financial condition and its quarterly results of operations. In addition, First United Corporation’s ability to make future quarterly dividend payments on the Series A Preferred Stock will depend in large part on its receipt of dividends from the Bank, the declaration and payment of which, as discussed above, are subject to the prior approval of the FDIC and the Maryland Commissioner. If First United Corporation and/or the Bank do not obtain the regulatory approvals required for a particular quarterly dividend, then First United Corporation would have to again suspend quarterly dividend payments, which would result in a prohibition against paying any dividends or other distributions on the outstanding shares of First United Corporation’s common stock during the suspension period.

First United Corporation’s Board of Directors suspended the payment of dividends on the common stock in December 2010 when it approved the above-mentioned deferral of dividends on the Series A Preferred Stock. That Board of Directors has not resumed the payment of cash dividends on the common stock, and no assurance can be given with respect to if or when such resumption will occur.

Note 12 – Borrowed Funds

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

(Dollars in thousands)	Nine months ended September 30, 2015			Year ended December 31, 2014
Securities sold under agreements to repurchase:
Outstanding at end of period	$	38,460		$	39,801
Weighted average interest rate at end of period		0.15	%		0.15	%
Maximum amount outstanding as of any month end	$	47,131		$	53,819
Average amount outstanding	$	33,506		$	45,702
Approximate weighted average rate during the period		0.12	%		0.13	%

At September 30, 2015, the repurchase agreements were secured by $59.7 million in investment securities issued by government related agencies. A minimum of 102% of fair value is pledged against account balances.

The following is a summary of long-term borrowings with original maturities exceeding one year:

	September 30,		December 31,
(in thousands)	2015		2014
FHLB advances, bearing fixed interest at rates ranging from 1.00% to 3.69% at September 30, 2015	$	105,825	$	135,876
Junior subordinated debt, bearing variable interest rate of 3.03% at September 30, 2015		30,929		35,929
Junior subordinated debt, bearing fixed interest rate of 9.88% at September 30, 2015		10,801		10,801
Total long-term debt	$	147,555	$	182,606

At September 30, 2015, the long-term FHLB advances were secured by $216.8 million in loans.

The contractual maturities of all long-term borrowings are as follows:

	September 30, 2015						December 31, 2014
(in thousands)	Fixed Rate		Floating Rate		Total		Total
Due in 2015		0		0		0		35,000
Due in 2016		0		0		0		0
Due in 2017		0		0		0		0
Due in 2018		70,000		0		70,000		70,000
Due in 2019		0		0		0		0
Thereafter		46,626		30,929		77,555		77,606
Total long-term debt	$	116,626	$	30,929	$	147,555	$	182,606

Note 13 – Employee Benefit Plans

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

Pension	For the nine months ended						For the three months ended
	September 30,						September 30,
(in thousands)	2015			2014			2015			2014
Service cost	$	242		$	193		$	74		$	64
Interest cost		1,177			1,106			403			369
Expected return on assets		(2,224	)		(1,990	)		(740	)		(662	)
Amortization of transition asset		(15	)		(30	)		(5	)		(10	)
Amortization of net actuarial loss		576			280			204			93
Amortization of prior service cost		9			9			3			3
Net pension credit included in employee benefits	$	(235	)	$	(432	)	$	(61	)	$	(143	)

SERP	For the nine months ended					For the three months ended
	September 30,					September 30,
(in thousands)	2015		2014			2015		2014
Service cost	$	87	$	71		$	29	$	23
Interest cost		174		172			58		58
Amortization of recognized loss/(gain)		37		(13	)		13		(4	)
Amortization of prior service cost		15		15			5		5
Net SERP expense included in employee benefits	$	313	$	245		$	105	$	82

The Pension Plan is a noncontributory defined benefit pension plan 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 (a) their 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 SERP in 2001 as an unfunded supplemental executive retirement plan. The 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 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 SERP benefits as well as other employee benefit costs.

The benefit obligation activity for both the Pension Plan and 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. There have been no contributions made as of September 30, 2015. The Corporation expects to fund the annual projected benefit payments for the SERP from operations.

On January 9, 2015, the Corporation and members of management who do not participate in the SERP entered into participation agreements under the Deferred Compensation Plan, each styled as a SERP Alternative Participation Agreement (the “Participation Agreement”). Pursuant to each Participation Agreement, the 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 Participation 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 Participation 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 Participation Agreement); (b) Separation from Service (as defined in the Participation Agreement) following a Change of Control (as defined in the Deferred Compensation Plan) and subsequent Triggering Event (as defined in the Participation Agreement); (c) Separation from Service due to a Disability (as defined in the Participation Agreement); (d) with respect to a particular award of Employer Contribution Credits, the participant’s completion of two consecutive Years of Service (as defined in the Participation 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 Participation Agreement). In addition, the Participation 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 Participation 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 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.

Note 14 - Equity Compensation Plan Information

At the 2007 Annual Meeting of Shareholders, First United Corporation’s shareholders approved the First United Corporation Omnibus Equity Compensation Plan (the “Omnibus Plan”), which authorizes the issuance of up to 185,000 shares of common stock pursuant to the grant of stock options, stock appreciation rights, stock awards, stock units, performance units, dividend equivalents, and other stock-based awards to employees or directors.

On June 18, 2008, the Board of Directors of First United Corporation adopted a Long-Term Incentive Program (the “LTIP”). This program was adopted as a sub-plan of the Omnibus Plan to reward participants for increasing shareholder value, align executive interests with those of shareholders, and serve as a retention tool for key executives. Under the LTIP, participants are granted shares of restricted common stock of First United Corporation. The amount of an award is based on a specified percentage of the participant’s salary as of the date of grant. These shares will vest if the Corporation meets or exceeds certain performance thresholds.

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 May 2015 pursuant to First United Corporation’s director compensation policy. Beginning May 2014, each director’s annual retainer is paid in 1,000 shares of common stock, with the remainder of $10,000 paid in cash or any portion thereof, in shares of stock. Prior to May 2014, the retainer of the 1,000 shares of stock was paid in shares of stock in the amount of $5,000. A total of 16,022 fully-vested shares of common stock were issued to directors in 2015, which had a fair market value of $8.96 per share. Director stock compensation expense was $111,848 for the nine months ended September 30, 2015 and $95,035 for the nine months ended September 30, 2014. Stock compensation expense was $35,889 and $39,025 for the three months ended September 30, 2015 and 2014, respectively.

In the first quarter of 2015, a one-time stock grant was awarded to two executive officers in the amount of 10,232 shares. These shares do not have any performance restrictions; however, they have a two-year vesting period. Executive stock compensation expense was $32,094 for the nine months ended September 30, 2015 and $11,382 for the three months ended September 30, 2015.

Note 15 – Letters of Credit and Off Balance Sheet Liabilities

The Corporation does not issue any guarantees that would require liability recognition or disclosure other than the standby letters of credit issued by the Bank. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Generally, the Bank’s letters of credit are issued with expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank generally holds collateral and/or personal guarantees supporting these commitments. The Bank had $1.7 million of outstanding standby letters of credit at September 30, 2015 and $.9 million at December 31, 2014. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payment required by the letters of credit. Management does not believe that the amount of the liability associated with guarantees under standby letters of credit outstanding at September 30, 2015 and December 31, 2014 is material.

Note 16 – 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 income.

In July 2009, the Corporation entered into three interest rate swap contracts totaling $20.0 million notional amount, hedging future cash flows associated with floating rate trust preferred debt. As of September 30, 2015, swap contracts totaling $5.0 million notional amount remained, as the three-year $5.0 million contract matured on June 15, 2012 and the five-year $10.0 million contract matured on June 17, 2014. The seven-year $5 million contract matures June 17, 2016. The fair value of the interest rate swap contract was ($107) thousand at September 30, 2015 and ($199) thousand at December 31, 2014 and was reported in Other Liabilities on the Consolidated Statement of Financial Condition. Cash in the amount of $.9 million was posted as collateral as of September 30, 2015.

For the nine months ended September 30, 2015, the Corporation recorded an increase in the value of the derivatives of $92 thousand and the related deferred tax benefit of $37 thousand in net accumulated other comprehensive loss to reflect the effective portion of cash flow hedges. ASC Subtopic 815-30 requires this amount to be reclassified to earnings if the hedge becomes ineffective or is terminated. There was no hedge ineffectiveness recorded for the nine months ending September 30, 2015. The Corporation does not expect any losses relating to these hedges to be reclassified into earnings within the next 12 months.

Interest rate swap agreements are entered into with counterparties that meet established credit standards and the Corporation believes that the credit risk inherent in these contracts is not significant as of September 30, 2015.

The table below discloses the impact of derivative financial instruments on the Corporation’s Consolidated Financial Statements for the nine- and three-months ended September 30, 2015 and 2014.

Derivative in Cash Flow Hedging Relationships

(in thousands)	Amount of gain 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:
Nine months ended:
September 30, 2015	$	55	$	0	$	0
September 30, 2014		137		0		0
Three months ended:
September 30, 2015	$	20	$	0	$	0
September 30, 2014		26		0		0

Notes:

(a) Reported as interest expense

(b) Reported as other income

Note 17 – Variable Interest Entities (VIE)

As noted in Note 11, First United Corporation created the Trusts for the purposes of raising regulatory capital through the sale of mandatorily redeemable preferred capital securities to third party investors and common equity interests to First United Corporation. The Trusts are considered Variable Interest Entities (“VIEs”), but are not consolidated because First United Corporation is not the primary beneficiary of the Trusts. At September 30, 2015, the Corporation reported all of the $41.7 million of TPS Debentures issued in connection with these offerings as long-term borrowings and it reported its $1.3 million equity interest in the Trusts as “Other Assets”.

In November 2009, the Bank became a 99.99% limited partner in Liberty Mews Limited Partnership (“Liberty Mews”), a Maryland limited partnership formed for the purpose of acquiring, developing and operating low-income housing units in Garrett County, Maryland. The Partnership was financed with a total of $10.6 million of funding, including a $6.1 million equity contribution from the Bank as the limited partner. Liberty Mews used the proceeds from these sources to purchase the land and construct a 36-unit low income housing rental complex at a total cost of $10.6 million. The total assets of Liberty Mews were approximately $9.2 million at September 30, 2015 and $9.4 million at December 31, 2014.

As of December 31, 2011, the Bank had made contributions to Liberty Mews totaling $6.1 million. The project was completed in June 2011, and the Bank is entitled to $8.4 million in federal investment tax credits over a 10-year period as long as certain qualifying hurdles are maintained. The Bank will also receive the benefit of tax operating losses from Liberty Mews to the extent of its capital contribution. The investment in Liberty Mews assists the Bank in achieving its community reinvestment initiatives.

Because Liberty Mews is considered to be a VIE, management performed an analysis to determine whether its involvement with the Partnership would lead it to determine that it must consolidate Liberty Mews. In performing its analysis, management evaluated the risks creating the variability in the Partnership and identified which activities most significantly impact the VIE’s economic performance. Finally, it examined each of the variable interest holders to determine which, if any, of the holders was the primary beneficiary based on their power to direct the most significant activities and their obligation to absorb potentially significant losses of Liberty Mews.

The Bank, as a limited partner, generally has no voting rights. The Bank is not in any way involved in the daily management of Liberty Mews and has no other rights that provide it with the power to direct the activities that most significantly impact Liberty Mews’s economic performance, which are to develop and operate the housing project in such a manner that complies with specific tax credit guidelines. As a limited partner, there is no recourse to the Bank by the creditors of Liberty Mews. The tax credits that result from the Bank’s investment in Liberty Mews are generally subject to recapture should the partnership fail to comply with the applicable government regulations. The Bank has not provided any financial or other support to Liberty Mews beyond its required capital contributions and does not anticipate providing such support in the future. Management currently believes that no material losses are probable as a result of the Bank’s investment in Liberty Mews.

On the basis of management’s analysis, the general partner is deemed to be the primary beneficiary of Liberty Mews. Because the Bank is not the primary beneficiary, Liberty Mews has not been included in the Corporation’s consolidated financial statements.

The Corporation accounts for its investment in Liberty Mews utilizing the effective yield method under guidance that applies specifically to investments in limited partnerships that operate qualified affordable housing projects. Under the effective yield method, the investor recognizes tax credits as they are allocated and amortizes the initial cost of the investment to provide a constant effective yield over the period that tax credits are allocated to the investor. The effective yield is the internal rate of return on the investment, based on the cost of the investment and the guaranteed tax credits allocated to the investor. The tax credit allocated, net of the amortization of the investment in the limited partnership, is recognized in the income statement as a component of income taxes attributable to continuing operations.

The Corporation’s tax expense for the nine months ended September 30, 2015 was approximately $.3 million lower as a result of the impact of the tax credits and the tax losses relating to the partnership.

At September 30, 2015 and December 31, 2014, the Corporation included its total investment in Liberty Mews in “Other Assets” in its Consolidated Statement of Financial Condition. As of September 30, 2015, the Corporation’s commitment in Liberty Mews was fully funded. The following table presents details of the Bank’s involvement with Liberty Mews at the dates indicated:

	September 30,		December 31,
(in thousands)	2015		2014
Investment in LIHTC Partnership
Carrying amount on Balance Sheet of:
Investment (Other Assets)	$	3,994	$	4,429
Maximum exposure to loss		3,994		4,429

Note 18 – Assets and Liabilities Subject to Enforceable Master Netting Arrangements

Interest Rate Swap Agreements (“Swap Agreements”)

The Corporation has entered into interest rate swap agreements to modify the re-pricing characteristics of certain interest-bearing liabilities as a part of managing interest rate risk. The swap agreements have been designated as cash flow hedges, and accordingly, the fair value of the interest rate swap contracts is reported in Other Liabilities on the Consolidated Statement of Financial Condition. The swap agreements were entered into with a third party financial institution. The Corporation is party to master netting arrangements with its financial institution counterparty; however, the Corporation does not offset assets and liabilities under these arrangements for financial statement presentation purposes. The master netting arrangements provide for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract. Collateral, in the form of cash, is pledged by the Corporation as the counterparty with net liability positions in accordance with contract thresholds. See Note 16 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. 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 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 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 liabilities subject to an enforceable master netting arrangement or repurchase agreements as of September 30, 2015 and December 31, 2014.

							Gross Amounts Not Offset in the Statement of Condition
(In thousands)	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Statement of Condition		Net Amounts of Liabilities Presented in the Statement of Condition		Financial Instruments			Cash Collateral Pledged		Net Amount
September 30, 2015
Interest Rate Swap Agreements	$	107	$	0	$	107	$	(107	)	$	0	$	0

Repurchase Agreements	$	38,460	$	0	$	38,460	$	(38,460	)	$	0	$	0
December 31, 2014
Interest Rate Swap Agreements	$	199	$	0	$	199	$	(199	)	$	0