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 June 30, 2018

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 7,082,443 shares of common stock, par value $.01 per share, as of July 31, 2018.

INDEX TO QUARTERLY REPORT

FIRST UNITED CORPORATION

		Page
PART I. FINANCIAL INFORMATION		3

Item 1.	Financial Statements (unaudited)	3

	Consolidated Statement of Financial Condition – June 30, 2018 and December 31, 2017	3

	Consolidated Statement of Operations - for the six and three months ended June 30, 2018 and 2017	4

	Consolidated Statement of Comprehensive Income – for the six and three months ended June 30, 2018 and 2017	6

	Consolidated Statement of Changes in Shareholders’ Equity - for the six months ended June 30, 2018 and year ended December 31, 2017	7

	Consolidated Statement of Cash Flows - for the six months ended June 30, 2018 and 2017	8

	Notes to Consolidated Financial Statements	9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	53

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	79

Item 4.	Controls and Procedures	79

PART II. OTHER INFORMATION		80

Item 1.	Legal Proceedings	80

Item 1A.	Risk Factors	80

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	80

Item 3.	Defaults upon Senior Securities	80

Item 4.	Mine Safety Disclosures	80

Item 5.	Other Information	80

Item 6.	Exhibits	80

SIGNATURES		81

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FIRST UNITED CORPORATION

Consolidated Statement of Financial Condition

(In thousands, except per share data)

	June 30,			December 31,
	2018			2017
	(Unaudited)
Assets
Cash and due from banks	$	23,072		$	82,273
Interest bearing deposits in banks		2,319			1,479
Cash and cash equivalents		25,391			83,752
Investment securities – available-for-sale (at fair value)		142,303			146,470
Investment securities – held to maturity (fair value $89,242 at June 30, 2018 and $95,346 at December 31, 2017)		90,295			93,632
Restricted investment in bank stock, at cost		4,332			5,204
Loans		941,201			892,518
Allowance for loan losses		(9,769	)		(9,972	)
Net loans		931,432			882,546
Premises and equipment, net		35,177			30,881
Goodwill and other intangible assets, net		11,004			11,004
Bank owned life insurance		42,739			42,155
Deferred tax assets		9,168			9,252
Other real estate owned		8,503			10,141
Accrued interest receivable and other assets		22,972			21,433
Total Assets	$	1,323,316		$	1,336,470

Liabilities and Shareholders’ Equity
Liabilities:
Non-interest bearing deposits	$	271,743		$	252,049
Interest bearing deposits		769,377			787,341
Total deposits		1,041,120			1,039,390

Short-term borrowings		47,929			48,845
Long-term borrowings		100,929			120,929
Accrued interest payable and other liabilities		20,364			18,916
Total Liabilities		1,210,342			1,228,080

Shareholders’ Equity:
Common Stock – par value $.01 per share; Authorized 25,000 shares; issued and outstanding 7,082,443 shares at June 30, 2018 and December 31, 2017		71			71
Surplus		31,709			31,553
Retained earnings		105,607			101,359
Accumulated other comprehensive loss		(24,413	)		(24,593	)
Total Shareholders’ Equity		112,974			108,390
Total Liabilities and Shareholders’ Equity	$	1,323,316		$	1,336,470

See accompanying notes to the consolidated financial statements

FIRST UNITED CORPORATION

Consolidated Statement of Operations

(In thousands, except per share data)

	Six months ended
	June 30,
	2018		2017
	(Unaudited)
Interest income
Interest and fees on loans	$	21,408	$	19,517
Interest on investment securities
Taxable		2,921		2,743
Exempt from federal income tax		473		454
Total investment income		3,394		3,197
Other		284		304
Total interest income		25,086		23,018
Interest expense
Interest on deposits		1,784		1,577
Interest on short-term borrowings		124		34
Interest on long-term borrowings		1,728		2,109
Total interest expense		3,636		3,720
Net interest income		21,450		19,298
Provision for loan losses		716		908
Net interest income after provision for loan losses		20,734		18,390
Other operating income
Net gains		181		14
Service charges		1,560		1,508
Trust department		3,305		3,050
Debit card income		1,201		1,144
Bank owned life insurance		584		600
Brokerage commissions		551		426
Other		210		231
Total other income		7,411		6,959
Total other operating income		7,592		6,973
Other operating expenses
Salaries and employee benefits		12,038		10,792
FDIC premiums		303		268
Equipment		1,436		1,236
Occupancy		1,252		1,219
Data processing		1,843		1,725
Professional Services		643		537
Contract Labor		337		406
Telephony Expense		430		402
Other real estate owned		493		212
Other		2,541		2,532
Total other operating expenses		21,316		19,329
Income before income tax expense		7,010		6,034
Provision for income tax expense		1,488		1,745
Net Income		5,522		4,289
Accumulated preferred stock dividends		0		(765	)
Net Income Available to Common Shareholders	$	5,522	$	3,524
Basic and diluted net income per common share	$	0.78	$	0.52
Weighted average number of basic and diluted shares outstanding		7,072		6,796
Dividends declared per common share	$	0.18	$	0.00

See accompanying notes to the consolidated financial statements

FIRST UNITED CORPORATION

Consolidated Statement of Operations

(In thousands, except per share data)

	Three Months Ended
	June 30,
	2018		2017
	(Unaudited)
Interest income
Interest and fees on loans	$	10,927	$	9,865
Interest on investment securities
Taxable		1,474		1,443
Exempt from federal income tax		235		223
Total investment income		1,709		1,666
Other		88		160
Total interest income		12,724		11,691
Interest expense
Interest on deposits		928		809
Interest on short-term borrowings		94		18
Interest on long-term borrowings		834		935
Total interest expense		1,856		1,762
Net interest income		10,868		9,929
Provision for loan losses		269		299
Net interest income after provision for loan losses		10,599		9,630
Other operating income
Net gains		147		9
Service charges		768		773
Trust department		1,641		1,535
Debit card income		648		575
Bank owned life insurance		285		291
Brokerage commissions		306		213
Other		87		95
Total other income		3,735		3,482
Total other operating income		3,882		3,491
Other operating expenses
Salaries and employee benefits		6,119		5,525
FDIC premiums		170		184
Equipment		753		596
Occupancy		614		598
Data processing		911		918
Professional Services		307		284
Contract Labor		161		279
Telephony Expense		219		200
Other real estate owned		108		38
Other		1,263		1,237
Total other operating expenses		10,625		9,859
Income before income tax expense		3,856		3,262
Provision for income tax expense		840		952
Net Income		3,016		2,310
Accumulated preferred stock dividends		0		(225	)
Net Income Available to Common Shareholders	$	3,016	$	2,085
Basic and diluted net income per common share	$	0.43	$	0.30
Weighted average number of basic and diluted shares outstanding		7,077		7,062
Dividends declared per common share	$	0.09	$	0.00

See accompanying notes to the consolidated financial statements

FIRST UNITED CORPORATION

Consolidated Statement of Comprehensive Income

(In thousands)

	Six months ended
	June 30,
	2018			2017
Comprehensive Income (in thousands)	(Unaudited)
Net Income	$	5,522		$	4,289
Other comprehensive income/(loss), net of tax and reclassification adjustments:
Net unrealized gains on investments with OTTI		1,590			32

Net unrealized (losses)/gains on all other AFS securities		(1,308	)		1,786

Net unrealized gains on HTM securities		83			104

Net unrealized gains/(losses) on cash flow hedges		551			(98	)

Net unrealized (losses)/gains on pension		(794	)		196

Net unrealized gains on SERP		58			43

Other comprehensive income, net of tax		180			2,063

Comprehensive income	$	5,702		$	6,352

See accompanying notes to the consolidated financial statements

FIRST UNITED CORPORATION

Consolidated Statement of Comprehensive Income

(In thousands)

	Three months ended
	June 30,
	2018			2017
Comprehensive Income (in thousands)	(Unaudited)
Net Income	$	3,016		$	2,310
Other comprehensive income/(loss), net of tax and reclassification adjustments:
Net unrealized gains/(losses) on investments with OTTI		945			(66	)

Net unrealized (losses)/gains on all other AFS securities		(230	)		1,708

Net unrealized gains on HTM securities		38			43

Net unrealized gains/(losses) on cash flow hedges		108			(150	)

Net unrealized (losses)/gains on pension		(1,530	)		2

Net unrealized gains on SERP		29			21

Other comprehensive (loss)/income, net of tax		(640	)		1,558

Comprehensive income	$	2,376		$	3,868

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 Loss			Total Shareholders' Equity
	(Unaudited)
Balance at January 1, 2017	$	20,000		$	63	$	22,178	$	92,922		$	(21,465	)	$	113,698

Net income									5,269						5,269
Other comprehensive income												1,255			1,255
Stock based compensation							192								192
Common stock issued					8		9,183								9,191
Preferred stock redemption		(20,000	)												(20,000	)
Reclassification of certain tax effect									4,383			(4,383	)		0
Preferred stock dividends paid									(1,215	)					(1,215	)

Balance at December 31, 2017		0			71		31,553		101,359			(24,593	)		108,390

Net income									5,522						5,522
Other comprehensive income												180			180
Common stock issued							40								40
Common stock dividend declared - $.18 per share									(1,274	)					(1,274	)
Stock based compensation							116								116

Balance at June 30, 2018	$	0		$	71	$	31,709	$	105,607		$	(24,413	)	$	112,974

See accompanying notes to the consolidated financial statements

FIRST UNITED CORPORATION

Consolidated Statement of Cash Flows

(In thousands)

	Six months ended
	June 30,
	2018			2017
	(Unaudited)
Operating activities
Net income	$	5,522		$	4,289
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		716			908
Depreciation		1,117			921
Stock compensation		116			85
Gain on sales of other real estate owned		(183	)		(74	)
Write-downs of other real estate owned		478			93
Originations of loans held for sale		(7,166	)		(4,826	)
Proceeds from sale of loans held for sale		6,820			3,900
Gains from sale of loans held for sale		(55	)		(32	)
Losses on disposal of fixed assets		0			1
Net amortization of investment securities discounts and premiums- AFS		27			123
Net amortization of investment securities discounts and premiums- HTM		40			30
(Gains)/losses on sales of investment securities – available-for-sale		(126	)		17
Amortization of deferred loan fees		(358	)		(297	)
Increase in accrued interest receivable and other assets		(1,673	)		(2,626	)
(Increase)/decrease in deferred tax benefit		(744	)		1,368
Increase in accrued interest payable and other liabilities		2,203			642
Earnings on bank owned life insurance		(584	)		(600	)
Net cash provided by operating activities		6,150			3,922

Investing activities
Proceeds from maturities/calls of investment securities available-for-sale		6,058			14,192
Proceeds from maturities/calls of investment securities held-to-maturity		3,297			2,973
Proceeds from sales of investment securities available-for-sale		0			18,530
Purchases of investment securities available-for-sale		(1,405	)		(19,047	)
Purchases of investment securities held-to-maturity		0			(4,188	)
Proceeds from sales of other real estate owned		1,637			538
Proceeds from disposal of fixed assets		0			1
Net decrease in FHLB stock		872			5
Net increase in loans		(23,969	)		(4,913	)
Purchases of loans		(25,168	)		0
Purchases of premises and equipment		(5,413	)		(2,718	)
Net cash (used in)/provided by investing activities		(44,091	)		5,373

Financing activities
Net increase in deposits		1,730			23,483
Preferred stock dividends paid		0			(765	)
Preferred stock redemption		0			(10,000	)
Proceeds from sale of common stock		40			9,349
Rights Offering costs		0			(158	)
Cash dividends on common stock		(1,274	)		0
Net decrease in short-term borrowings		(916	)		(10,776	)
Net decrease in long-term borrowings		(20,000	)		(10,808	)
Net cash (used in)/provided by financing activities		(20,420	)		325
(Decrease)/increase in cash and cash equivalents		(58,361	)		9,620
Cash and cash equivalents at beginning of the year		83,752			63,310
Cash and cash equivalents at end of period	$	25,391		$	72,930

Supplemental information
Interest paid	$	3,506		$	3,672
Non-cash investing activities:
Transfers from loans to other real estate owned	$	294		$	1,203

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 10-01 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 six- and three-month periods ended June 30, 2018 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, 2017. For purposes of comparability, certain prior period amounts have been reclassified to conform to the 2018 presentation. Such reclassifications had no impact on net income or equity.

As used in these notes, the term “the Corporation” refers to First United Corporation and, unless the context clearly requires otherwise, its consolidated subsidiaries.

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. No common stock equivalents were outstanding at June 30, 2018 or June 30, 2017.

The following tables set forth the calculation of basic and diluted earnings per common share for the six- and three-month periods ended June 30, 2018 and 2017:

	Six months ended June 30,
	2018						2017
			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	$	5,522					$	4,289
Preferred stock dividends		0						(765	)
Net income available to common shareholders	$	5,522		7,072	$	0.78	$	3,524			6,796	$	0.52

	Three months ended June 30,
	2018						2017
			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	$	3,016					$	2,310
Preferred stock dividends		0						(225	)
Net income available to common shareholders	$	3,016		7,077	$	0.43	$	2,085			7,062	$	0.30

Note 3 – Net Gains

The following table summarizes the gain/(loss) activity for the six- and three-month periods ended June 30, 2018 and 2017:

	Six months ended						Three months ended
	June 30,						June 30,
(in thousands)	2018			2017			2018			2017
Net gains/(losses):
Available-for-sale securities:
Realized gains	$	145		$	52		$	145		$	44
Realized losses		(19	)		(69	)		(10	)		(52	)
Gain on sale of consumer loans		55			32			12			17
Losses on disposal of fixed assets		0			(1	)		0			0
Net gains:	$	181		$	14		$	147		$	9

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.

	June 30,		December 31,
(in thousands)	2018		2017
Cash and due from banks, weighted average interest rate of 0.83% (at June 30, 2018)	$	23,072	$	82,273

Interest bearing deposits in banks, which represent funds invested at a correspondent bank, are carried at cost which approximates fair value and, as of June 30, 2018 and December 31, 2017, consisted of daily funds invested at the Federal Home Loan Bank (“FHLB”) of Atlanta and Merchants and Traders (“M&T”).

	June 30,		December 31,
(in thousands)	2018		2017
FHLB daily investments, interest rate of 1.81% (at June 30, 2018)	$	1,303	$	464
M&T daily investments, interest rate of 0.15% (at June 30, 2018)		1,016		1,015
	$	2,319	$	1,479

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 June 30, 2018 and December 31, 2017:

(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		OTTI in AOCL
June 30, 2018
Available for Sale:
U.S. government agencies	$	30,000	$	0	$	1,249	$	28,751	$	0
Commercial mortgage-backed agencies		40,450		0		1,607		38,843		0
Collateralized mortgage obligations		39,103		0		1,478		37,625		0
Obligations of states and political subdivisions		21,088		178		329		20,937		0
Collateralized debt obligations		18,357		0		2,210		16,147		(1,209	)
Total available for sale	$	148,998	$	178	$	6,873	$	142,303	$	(1,209	)

Held to Maturity:
U.S. government agencies	$	15,946	$	0	$	12	$	15,934	$	0
Residential mortgage-backed agencies		45,297		9		1,451		43,855		0
Commercial mortgage-backed agencies		16,643		0		227		16,416		0
Collateralized mortgage obligations		3,989		0		218		3,771		0
Obligations of states and political subdivisions		8,420		980		134		9,266		0
Total held to maturity	$	90,295	$	989	$	2,042	$	89,242	$	0

December 31, 2017
Available for Sale:
U.S. government agencies	$	30,000	$	0	$	744	$	29,256	$	0
Commercial mortgage-backed agencies		41,771		0		880		40,891		0
Collateralized mortgage obligations		41,298		2		916		40,384		0
Obligations of states and political subdivisions		20,772		365		118		21,019		0
Collateralized debt obligations		19,711		0		4,791		14,920		(3,389	)
Total available for sale	$	153,552	$	367	$	7,449	$	146,470	$	(3,389	)
Held to Maturity:
U.S. government agencies	$	15,876	$	447	$	0	$	16,323	$	0
Residential mortgage-backed agencies		47,771		94		423		47,442		0
Commercial mortgage-backed agencies		17,288		236		6		17,518		0
Collateralized mortgage obligations		4,187		0		69		4,118		0
Obligations of states and political subdivisions		8,510		1,443		8		9,945		0
Total held to maturity	$	93,632	$	2,220	$	506	$	95,346	$	0

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

	Six months ended				Three months ended
	June 30,				June 30,
(in thousands)	2018		2017		2018		2017
Proceeds	$	0	$	18,530	$	0	$	14,700
Realized gains		145		52		145		44
Realized losses		19		69		10		52

The following table shows the Corporation’s investment securities with gross unrealized losses and fair values at June 30, 2018 and December 31, 2017, 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
June 30, 2018
Available for Sale:
U.S. government agencies	$	4,838	$	162	$	23,913	$	1,087
Commercial mortgage-backed agencies		12,311		473		26,532		1,134
Collateralized mortgage obligations		16,826		619		20,799		859
Obligations of states and political subdivisions		10,712		233		2,431		96
Collateralized debt obligations		0		0		16,147		2,210
Total available for sale	$	44,687	$	1,487	$	89,822	$	5,386

Held to Maturity:
U.S. government agencies	$	15,934	$	12	$	0	$	0
Residential mortgage-backed agencies		29,047		696		14,645		755
Commercial mortgage-backed agencies		16,416		227		0		0
Collateralized mortgage obligations		0		0		3,771		218
Obligations of states and political subdivisions		2,162		134		0		0
Total held to maturity	$	63,559	$	1,069	$	18,416	$	973

December 31, 2017
Available for Sale:
U.S. government agencies	$	4,931	$	69	$	24,325	$	675
Commercial mortgage-backed agencies		12,593		169		28,298		711
Collateralized mortgage obligations		27,387		472		12,447		443
Obligations of states and political subdivisions		2,683		44		2,747		75
Collateralized debt obligations		0		0		14,920		4,791
Total available for sale	$	47,594	$	754	$	82,737	$	6,695
Held to Maturity:
Residential mortgage-backed agencies	$	15,897	$	135	$	10,422	$	288
Commercial mortgage-backed agencies		9,028		6		0		0
Collateralized mortgage obligations		0		0		4,118		69
Obligations of states and political subdivisions		2,377		8		0		0
Total held to maturity	$	27,302	$	149	$	14,540	$	357

Management systematically evaluates securities for impairment on a quarterly basis. Based upon application of accounting guidance for subsequent measurement in ASC Topic 320 (ASC Section 320-10-35), management assesses whether (a) the Corporation has the intent to sell a security being evaluated and (b) it is more likely than not that the Corporation will be required to sell the security prior to 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 June 30, 2018.

U.S. Government Agencies – Available for Sale – There was one U.S. government agency in an unrealized loss position for less than 12 months as of June 30, 2018. There were four U.S. government agency investments in an unrealized loss position for more than 12 months as of June 30, 2018. The securities are of investment grade and the Corporation does not intend to sell them, and it is not more than 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 June 30, 2018.

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 June 30, 2018. There were six commercial mortgage-backed agencies in an unrealized loss position for more than 12 months as of June 30, 2018. 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 June 30, 2018.

Collateralized Mortgage Obligations – Available for Sale – There were six collateralized mortgage obligations in an unrealized loss position for less than 12 months as of June 30, 2018. There were three collateralized mortgage obligations in an unrealized loss position for more than 12 months as of June 30, 2018. 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 June 30, 2018.

Obligations of State and Political Subdivisions – Available for Sale – There were 1 obligations of state and political subdivisions that have been in an unrealized loss position for less than 12 months and two securities that have been in an unrealized loss position for 12 months or more at June 30, 2018. 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 June 30, 2018.

Collateralized Debt Obligations – Available for Sale - The $2.2 million in unrealized losses recorded with respect to the CDOs that had been in an unrealized loss position for 12 months or more as of June 30, 2018 relates to nine pooled trust preferred securities. See Note 9 for a discussion of the methodology used by management to determine the fair values of these securities. Based upon a review of credit quality and the cash flow tests performed by the independent third party, management determined that there were no securities that had credit-related non-cash OTTI charges during the first six months of 2018. The unrealized losses on the remaining securities in the portfolio are primarily attributable to continued depression in marketability, liquidity and the current economic environment.

U.S. Government Agencies – Held to Maturity – There were two U.S. government agencies in an unrealized loss position for less than 12 months as of June 30, 2018. There were no U.S. government agency investments in an unrealized loss position for more than 12 months as of June 30, 2018. The securities are of investment grade and the Corporation does not intend to sell them, and it is not more than 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 June 30, 2018.

Residential Mortgage-Backed Agencies – Held to Maturity - Fifteen residential mortgage-backed agencies have been in an unrealized loss position for less than 12 months as of June 30, 2018. Fourteen residential mortgage-backed agency investments were in an unrealized loss position for more than 12 months as of June 30, 2018. 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 June 30, 2018.

Commercial Mortgage-Backed Agencies – Held to Maturity - There were four commercial mortgage-backed agency investments in an unrealized loss position for less than 12 months as of June 30, 2018. 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 June 30, 2018. There were no commercial mortgage-backed agencies in a loss position for more than 12 months as of June 30, 2018.

Collateralized Mortgage Obligations – Held to Maturity – There were no collateralized mortgage obligations in an unrealized loss position for less than 12 months as of June 30, 2018. There was one collateralized mortgage obligation in a loss position for more than 12 months as of June 30, 2018. 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 June 30, 2018.

Obligations of State and Political Subdivisions – Held to Maturity –There was one obligation of state and political subdivisions that has been in an unrealized loss for less than 12 months. 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 June 30, 2018. There were no obligations of state and political subdivisions securities in an unrealized loss position for more than 12 months as of June 30, 2018.

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 six- and three-month periods ended June 30, 2018 and 2017:

	Six months ended June 30,
(in thousands)	2018			2017
Balance of credit-related OTTI at January 1	$	2,958		$	3,124
Reduction for increases in cash flows expected to be collected		(207	)		(57	)
Balance of credit-related OTTI at June 30	$	2,751		$	3,067

	Three months ended June 30,
(in thousands)	2018			2017
Balance of credit-related OTTI at April 1	$	2,903		$	3,122
Reduction for increases in cash flows expected to be collected		(152	)		(55	)
Balance of credit-related OTTI at June 30	$	2,751		$	3,067

The amortized cost and estimated fair value of securities by contractual maturity at June 30, 2018 are shown in the following table. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

	June 30, 2018
(in thousands)	Amortized Cost		Fair Value
Contractual Maturity
Available for sale:
Due after one year through five years	$	16,943	$	16,534
Due after five years through ten years		19,020		18,053
Due after ten years		33,482		31,248
		69,445		65,835
Commercial mortgage-backed agencies		40,450		38,843
Collateralized mortgage obligations		39,103		37,625
Total available for sale	$	148,998	$	142,303
Held to Maturity:
Due after five years through ten years	$	15,946	$	15,934
Due after ten years		8,420		9,266
		24,366		25,200
Residential mortgage-backed agencies		45,297		43,855
Commercial mortgage-backed agencies		16,643		16,416
Collateralized mortgage obligations		3,989		3,771
Total held to maturity	$	90,295	$	89,242

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 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 June 30, 2018.

The Corporation recognizes dividends received on its restricted stock investments on a cash basis. For the six months ended June 30, 2018, dividends of $135,343 were recognized in earnings. For the comparable period of 2017, dividends of $126,489 were recognized in earnings. For the three months ended June 30, 2018, dividends of $69,376 were recognized in earnings. For the comparable period of 2017, dividends of $59,270 were recognized in earnings.

Note 7 – Loans and Related Allowance for Loan Losses

The following table summarizes the primary segments of the loan portfolio at June 30, 2018 and December 31, 2017:

(in thousands)	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Residential Mortgage		Consumer		Total
June 30, 2018

Individually evaluated for impairment	$	7,438	$	733	$	305	$	4,040	$	23	$	12,539
Collectively evaluated for impairment	$	283,257	$	111,046	$	87,869	$	413,242	$	33,248	$	928,662
Total loans	$	290,695	$	111,779	$	88,174	$	417,282	$	33,271	$	941,201

December 31, 2017

Individually evaluated for impairment	$	9,076	$	976	$	668	$	4,201	$	30	$	14,951
Collectively evaluated for impairment	$	274,086	$	109,554	$	76,055	$	394,447	$	23,425	$	877,567
Total loans	$	283,162	$	110,530	$	76,723	$	398,648	$	23,455	$	892,518

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, which are primarily first lien loans and home equity lines of credit, which are generally second liens. The consumer loan segment consists primarily of installment loans (direct and indirect) and overdraft lines of credit connected with customer deposit accounts.

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 Departments perform 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 Departments continually review and assess 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 at June 30, 2018 and December 31, 2017:

(in thousands)	Pass		Special Mention		Substandard		Total
June 30, 2018
Commercial real estate
Non owner-occupied	$	133,604	$	2,970	$	2,914	$	139,488
All other CRE		140,070		3,659		7,478		151,207
Acquisition and development
1-4 family residential construction		19,931		0		0		19,931
All other A&D		84,218		7,207		423		91,848
Commercial and industrial		82,967		4,180		1,027		88,174
Residential mortgage
Residential mortgage - term		339,928		0		4,847		344,775
Residential mortgage - home equity		71,343		146		1,018		72,507
Consumer		33,153		4		114		33,271
Total	$	905,214	$	18,166	$	17,821	$	941,201

December 31, 2017
Commercial real estate
Non owner-occupied	$	133,725	$	0	$	5,843	$	139,568
All other CRE		132,003		3,963		7,628		143,594
Acquisition and development
1-4 family residential construction		17,719		0		0		17,719
All other A&D		84,345		7,294		1,172		92,811
Commercial and industrial		75,299		17		1,407		76,723
Residential mortgage
Residential mortgage - term		319,059		0		5,326		324,385
Residential mortgage - home equity		73,059		148		1,056		74,263
Consumer		23,391		5		59		23,455
Total	$	858,600	$	11,427	$	22,491	$	892,518

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 at June 30, 2018 and December 31, 2017:

(in thousands)	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days+ Past Due		Total Past Due and Accruing		Non-Accrual		Total Loans
June 30, 2018
Commercial real estate
Non owner-occupied	$	138,781	$	18	$	0	$	0	$	18	$	689	$	139,488
All other CRE		148,934		0		0		25		25		2,248		151,207
Acquisition and development
1-4 family residential construction		19,931		0		0		0		0		0		19,931
All other A&D		91,806		0		0		0		0		42		91,848
Commercial and industrial		88,054		78		23		3		104		16		88,174
Residential mortgage
Residential mortgage - term		341,291		408		1,234		397		2,039		1,445		344,775
Residential mortgage - home equity		71,360		404		190		0		594		553		72,507
Consumer		33,109		84		49		6		139		23		33,271
Total	$	933,266	$	992	$	1,496	$	431	$	2,919	$	5,016	$	941,201

December 31, 2017
Commercial real estate
Non owner-occupied	$	136,134	$	186	$	0	$	0	$	186	$	3,248	$	139,568
All other CRE		141,680		461		248		0		709		1,205		143,594
Acquisition and development
1-4 family residential construction		17,719		0		0		0		0		0		17,719
All other A&D		92,291		0		165		144		309		211		92,811
Commercial and industrial		76,322		0		17		6		23		378		76,723
Residential mortgage
Residential mortgage - term		319,633		322		2,534		430		3,286		1,466		324,385
Residential mortgage - home equity		72,683		600		400		0		1,000		580		74,263
Consumer		23,273		115		22		15		152		30		23,455
Total	$	879,735	$	1,684	$	3,386	$	595	$	5,665	$	7,118	$	892,518

Non-accrual loans totaled $5.0 million at June 30, 2018, compared to $7.1 million at December 31, 2017. The decrease in non-accrual balances at June 30, 2018 was primarily due to payoffs of two relationships totaling $2.5 million and a charge-off of $.8 million on one relationship, offset by the addition of one large commercial real estate credit of $1.9 million. Non-accrual loans that have been subject to partial charge-offs totaled $.9 million at June 30, 2018, compared to $2.1 million at December 31, 2017. Loans secured by 1-4 family residential real estate properties in the process of foreclosure were $.1 million at June 30, 2018 and $.4 million at December 31, 2017.

Accruing loans past due 30 days or more decreased to .31% of the loan portfolio at June 30, 2018, compared to .63% at December 31, 2017. The decrease for the first six months of 2018 was due primarily to improvements in the commercial real estate and residential mortgage portfolios.

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 at June 30, 2018 and December 31, 2017, segregated by the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment:

(in thousands)	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Residential Mortgage		Consumer		Unallocated		Total
June 30, 2018

Individually evaluated for impairment	$	16	$	28	$	0	$	125	$	6	$	0	$	175
Collectively evaluated for impairment	$	3,287	$	1,144	$	786	$	3,619	$	258	$	500	$	9,594
Total ALL	$	3,303	$	1,172	$	786	$	3,744	$	264	$	500	$	9,769

December 31, 2017

Individually evaluated for impairment	$	245	$	40	$	0	$	65	$	12	$	0	$	362
Collectively evaluated for impairment	$	3,454	$	1,217	$	869	$	3,379	$	191	$	500	$	9,610
Total ALL	$	3,699	$	1,257	$	869	$	3,444	$	203	$	500	$	9,972

Management uses the following methodology for determining impairment on consumer and commercial loans. All nonaccrual loans and all loans designated as troubled debt restructurings (“TDRs”) are considered to be impaired. Additionally, an impairment evaluation is performed on any account that meets either of the following criteria: (a) commercial loans that (1) are risk-rated substandard and (2) have a balance of at least $500,000; and (b) commercial loans that are (1) part of a relationship having an amount of $750,000 or more and (2) at least 60 days past-due. For those loans that are not classified as nonaccrual or troubled debt restructures, a judgment is made as to the likelihood that contractual principal and interest will be collected. 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.

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. A valuation grid for impaired loans is used to determine when or how collateral values are to be updated based on size and collateral dependency for commercial loans and foreclosure status for consumer loans. 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 required at June 30, 2018 and December 31, 2017:

	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
June 30, 2018
Commercial real estate
Non owner-occupied	$	124	$	16	$	689	$	813	$	8,598
All other CRE		0		0		6,625		6,625		6,625
Acquisition and development
1-4 family residential construction		0		0		457		457		457
All other A&D		234		28		42		276		367
Commercial and industrial		0		0		305		305		2,519
Residential mortgage
Residential mortgage - term		1,213		125		2,274		3,487		3,772
Residential mortgage – home equity		0		0		553		553		566
Consumer		23		6		0		23		23
Total impaired loans	$	1,594	$	175	$	10,945	$	12,539	$	22,927

December 31, 2017
Commercial real estate
Non owner-occupied	$	1,711	$	245	$	1,907	$	3,618	$	10,579
All other CRE		0		0		5,458		5,458		5,731
Acquisition and development
1-4 family residential construction		0		0		527		527		527
All other A&D		295		40		154		449		722
Commercial and industrial		0		0		668		668		2,882
Residential mortgage
Residential mortgage - term		598		65		3,023		3,621		3,919
Residential mortgage – home equity		0		0		580		580		593
Consumer		30		12		0		30		30
Total impaired loans	$	2,634	$	362	$	12,317	$	14,951	$	24,983

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.

The following tables present the activity in the ALL for the six- and three-month periods ended June 30, 2018 and 2017:

(in thousands)	Commercial Real Estate			Acquisition and Development			Commercial and Industrial			Residential Mortgage			Consumer			Unallocated		Total
ALL balance at January 1, 2018	$	3,699		$	1,257		$	869		$	3,444		$	203		$	500	$	9,972
Charge-offs		(889	)		(98	)		(10	)		(240	)		(175	)		0		(1,412	)
Recoveries		60			258			31			65			79			0		493
Provision		433			(245	)		(104	)		475			157			0		716
ALL balance at June 30, 2018	$	3,303		$	1,172		$	786		$	3,744		$	264		$	500	$	9,769
ALL balance at January 1, 2017	$	3,913		$	871		$	858		$	3,588		$	188		$	500	$	9,918
Charge-offs		(2,745	)		(18	)		(33	)		(236	)		(143	)		0		(3,175	)
Recoveries		63			188			1,651			253			116			0		2,271
Provision		2,418			159			(1,640	)		(60	)		31			0		908
ALL balance at June 30, 2017	$	3,649		$	1,200		$	836		$	3,545		$	192		$	500	$	9,922

(in thousands)	Commercial Real Estate			Acquisition and Development			Commercial and Industrial			Residential Mortgage			Consumer			Unallocated		Total
ALL balance at April 1, 2018	$	3,976		$	1,160		$	860		$	3,678		$	296		$	500	$	10,470
Charge-offs		(889	)		(7	)		(10	)		(86	)		(107	)		0		(1,099	)
Recoveries		1			44			13			27			44			0		129
Provision		215			(25	)		(77	)		125			31			0		269
ALL balance at June 30, 2018	$	3,303		$	1,172		$	786		$	3,744		$	264		$	500	$	9,769
ALL balance at April 1, 2017	$	5,567		$	883		$	936		$	3,502		$	195		$	500	$	11,583
Charge-offs		(2,316	)		0			0			(88	)		(59	)		0		(2,463	)
Recoveries		58			177			196			33			39			0		503
Provision		340			140			(296	)		98			17			0		299
ALL balance at June 30, 2017	$	3,649		$	1,200		$	836		$	3,545		$	192		$	500	$	9,922

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

The following table presents the average recorded investment in impaired loans by class and related interest income recognized for the periods indicated:

	Six months ended						Six months ended
	June 30, 2018						June 30, 2017
(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	$	813	$	7	$	66	$	6,037	$	12	$	0
All other CRE		6,625		99		56		8,658		105		0
Acquisition and development
1-4 family residential construction		457		12		0		582		12		0
All other A&D		276		6		0		1,860		45		0
Commercial and industrial		305		10		0		290		6		0
Residential mortgage
Residential mortgage - term		3,487		62		0		3,918		66		7
Residential mortgage – home equity		553		0		7		230		0		0
Consumer		23		0		0		0		0		0
Total	$	12,539	$	196	$	129	$	21,575	$	246	$	7

	Three months ended						Three months ended
	June 30, 2018						June 30, 2017
(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	$	1,258	$	3	$	0	$	5,672	$	6	$	0
All other CRE		5,726		50		0		7,766		52		0
Acquisition and development
1-4 family residential construction		492		6		0		582		6		0
All other A&D		340		3		0		1,818		22		0
Commercial and industrial		311		5		0		290		3		0
Residential mortgage
Residential mortgage - term		3,529		30		0		3,860		33		7
Residential mortgage – home equity		614		0		0		269		0		0
Consumer		24		0		0		0		0		0
Total	$	12,294	$	97	$	0	$	20,257	$	122	$	7

The Bank modifies loan terms in the normal course of business. Among other reasons, modifications might be made in an effort to retain the loan relationship, to remain competitive in the current interest rate environment and/or to re-amortize or extend the loan’s term to better match the loan’s payment stream with the borrower’s cash flow. A modified loan is considered to be a TDR when the Bank has determined that the borrower is troubled (i.e., experiencing financial difficulties). The Bank evaluates the probability that the borrower will be in payment default on any of its debt obligations in the foreseeable future without modification. To make this determination, the Bank performs a global financial review of the borrower and loan guarantors to assess their current ability to meet their financial obligations.

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 offered only for that time period. Where possible, the Bank obtains additional collateral and/or secondary payment sources at the time the loan is restructured 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 that 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
Six months ended June 30, 2018
Commercial real estate
Non owner-occupied		0	$	0		0	$	0		1	$	126
All other CRE		0		0		1		179		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		1	$	179		1	$	126

	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
Six months ended June 30, 2017
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		1		244		0		0
Commercial and industrial		0		0		0		0		0		0
Residential mortgage
Residential mortgage – term		0		0		1		259		0		0
Residential mortgage – home equity		0		0		0		0		0		0
Consumer		0		0		0		0		0		0
Total		0	$	0		2	$	503		0	$	0

During the six months ended June 30, 2018, there were no new TDRs, but two existing TDRs that had reached their original modification maturity were re-modified. These re-modifications did not impact the ALL. During the six months ended June 30, 2018, there were no payment defaults.

During the six months ended June 30, 2017, there were no new TDRs, but two existing TDRs that had reached their original modification maturity were re-modified. These re-modifications did not impact the ALL. During the six months ended June 30, 2017, there were no payment defaults.

The following tables present the volume and recorded investment at that 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
Three months ended June 30, 2018
Commercial real estate
Non owner-occupied		0	$	0		0	$	0		1	$	126
All other CRE		0		0		1		179		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		1	$	179		1	$	126

During the three months ended June 30, 2018, there were no new TDRs, but two existing TDRs that had reached their original modification maturity were remodified. These re-modifications did not impact the ALL. During the second quarter of 2018, there were no payment defaults.

There were no new TDRs and no activity for the three months ended June 30, 2017.

Note 8 - Other Real Estate Owned

The following table presents the components of other real estate owned (“OREO”) at June 30, 2018 and December 31, 2017:

(in thousands)	June 30, 2018		December 31, 2017
Commercial real estate	$	3,657	$	3,605
Acquisition and development		4,033		5,295
Commercial and industrial		24		24
Residential mortgage		789		1,217
Total OREO	$	8,503	$	10,141

The following table presents the activity in the OREO valuation allowance for the six- and three-month periods ended June 30, 2018 and 2017:

	For the Six Months Ended						For the Three Months Ended
	June 30,						June 30,
(in thousands)	2018			2017			2018			2017
Balance beginning of period	$	2,740		$	3,535		$	2,911		$	3,316
Fair value write-down		478			93			183			23
Sales of OREO		(271	)		(396	)		(147	)		(107	)
Balance at end of period	$	2,947		$	3,232		$	2,947		$	3,232

The following table presents the components of OREO expenses, net, for the six- and three-month periods ended June 30, 2018 and 2017:

	For the Six Months Ended						For the Three Months Ended
	June 30,						June 30,
(in thousands)	2018			2017			2018			2017
Gains on real estate, net	$	(183	)	$	(74	)	$	(163	)	$	(44	)
Fair value write-down, net		478			93			183			23
Expenses, net		272			279			124			110
Rental and other income		(74	)		(86	)		(36	)		(51	)
Total OREO expense, net	$	493		$	212		$	108		$	38

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 June 30, 2018 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 June 30, 2018, the U.S. Government agencies, residential and commercial mortgage-backed securities, collateralized mortgage obligations, and state and political subdivisions bonds, excluding the TIF bonds, segments are classified as Level 2 within the valuation hierarchy. Their fair values were determined based upon market-corroborated inputs and valuation matrices, which were obtained through third party data service providers or securities brokers through which the Corporation has historically transacted both purchases and sales of investment securities. The TIF bonds are classified as Level 3 within the valuation hierarchy as they are not openly traded.

The CDO segment, which consists of pooled trust preferred securities issued by banks, thrifts and insurance companies, is classified as Level 3 within the valuation hierarchy. At June 30, 2018, the Corporation owned nine pooled trust preferred securities with an amortized cost of $18.4 million and a fair value of $16.1 million. As of June 30, 2018, the market for these securities is not active and the 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 June 30, 2018, (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 June 30, 2018.

The approach used by the third party to determine fair value involved several steps, which included detailed credit and structural evaluation of each piece of collateral in each bond, projection of default, recovery and prepayment/amortization probabilities for each piece of collateral in the bond, and discounted cash flow modeling. The discount rate methodology used by the third party combines a baseline current market yield for comparable corporate and structured credit products with adjustments based on evaluations of the differences found in structure and risks associated with actual and projected credit performance of each CDO being valued. Currently, the only active and liquid trading market that exists is for stand-alone trust preferred securities, with a limited market for highly-rated CDO securities that are more senior in the capital structure than the securities in the CDO portfolio. Therefore, adjustments to the baseline discount rate are also made to reflect the additional leverage found in structured instruments.

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

Impaired loans – Loans included in the table below are those that are considered impaired with a specific allocation or with 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 June 30, 2018 and December 31, 2017, the significant unobservable inputs used in the fair value measurements were as follows:

(in thousands)	Fair Value at June 30, 2018		Valuation Technique	Significant Unobservable Inputs	Significant Unobservable Input Value
Recurring:

Investment Securities – available for sale	$	16,147	Discounted Cash Flow	Discount Rate	LIBOR+ 4.00%

Non-recurring:

Impaired Loans	$	2,044	Market Comparable Properties	Marketability Discount	10.0% - 15.0% ⁽¹⁾ (weighted avg 11.1%)

Other Real Estate Owned	$	1,665	Market Comparable Properties	Marketability Discount	10.0% - 15.0% ⁽¹⁾ (weighted avg 13.5%)

(in thousands)	Fair Value at December 31, 2017		Valuation Technique	Significant Unobservable Inputs	Significant Unobservable Input Value
Recurring:

Investment Securities – available for sale	$	14,920	Discounted Cash Flow	Discount Rate	Range of LIBOR+ 4.5% to 5.5%

Non-recurring:

Impaired Loans	$	2,507	Market Comparable Properties	Marketability Discount	10.0% - 15.0% ⁽¹⁾ (weighted avg 10.9%)

Other Real Estate Owned	$	1,841	Market Comparable Properties	Marketability Discount	10.0% - 15.0% ⁽¹⁾ (weighted avg 13.3%)

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 June 30, 2018 and December 31, 2017 are as follows:

			Fair Value Measurements at June 30, 2018 Using
	Assets Measured at Fair Value		Quoted Prices in Active Markets for Identical Assets	Significant Other Observable Inputs		Significant Unobservable Inputs
(in thousands)	06/30/2018		(Level 1)	(Level 2)		(Level 3)
Recurring:
Investment securities available-for-sale:
U.S. government agencies	$	28,751		$	28,751
Commercial mortgage-backed agencies	$	38,843		$	38,843
Collateralized mortgage obligations	$	37,625		$	37,625
Obligations of states and political subdivisions	$	20,937		$	20,937
Collateralized debt obligations	$	16,147				$	16,147
Financial Derivatives	$	1,536		$	1,536
Non-recurring:
Impaired loans	$	2,044				$	2,044
Other real estate owned	$	1,665				$	1,665

			Fair Value Measurements at December 31, 2017 Using
	Assets Measured at Fair Value		Quoted Prices in Active Markets for Identical Assets	Significant Other Observable Inputs		Significant Unobservable Inputs
(in thousands)	12/31/2017		(Level 1)	(Level 2)		(Level 3)
Recurring:
Investment securities available-for-sale:
U.S. government agencies	$	29,256		$	29,256
Commercial mortgage-backed agencies	$	40,891		$	40,891
Collateralized mortgage obligations	$	40,384		$	40,384
Obligations of states and political subdivisions	$	21,019		$	21,019
Collateralized debt obligations	$	14,920				$	14,920
Financial Derivative	$	781		$	781
Non-recurring:
Impaired loans	$	2,507				$	2,507
Other real estate owned	$	1,841				$	1,841

There were no transfers of assets between any of the fair value hierarchy for the six-month periods ended June 30, 2018 or 2017.

The following tables show a reconciliation of the beginning and ending balances for fair valued assets measured on a recurring basis using Level 3 significant unobservable inputs for the six- and three-month periods ended June 30, 2018 and 2017:

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
(In thousands)	Investment Securities Available for Sale
Beginning balance January 1, 2018	$	14,920
Total gains realized/unrealized:
Included in other comprehensive income		1,227
Ending balance June 30, 2018	$	16,147

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
(in thousands)	Investment Securities Available for Sale
Beginning balance January 1, 2017	$	20,254
Total gains/(losses) realized/unrealized:
Included in other comprehensive income		(5,907	)
Ending balance June 30, 2017	$	14,347

	Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
(in thousands)	Investment Securities Available for Sale
Beginning balance April 1, 2018	$	15,977
Total gains realized/unrealized:
Included in other comprehensive loss		170
Ending balance June 30, 2018	$	16,147

	Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
(in thousands)	Investment Securities Available for Sale
Beginning balance April 1, 2017	$	20,357
Total losses realized/unrealized:
Included in other comprehensive income		(6,010	)
Ending balance June 30, 2017	$	14,347

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 six- and three- month periods ended June 30, 2018 and 2017.

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

June 30, 2018

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: