# First United Corp: Form 10-Q for the period ended Jun 30, 2013

- Company: [First United Corp](/companies/func.md) (CIK 763907)
- Form: 10-Q
- Filed: 2013-08-14
- Accepted by EDGAR: Aug 14, 2013, 21:53 ET
- Period: 2013-06-30
- Accession: 0001144204-13-045971
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/763907/000114420413045971/v352697_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/763907/000114420413045971/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2013-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2013-04-01 to 2013-06-30 | $2.9m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2013-01-01 to 2013-06-30 | $5.9m | us-gaap:InterestExpense |
| Income tax | 3 months, 2013-04-01 to 2013-06-30 | $607.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2013-01-01 to 2013-06-30 | $1.2m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2013-04-01 to 2013-06-30 | $1.8m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2013-01-01 to 2013-06-30 | $3.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2013-04-01 to 2013-06-30 | $0.23 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted EPS | 6 months, 2013-01-01 to 2013-06-30 | $0.47 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 6 months, 2013-01-01 to 2013-06-30 | $10.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2013-01-01 to 2013-06-30 | $727.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2013-06-30 | $42.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2013-06-30 | $1.33bn | us-gaap:Assets |
| Total liabilities | at 2013-06-30 | $1.23bn | us-gaap:Liabilities |
| Long-term debt | at 2013-06-30 | $182.7m | us-gaap:LongTermDebt |
| Short-term borrowings | at 2013-06-30 | $51.0m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2013-06-30 | $97.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 85,053 characters.

INTRODUCTION

The following discussion and analysis is intended as a review of material changes in and significant factors affecting the financial condition and results of operations of the First United Corporation and its consolidated subsidiaries for the periods indicated. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and the notes thereto contained in Item 1 of Part I of this report. Unless the context clearly suggests otherwise, references in this report to “us”, “we”, “our”, and “the Corporation” are to First United Corporation and its consolidated subsidiaries.

FORWARD-LOOKING STATEMENTS

This report may contain forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Readers of this report should be aware of the speculative nature of “forward-looking statements.” Statements that are not historical in nature, including those that include the words “anticipate”, “estimate”, “should”, “expect”, “believe”, “intend”, and similar expressions, are based on current expectations, estimates and projections about, among other things, the industry and the markets in which we operate, and they are not guarantees of future performance. Whether actual results will conform to expectations and predictions is subject to known and unknown risks and uncertainties, including risks and uncertainties discussed in this report; general economic, market, or business conditions; changes in interest rates, deposit flow, the cost of funds, and demand for loan products and financial services; changes in our competitive position or competitive actions by other companies; changes in the quality or composition of our loan and investment portfolios; our ability to manage growth; changes in laws or regulations or policies of federal and state regulators and agencies; and other circumstances beyond our control. Consequently, all of the forward-looking statements made in this report are qualified by these cautionary statements, and there can be no assurance that the actual results anticipated will be realized, or if substantially realized, will have the expected consequences on our business or operations. These and other risks are discussed in detail in the periodic reports that First United Corporation files with the Securities and Exchange Commission (the “SEC”) (see Item 1A of Part II of this report for further information). Except as required by applicable laws, we do not intend to publish updates or revisions of any forward-looking statements we make to reflect new information, future events or otherwise.

FIRST UNITED CORPORATION

First United Corporation is a Maryland corporation chartered in 1985 and a financial holding company registered under the federal Bank Holding Company Act of 1956, as amended. First United Corporation’s primary business is serving as the parent company of First United Bank & Trust, a Maryland trust company (the “Bank”), First United Statutory Trust I (“Trust I”) and First United Statutory Trust II (“Trust II”), both Connecticut statutory business trusts, and First United Statutory Trust III, a Delaware statutory business trust (“Trust III” and together with Trust I and Trust II, the “Trusts”). The Trusts were formed for the purpose of selling trust preferred securities that qualified as Tier 1 capital. First United Corporation is also the parent company of First United Insurance Group, LLC, a Maryland limited liability company (the “Insurance Agency”) that, through the close of business on December 31, 2011, operated as a full service insurance agency. Effective on January 1, 2012, the Insurance Agency sold substantially all of its assets, net of cash, to a third-party and is no longer an active subsidiary. The Bank has three wholly-owned subsidiaries: OakFirst Loan Center, Inc., a West Virginia finance company; OakFirst Loan Center, LLC, a Maryland finance company (collectively, the “OakFirst Loan Centers”), and First OREO Trust, a Maryland statutory trust formed for the purposes of servicing and disposing of the real estate that the Bank acquires through foreclosure or by deed in lieu of foreclosure. Until March 27, 2013, the Bank also owned a majority interest in Cumberland Liquidation Trust, a Maryland statutory trust formed for the purposes of servicing and disposing of real estate that secured a loan made by another bank and in which the Bank held a participation interest, but this entity was dissolved on such date. The Bank also owns 99.9% of the limited partnership interests in Liberty Mews Limited Partnership, a Maryland limited partnership formed for the purpose of acquiring, developing and operating low-income housing units in Garrett County, Maryland.

At June 30, 2013, the Corporation had total assets of approximately $1.3 billion, net loans of $826.3 million, and deposits of approximately $972.7 million. Shareholders’ equity at June 30, 2013 was approximately $97.8 million.

The Corporation maintains an Internet site at www.mybank4.com on which it makes available, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the foregoing as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the SEC.

ESTIMATES AND CRITICAL ACCOUNTING POLICIES

This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. (See Note 1 of the Notes to Consolidated Financial Statements included in Item 8 of Part II of First United Corporation’s Annual Report on Form 10-K for the year ended December 31, 2012). On an on-going basis, management evaluates estimates, including those related to loan losses and intangible assets, other-than-temporary impairment (“OTTI”) of investment securities, income taxes, fair value of investments and pension plan assumptions. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the consolidated financial statements.

#### Allowance for Loan Losses

One of our most important accounting policies is that related to the monitoring of the loan portfolio. A variety of estimates impact the carrying value of the loan portfolio, including the calculation of the allowance for loan losses (the “ALL”), the valuation of underlying collateral, the timing of loan charge-offs and the placement of loans on non-accrual status. The ALL is established and maintained at a level that management believes is adequate to cover losses resulting from the inability of borrowers to make required payment on loans. Estimates for loan losses are arrived at by analyzing risks associated with specific loans and the loan portfolio, current and historical trends in delinquencies and charge-offs, and changes in the size and composition of the loan portfolio. The analysis also requires consideration of the economic climate and direction, changes in lending rates, political conditions, legislation impacting the banking industry and economic conditions specific to Western Maryland and Northeastern West Virginia. Because the calculation of the ALL relies on management’s estimates and judgments relating to inherently uncertain events, actual results may differ from management’s estimates.

#### Goodwill and Other Intangible Assets

Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 350, *Intangibles - Goodwill and Other*, establishes standards for the amortization of acquired intangible assets and impairment assessment of goodwill. The $11 million in recorded goodwill is primarily related to the acquisition of Huntington National Bank branches that occurred in 2003 and is not subject to periodic amortization.

Goodwill arising from business combinations represents the value attributable to unidentifiable intangible elements in the business acquired. Goodwill is not amortized but is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. Impairment testing requires that the fair value of each of the Corporation’s reporting units be compared to the carrying amount of its net assets, including goodwill. If the estimated current fair value of the reporting unit exceeds its carrying value, no additional testing is required and an impairment loss is not recorded. Otherwise, additional testing is performed, and to the extent such additional testing results in a conclusion that the carrying value of goodwill exceeds its implied fair value, an impairment loss is recognized.

Our goodwill relates to value inherent in the banking business, and that value is dependent upon our ability to provide quality, cost effective services in a highly competitive local market. This ability relies upon continuing investments in processing systems, the development of value-added service features and the ease of use of our services. As such, goodwill value is ultimately supported by revenue that is driven by the volume of business transacted. A decline in earnings as a result of a lack of growth or the inability to deliver cost effective services over sustained periods can lead to impairment of goodwill, which could adversely impact earnings in future periods. ASC Topic 350 requires an annual evaluation of goodwill for impairment. The determination of whether or not these assets are impaired involves significant judgments and estimates.

#### Accounting for Income Taxes

First United Corporation accounts for income taxes in accordance with ASC Topic 740, “Income Taxes”. Under this guidance, deferred taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.

Management regularly reviews the carrying amount of its net deferred tax assets to determine if the establishment of a valuation allowance is necessary. If based on the available evidence, it is more likely than not that all or a portion of the Company’s net deferred tax assets will not be realized in future periods, a deferred tax valuation allowance would be established. Consideration is given to various positive and negative factors that could affect the realization of the deferred tax assets. In evaluating this available evidence, management considers, among other things, historical performance, expectations of future earnings, the ability to carry back losses to recoup taxes previously paid, length of statutory carry forward periods, experience with utilization of operating loss and tax credit carry forwards not expiring, tax planning strategies and timing of reversals of temporary differences. Significant judgment is required in assessing future earnings trends and the timing of reversals of temporary differences. The Corporation’s evaluation is based on current tax laws as well as management’s expectations of future performance.

Management expects that First United Corporation’s adherence to the required accounting guidance may result in increased volatility in quarterly and annual effective income tax rates because of changes in judgment or measurement including changes in actual and forecasted income before taxes, tax laws and regulations, and tax planning strategies.

#### Other-Than-Temporary Impairment of Investment Securities

Management systematically evaluates securities for impairment on a quarterly basis. Based upon application of accounting guidance for subsequent measurement in ASC Topic 320 (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 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). This process is described more fully in the Investment Securities section of the Consolidated Balance Sheet Review.

#### Fair Value of Investments

We have determined the fair value of our investment securities in accordance with the requirements of ASC Topic 820, *Fair Value Measurements and Disclosures,* which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements required under other accounting pronouncements. The Corporation measures the fair market values of its investments based on the fair value hierarchy established in Topic 820. The determination of fair value of investments and other assets is discussed further in Note 8 to the consolidated financial statements presented elsewhere in this report.

#### Pension Plan Assumptions

Our pension plan costs are calculated using actuarial concepts, as discussed within the requirements of ASC Topic 715, *Compensation – Retirement Benefits.* Pension expense and the determination of our projected pension liability are based upon two critical assumptions: the discount rate and the expected return on plan assets. We evaluate each of these critical assumptions annually. Other assumptions impact the determination of pension expense and the projected liability including the primary employee demographics, such as retirement patterns, employee turnover, mortality rates, and estimated employer compensation increases. These factors, along with the critical assumptions, are carefully reviewed by management each year in consultation with our pension plan consultants and actuaries. Further information about our pension plan assumptions, the plan’s funded status, and other plan information is included in Note 12 to the consolidated financial statements presented elsewhere in this report.

Other than as discussed above, management does not believe that any material changes in our critical accounting policies have occurred since December 31, 2012.

SELECTED FINANCIAL DATA

The following table sets forth certain selected financial data for the six months ended June 30, 2013 and 2012 and is qualified in its entirety by the detailed information and unaudited financial statements, including the notes thereto, included elsewhere in this quarterly report.

| Per Share Data | As of or For the six months ended June 30, 2013 | 2012 |
| --- | ---: | ---: |
| Basic and diluted net income/(loss) per common share | $0.47 | $(0.30) |
| Book Value | $10.94 | $10.54 |
| Significant Ratios |  |  |
| Return on Average Assets (a) | 0.57% | (0.15)% |
| Return on Average Equity (a) | 7.58% | (2.12)% |
| Average Equity to Average Assets | 7.54% | 7.01% |

Note: (a) Annualized

RESULTS OF OPERATIONS

#### Overview

Consolidated net income available to common shareholders was $2.9 million for the first six months of 2013, compared to a net loss attributable to common shareholders of $1.9 million for the same period of 2012. Basic and diluted net income per common share for the first six months of 2013 was $.47, compared to a net loss per common share of $.30 for the same period of 2012. The change in earnings, from a net loss for the first six months of 2012 to net income for the first six months in 2013, was primarily due to a $8.3 million decrease in the provision for loan losses during the first six months of 2013 when compared to the same time period of 2012. This decrease was offset by a decrease in net gains of $.3 million due to reduced gains on sales of investment securities, and a decrease of $.8 million in other income due to a reduction in bank-owned life insurance (“BOLI”) income driven by a one-time death benefit of $.7 million that occurred in March 2012. Total other operating expenses increased $.1 million during the first six months of 2013 when compared to the same period of 2012. Other expenses related to other real estate owned (“OREO”) increased $.3 million in the first six months of 2013 when compared to the first six months of 2012. The net interest margin for the first six months of 2013, on a fully tax equivalent (“FTE”) basis, decreased to 3.17% from 3.33% for the first six months of 2012. The net interest margin for the year ended December 31, 2012, on a FTE basis, was 3.30%.

The provision for loan losses decreased to $.9 million for the six months ended June 30, 2013, compared to $9.2 million for the same period of 2012. The lower provision expense thus far in 2013 was primarily due to a loan charge-off of $9.0 million on a shared national credit for an ethanol plant in western Pennsylvania during the first quarter of 2012 and charge-offs of $1.1 million on a participation loan for a hotel located in Hazleton, Pennsylvania and $.9 million on a motel located in Salisbury, Maryland during the first quarter of 2012. For the first six months of 2013, we continued to see a leveling in the credit quality of our loan portfolio as we experienced fewer loan downgrades and delinquency levels have improved. Specific allocations have been made for impaired loans where management has determined that the collateral supporting the loans is not adequate to cover the loan balance, and the qualitative factors affecting the ALL have been adjusted based on the current economic environment and the characteristics of the loan portfolio.

Interest expense on our interest-bearing liabilities decreased $1.6 million during the six months ended June 30, 2013 when compared to the same period of 2012 due primarily to a decrease of $76.8 million in average interest-bearing deposits and a $24.1 million decrease in average long-term debt outstanding. The decline in average interest-bearing deposits and average long-term debt was due to the repayment of $40.0 million in brokered certificates of deposit and the repayment of $23.5 million in Federal Home Loan Bank (“FHLB”) advances at their stated maturities, respectively. During 2013, the Bank’s treasury team will continue to monitor rates on our deposits and increases special pricing only for full relationship customers. Our retail staff continues to be focused on shifting our deposit mix away from higher cost certificates of deposit and towards lower cost money market and transaction accounts.

Other operating income decreased $.8 million during the first six months of 2013 when compared to the same period of 2012. This decrease was primarily attributable to a decline in BOLI income due to the one-time death benefit of $.7 million received in March 2012. Net gains declined $.3 million during the first six months of 2013 when compared to the first six months of 2012 due to a reduction in gains on sales of investment securities.

Operating expenses increased $.1 million in the first six months of 2013 when compared to the same period of 2012. This increase was due to a $.6 million reduction in gains on sales of OREO offset by a reduction of approximately $.3 million in salaries and benefits due to reduced health insurance costs and incentives and a decrease of $.2 million in other miscellaneous expenses.

Consolidated net income available to common shareholders was $1.4 million, or $.23 per common share, for the second quarter of 2013, compared to net income available to common shareholders of $1.2 million, or $.20 per common share, for the same period of 2012. The net interest margin for the second quarter of 2013, on a FTE basis, was 3.09%, compared to 3.34% for the same period of 2012.

Other operating income remained stable during the second quarter of 2013 when compared to the same period of 2012.

Operating expenses decreased $.3 million in the second quarter of 2013 when compared to the same period of 2012. This decrease was due to a $.3 million reduction in salaries and benefits related to reduced health insurance costs and incentives.

#### Net Interest Income

Net interest income is the largest source of operating revenue and is the difference between the interest earned on interest-earning assets and the interest expense incurred on interest-bearing liabilities. For analytical and discussion purposes, net interest income is adjusted to a FTE basis to facilitate performance comparisons between taxable and tax-exempt assets. FTE income is determined by increasing tax-exempt income by an amount equal to the federal income taxes that would have been paid if this income were taxable at the statutorily applicable rate.

The following table sets forth the average balances, net interest income and expense, and average yields and rates of our interest-earning assets and interest-bearing liabilities for the six months ended June 30, 2013 and 2012:

*(in thousands)*

| Interest-earning assets: | For the six months ended June 30, 2013 Average Balance | Interest | Average Rate | 2012 Average Balance | Interest | Average Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans | $860,191 | $21,037 | 4.93% | $922,665 | $23,983 | 5.23% |
| Investment securities | 259,810 | 3,632 | 2.82 | 235,917 | 3,738 | 3.19 |
| Other interest earning assets | 86,082 | 181 | 0.40 | 73,664 | 134 | 0.37 |
| **Total earning assets** | $1,206,083 | 24,850 | 4.15% | $1,232,246 | 27,855 | 4.55% |
| **Interest-bearing liabilities** |  |  |  |  |  |  |
| Interest-bearing deposits | $803,960 | 2,609 | 0.65% | $880,727 | 3,558 | 0.81% |
| Short-term borrowings | 44,067 | 29 | 0.13 | 35,408 | 97 | 0.55 |
| Long-term borrowings | 182,717 | 3,253 | 3.59 | 206,790 | 3,833 | 3.73 |
| **Total interest-bearing liabilities** | $1,030,744 | 5,891 | 1.15% | $1,122,925 | 7,488 | 1.34% |
| Net interest income and spread |  | $18,959 | 3.00% |  | $20,367 | 3.21% |
| Net interest margin |  |  | **3.17%** |  |  | **3.33%** |

Note: Interest income and yields are presented on a fully taxable equivalent basis using a 35% tax rate.

Net interest income on a FTE basis decreased $1.4 million during the first six months of 2013 over the same period in 2012 due to a $3.0 million (10.8%) decrease in interest income, which was partially offset by a $1.6 million (21.3%) decrease in interest expense. The decrease in interest income was primarily due to the $62.5 million reduction in the average balance of loans when comparing the first six months of 2013 to the same period of 2012. The slightly lower yield on both loans and investment securities, as funds were reinvested, also contributed to the decline in interest income when comparing the two periods. The decline in interest income was partially offset by a decline in interest expense due to the reduction in average balances in interest-bearing deposits and long-term borrowings. We saw a slight decline in the net interest margin in the first six months of 2013 to 3.17% when compared to 3.30% for the year ended December 31, 2012 and 3.33% for the first six months of 2012.

There was an overall $26.2 million decrease in average interest-earning assets, driven by a $62.5 million reduction in loans, offset by increases of $23.9 million in investment securities and $12.4 million in other interest earning assets, primarily cash.

Interest expense decreased during the first six months of 2013 when compared to the same period of 2012 due primarily to an overall reduction in average interest-bearing liabilities of $92.2 million. This reduction was due to the repayments of $40.0 in brokered deposits and $23.5 million in long-term borrowings. The overall effect was a 19 basis point decrease in the average rate paid on our average interest-bearing liabilities, from 1.34% for the six months ended June 30, 2012 to 1.15% for the same period of 2013.

The following table sets forth the average balances, net interest income and expense, and average yields and rates of our interest-bearing assets and interest-bearing liabilities for the three months ended June 30, 2013 and 2012:

*(in thousands)*

| Interest-Earning Assets: | For the three months ended June 30, 2013 Average Balance | Interest | Average Rate | 2012 Average Balance | Interest | Average Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans | $849,341 | $10,342 | 4.88% | $910,389 | $11,919 | 5.27% |
| Investment securities | 275,632 | 1,882 | 2.74 | 233,939 | 1,779 | 3.06 |
| Other interest earning assets | 96,617 | 96 | 0.40 | 77,540 | 75 | 0.39 |
| **Total earning assets** | $1,221,590 | 12,320 | 4.05% | $1,221,868 | 13,773 | 4.53% |
| **Interest-bearing liabilities** |  |  |  |  |  |  |
| Interest-bearing deposits | $824,823 | 1,282 | 0.62% | $866,885 | 1,665 | 0.77% |
| Short-term borrowings | 49,553 | 15 | 0.12 | 35,519 | 51 | 0.58 |
| Long-term borrowings | 182,709 | 1,639 | 3.6 | 206,657 | 1,887 | 3.67 |
| **Total interest-bearing liabilities** | $1,057,085 | 2,936 | 1.11% | $1,109,061 | 3,603 | 1.31% |
| Net interest income and spread |  | $9,384 | 2.94% |  | $10,170 | 3.22% |
| Net interest margin |  |  | **3.09%** |  |  | **3.34%** |

Note: Interest income and yields are presented on a fully taxable equivalent basis using a 35% tax rate.

Net interest income on a FTE basis decreased $.8 million during the second quarter of 2013 over the same period in 2012 due to a $1.5 million (10.6%) decrease in interest income, which was partially offset by a $.7 million (18.5%) decrease in interest expense. The decrease in interest income was primarily due to the $61.0 million reduction in the average balance of loans when comparing the second quarter of 2013 to the same period of 2012. The slightly lower yield on both loans and investment securities, as funds were reinvested, also contributed to the decline in interest income when comparing the two periods. The decline in interest income was partially offset by a decline in interest expense due to the reduction in average balances in interest-bearing deposits and long-term borrowings. We saw a decline in the net interest margin in the second quarter of 2013 to 3.09% when compared to 3.34% for the three months ended June 30, 2012.

Interest expense decreased during the second quarter of 2013 when compared to the same period of 2012 due primarily to an overall reduction in average interest-bearing liabilities of $52.0 million. This reduction was due to the repayments of $40.0 in brokered deposits and $23.5 million in long-term borrowings. The overall effect was a 20 basis point decrease in the average rate paid on our average interest-bearing liabilities, from 1.31% for the three months ended June 30, 2012 to 1.11% for the same period of 2013.

#### Provision for Loan Losses

The provision for loan losses was $.9 million for the first six months of 2013, compared to $9.2 million for the same period of 2012. The lower provision expense was primarily due to the significantly lower net charge-offs in the first six months of 2013 as well as overall lower loan balances. During 2013, we continue to see stabilization in our total rolling historical loss rates and the qualitative factors utilized in the determination of the ALL, as well as stabilization in the level of classified assets (discussed below in the section entitled “FINANCIAL CONDITION” under the heading “Allowance and Provision for Loan Losses”). Management strives to ensure that the ALL reflects a level commensurate with the risk inherent in our loan portfolio.

#### Other Operating Income

Other operating income, exclusive of gains, decreased $.8 million during the first six months of 2013 when compared to the same period of 2012. The decrease was due to the reduction in BOLI income due to the one-time death benefit of $.7 million received in March 2012.

Net gains of $.4 million were reported through other income in the first six months of 2013, compared to net gains of $.7 million during the same period of 2012. The reduction in net gains during the first six months of 2013 when compared to the same period of 2012 was due to reduced gains on sales of investment securities.

Other operating income, exclusive of gains, remained consistent during the second quarter of 2013 when compared to the same period of 2012.

Net gains of $ 27 thousand were reported through other income in the second quarter of 2013, compared to net losses of $23 thousand during the same period of 2012.

The following table shows the major components of other operating income for the six- and three -months ended June 30, 2013 and 2012, exclusive of net gains:

|  | Income as % of Total Other Operating Income For the six months ended June 30, 2013 | 2012 | Income as % of Total Other Operating Income For the three months ended June 30, 2013 | 2012 |
| --- | ---: | ---: | ---: | ---: |
| Service charges | 27% | 24% | 28% | 28% |
| Trust department | 38% | 32% | 38% | 37% |
| Debit card Income | 15% | 14% | 16% | 17% |
| Bank owned life insurance | 8% | 18% | 8% | 9% |
| Brokerage income | 6% | 6% | 7% | 7% |
| Other income | 6% | 6% | 3% | 2% |
|  | 100% | 100% | 100% | 100% |

#### Other Operating Expenses

Other operating expenses increased slightly for the first six months of 2013 when compared to the first six months of 2012. The increase was due to an increase of $.5 million in other expense due to reduced gains on sales of other real estate owned offset by a $.3 million reduction in salaries and benefits related to a decrease in health insurance costs and a reduction in incentives.

Operating expenses decreased $.3 million (3.3%) for the second quarter of 2013 when compared to the same period of 2012. The decrease was due primarily to a reduction in salaries and benefits related to reduced health insurance costs and a reduction in incentives.

The composition of other operating expenses for the six- and three -months ended June 30, 2013 and 2012 is illustrated in the following table.

|  | Expense as % of Total Other Operating Expenses For the six months ended June 30, 2013 | 2012 | Expense as % of Total Other Operating Expenses For the three months ended June 30, 2013 | 2012 |
| --- | ---: | ---: | ---: | ---: |
| Salaries and employee benefits | 50% | 52% | 49% | 50% |
| FDIC premiums | 5% | 5% | 5% | 5% |
| Occupancy, equipment and data processing | 22% | 22% | 22% | 21% |
| Other | 23% | 21% | 24% | 24% |
|  | 100% | 100% | 100% | 100% |

#### Applicable Income Taxes

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

The effective tax rate for the first six months of 2013 was 23.8%, compared to an effective tax rate of 20.4% for the first six months of 2012. Our effective income tax rates differed from the 35% federal statutory rate due to the effects of tax-exempt income on loans, securities and bank-owned life insurance, as well as the low income housing tax credits.

### FINANCIAL CONDITION

#### Balance Sheet Overview

Total assets remained stable at $1.3 billion at June 30, 2013 and December 31, 2012. During this time period, cash and interest-bearing deposits in other banks decreased $41.0 million, the investment portfolio increased $81.3 million, and gross loans decreased $33.0 million. Total liabilities increased by approximately $9.5 million during the first six months of 2013, reflecting a decrease in total deposits of $4.2 million offset by an increase of $11.7 million in short-term borrowings and a $2.1 million increase in accrued interest payable and other liabilities. Shareholders’ equity decreased $1.1 million from December 31, 2012 to June 30, 2013 as a result of increased earnings of $2.9 million offset by an increase of $4.1 million in accumulated other comprehensive loss.

#### Loan Portfolio

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

*(In thousands)*

|  | June 30, 2013 |  | December 31, 2012 |  |
| --- | ---: | ---: | ---: | ---: |
| Commercial real estate | $285,984 | 34% | $298,851 | 34% |
| Acquisition and development | 118,356 | 14 | 128,391 | 15 |
| Commercial and industrial | 63,844 | 8 | 69,013 | 8 |
| Residential mortgage | 346,636 | 41 | 346,919 | 40 |
| Consumer | 27,030 | 3 | 31,655 | 3 |
| Total Loans | $841,850 | 100% | $874,829 | 100% |

53

Comparing June 30, 2013 to December 31, 2012, outstanding loans decreased by $33.0 million (3.8%). Commercial Real Estate (“CRE”) loans decreased $12.9 million as a result of the payoff of several large loans and ongoing scheduled principal payments. Acquisition and development (“A&D”) loans decreased $10.0 million due to the movement of $2.1 million from construction to permanent financing and $2.2 million of payoffs. Commercial and industrial (“C&I”) loans decreased $5.2 million due to scheduled principal payments. Residential mortgages decreased by $.3 million. The decrease in the residential mortgage portfolio was attributable to the purchase of a pool of loans of approximately $8.4 million in January 2013 offset by refinancings and regularly scheduled principal payments on existing loans. Management continues to use Fannie Mae for the majority of new, longer-term, fixed-rate residential loan originations. The consumer portfolio decreased $4.6 million due primarily to repayment activity in the indirect auto portfolio offsetting new production. At June 30, 2013, approximately 59% of the commercial loan portfolio was collateralized by real estate compared to 60% at December 31, 2012.

#### Risk Elements of Loan Portfolio

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

*(In thousands)*

| Non-accrual loans: | June 30, 2013 | % of Applicable Portfolio | December 31, 2012 | % of Applicable Portfolio |
| --- | ---: | ---: | ---: | ---: |
| Commercial real estate | $6,153 | 2.15% | $6,194 | 2.07% |
| Acquisition and development | 9,304 | 7.86% | 10,778 | 8.39% |
| Commercial and industrial | 141 | 0.22% | 176 | 0.26% |
| Residential mortgage | 3,671 | 1.06% | 2,731 | 0.79% |
| Consumer | 108 | 0.40% | 36 | 0.11% |
| Total non-accrual loans | $19,377 | 2.30% | $19,915 | 2.28% |
| Accruing Loans Past Due 90 days or more: |  |  |  |  |
| Commercial real estate | $0 |  | $0 |  |
| Acquisition and development | 0 |  | 200 |  |
| Commercial and industrial | 2 |  | 0 |  |
| Residential mortgage | 627 |  | 1,888 |  |
| Consumer | 18 |  | 58 |  |
| Total loans past due 90 days or more | $647 |  | $2,146 |  |
| Total non-accrual and accruing loans past due |  |  |  |  |
| 90 days or more | $20,024 |  | $22,061 |  |
| Restructured Loans (TDRs): |  |  |  |  |
| Performing | $11,600 |  | $12,134 |  |
| Non-accrual (included above) | 5,005 |  | 5,540 |  |
| Total TDRs | $16,605 |  | $17,674 |  |
| Other Real Estate Owned | $19,344 |  | $17,513 |  |
| Impaired loans without a valuation allowance | $33,904 |  | $39,361 |  |
| Impaired loans with a valuation allowance | 9,862 |  | 8,481 |  |
| Total impaired loans | $43,766 |  | $47,842 |  |
| Valuation allowance related to impaired loans | $2,725 |  | $1,632 |  |

54

#### Other Real Estate Owned

The following table presents the components of OREO as of June 30, 2013 and December 31, 2012:

|  | June 30, 2013 | December 31, 2012 |
| --- | ---: | ---: |
| Commercial real estate | $5,353 | $5,559 |
| Acquisition and development | 12,799 | 9,831 |
| Residential mortgage | 1,192 | 2,123 |
| Total OREO | $19,344 | $17,513 |

The following table presents the activity in the OREO valuation allowance for the six- and three-months ended June 30, 2013 and 2012:

|  | For the six months ended June 30, 2013 | 2012 |
| --- | ---: | ---: |
| Balance January 1 | $2,766 | $1,745 |
| Fair value write-down | 37 | 0 |
| Sales of OREO | (815) | (176) |
| Balance June 30 | $1,988 | $1,569 |

|  | For the three months ended June 30, 2013 | 2012 |
| --- | ---: | ---: |
| Balance April 1 | $2,179 | $1,677 |
| Fair value write-down | 17 | 0 |
| Sales of OREO | (208) | (108) |
| Balance June 30 | $1,988 | $1,569 |

The following table presents the components of OREO expenses, net for the six- and three-months ended June 30, 2013 and 2012:

*(in thousands)*

|  | For the six months ended June 30, 2013 | 2012 | For the three months ended June 30, 2013 | 2012 |
| --- | ---: | ---: | ---: | ---: |
| Gains on real estate, net | $(62) | $(682) | $(55) | $(59) |
| Fair value write-down | 37 | 0 | 17 | 0 |
| Expenses, net | 223 | 415 | 106 | 273 |
| Rental and other income | (246) | (126) | (134) | (57) |
| Total OREO (income)/expense, net | $(48) | $(393) | $(66) | $157 |

Performing loans considered to be impaired (including performing troubled debt restructurings, or TDRs), as defined and identified by management, amounted to $24.4 million at June 30, 2013 and $28.2 million at December 31, 2012. Loans are identified as impaired when, based on current information and events, management determines that we will be unable to collect all amounts due according to contractual terms. These loans consist primarily of A&D loans and CRE loans. The fair values are generally determined based upon independent third party appraisals of the collateral or discounted cash flows based upon the expected proceeds. Specific allocations have been made where management believes there is insufficient collateral to repay the loan balance if liquidated and there is no secondary source of repayment available.

The level of performing impaired loans (other than performing TDRs) decreased $3.3 million during the six months ended June 30, 2013, due to the reclassification of a $1.8 million A&D loan out of impaired status due to improved performance as well as $1.5 million of net principal repayments received during the first six months of 2013. Management will continue to monitor all loans that have been removed from an impaired status and take appropriate steps to ensure that satisfactory performance is sustained.

The following table presents the details of impaired loans that are TDRs by class as of June 30, 2013 and December 31, 2012:

*(in thousands)*

| Performing Commercial real estate | June 30, 2013 Number of Contracts | Recorded Investment | December 31, 2012 Number of Contracts | Recorded Investment |
| --- | ---: | ---: | ---: | ---: |
| Non owner-occupied | 2 | $264 | 2 | $273 |
| All other CRE | 5 | 5,595 | 5 | 5,676 |
| Acquisition and development |  |  |  |  |
| 1-4 family residential construction | 1 | 1,687 | 1 | 2,052 |
| All other A&D | 6 | 2,536 | 4 | 2,330 |
| Commercial and industrial | 2 | 623 | 2 | 557 |
| Residential mortgage |  |  |  |  |
| Residential mortgage – term | 4 | 895 | 4 | 1,246 |
| Residential mortgage – home equity | 0 | 0 | 0 | 0 |
| Consumer | 0 | 0 | 0 | 0 |
| Total performing | 20 | $11,600 | 18 | $12,134 |
| **Non-accrual** |  |  |  |  |
| Commercial real estate |  |  |  |  |
| Non owner-occupied | 1 | $448 | 1 | $448 |
| All other CRE | 0 | 0 | 0 | 0 |
| Acquisition and development |  |  |  |  |
| 1-4 family residential construction | 0 | 0 | 0 | 0 |
| All other A&D | 4 | 4,075 | 6 | 4,600 |
| Commercial and industrial | 0 | 0 | 0 | 0 |
| Residential mortgage |  |  |  |  |
| Residential mortgage – term | 2 | 482 | 2 | 492 |
| Residential mortgage – home equity | 0 | 0 | 0 | 0 |
| Consumer | 0 | 0 | 0 | 0 |
| Total non-accrual | 7 | 5,005 | 9 | 5,540 |
| Total TDRs | 27 | $16,605 | 27 | $17,674 |

The level of TDRs decreased $1.1 million during the six months ended June 30, 2013. Three loans totaling $.4 million were added to performing TDRs and four loans already in performing TDRs were re-modified. One loan totaling $.5 million that had been modified prior to December 31, 2012 at a market rate is no longer reported as a performing TDR during 2013 because the borrower had made at least six consecutive payments and was current at the time of reclassification. Two non-performing A&D loans totaling $.4 million were transferred to OREO during the six months ended June 30, 2013 and $.6 million in principal payments were received during the same time period.

#### Allowance and Provision for Loan Losses

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

The ALL is also based on estimates, and actual losses will vary from current estimates. These estimates are reviewed quarterly, and as adjustments, either positive or negative, become necessary, a corresponding increase or decrease is made in the ALL. The methodology used to determine the adequacy of the ALL is consistent with prior years. An estimate for probable losses related to unfunded lending commitments, such as letters of credit and binding but unfunded loan commitments is also prepared. This estimate is computed in a manner similar to the methodology described above, adjusted for the probability of actually funding the commitment.

The following table presents a summary of the activity in the ALL for the six months ended June 30:

*(in thousands)*

|  | 2013 | 2012 |
| --- | ---: | ---: |
| Balance, January 1 | $16,047 | $19,480 |
| Charge-offs: |  |  |
| Commercial real estate | (184) | (2,280) |
| Acquisition and development | (262) | (670) |
| Commercial and industrial | (1,004) | (9,141) |
| Residential mortgage | (256) | (665) |
| Consumer | (275) | (347) |
| Total charge-offs | (1,981) | (13,103) |
| Recoveries: |  |  |
| Commercial real estate | 127 | 58 |
| Acquisition and development | 21 | 403 |
| Commercial and industrial | 51 | 332 |
| Residential mortgage | 119 | 123 |
| Consumer | 192 | 241 |
| Total recoveries | 510 | 1,157 |
| Net credit losses | (1,471) | (11,946) |
| Provision for loan losses | 946 | 9,236 |
| Balance at end of period | $15,522 | $16,770 |
| Allowance for loan losses to loans outstanding (as %) | 1.84% | 1.85% |
| Net charge-offs to average loans outstanding during the period, annualized (as %) | 0.34% | 2.59% |

The ALL decreased to $15.5 million at June 30, 2013, from $16.0 million at December 31, 2012 and $16.8 million at June 30, 2012. The provision for loan losses for the first six months of 2013 decreased to $.9 million from $9.2 million for the same period in 2012. Net charge-offs declined to $1.5 million for the six months ended June 30, 2013, compared to $11.9 million for the six months ended June 30, 2012. Included in the net charge-offs for the six months ended June 30, 2013 was a $.8 million charge-off for a C&I loan. The lower provision expense was due to the significantly lower level of net charge-offs as well as the lower level of loan balances. The ratio of the ALL to loans outstanding as of June 30, 2013 was 1.84%, which was slightly lower than the 1.85% for the same period last year.

The ratio of net charge-offs to average loans for the six months ended June 30, 2013 was an annualized .34%, compared to an annualized 2.59% for the same period in 2012 and 1.41% for the year ended December 31, 2012. Relative to December 31, 2012, C&I, residential mortgage and consumer segments of loans showed improvement. The CRE portfolio had an annualized net charge-off rate as of June 30, 2013 of 1.04% compared to an annualized net charge-off rate of .67% as of December 31, 2012. The annualized net charge-off rate for A&D loans as of June 30, 2013 was .39% compared to an annualized net charge-off rate of .29% as of December 31, 2012. The ratios for C&I loans were 2.87% and 12.10% for June 30, 2013 and December 31, 2012, respectively. The residential mortgage ratios were .08% and .33% for June 30, 2013 and December 31, 2012, respectively, and the consumer loan ratios were .57% and .69% for June 30, 2013 and December 31, 2012, respectively.

Accruing loans past due 30 days or more declined to .75% of the loan portfolio at June 30, 2013, compared to 2.39% at December 31, 2012. The decrease for the first six months of 2013 was primarily due to a decrease of $11.2 million in past-due accruing residential mortgage loans and a $1.9 million decrease in past-due accruing CRE loans. Other improvements in the levels of past-due loans were attributable to a combination of a slowly improving economy and vigorous collection efforts by the Bank.

Comparing the six-month periods ended June 30, 2013 and June 30, 2012, total non-accrual loan balances have declined. Non-accrual loans totaled $19.4 million as of June 30, 2013, compared to $19.9 million as of December 31, 2012 and $27.0 million as of June 30, 2012. Non-accrual loans which have been subject to a partial charge-off totaled $7.4 million as of June 30, 2013, compared to $6.7 million as of December 31, 2012.

Management believes that the ALL at June 30, 2013 is adequate to provide for probable losses inherent in our loan portfolio. Amounts that will be recorded for the provision for loan losses in future periods will depend upon trends in the loan balances, including the composition of the loan portfolio, changes in loan quality and loss experience trends, potential recoveries on previously charged-off loans and changes in other qualitative factors. Management also applies interest rate risk, collateral value and debt service sensitivity analyses to the Commercial real estate loan portfolio and obtains new appraisals on specific loans under defined parameters to assist in the determination of the periodic provision for loan losses.

#### Investment Securities

At June 30, 2013, the total amortized cost basis of the available-for-sale investment portfolio was $333.7 million, compared to a fair value of $304.7 million. Unrealized gains and losses on securities available-for-sale are reflected in accumulated other comprehensive loss, a component of shareholders’ equity.

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

*(Dollars in thousands)*

| Securities Available-for-Sale: | June 30, 2013 Amortized Cost | Fair Value (FV) | FV as % of Total | December 31, 2012 Amortized Cost | Fair Value (FV) | FV as % of Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| U.S. government agencies | $94,703 | $91,134 | 30% | $40,334 | $40,320 | 18% |
| Residential mortgage-backed agencies | 88,046 | 84,687 | 28% | 43,596 | 44,108 | 20% |
| Commercial mortgage-backed agencies | 35,903 | 35,228 | 12% | 37,330 | 37,618 | 17% |
| Collateralized mortgage obligations | 19,629 | 19,525 | 6% | 31,836 | 31,731 | 14% |
| Obligations of state and political subdivisions | 58,410 | 59,077 | 19% | 55,212 | 58,054 | 26% |
| Collateralized debt obligations | 37,045 | 15,030 | 5% | 36,798 | 11,442 | 5% |
| Total available for sale | $333,736 | $304,681 | 100% | $245,106 | $223,273 | 100% |
| **Securities Held to Maturity:** |  |  |  |  |  |  |
| Obligations of state and political subdivisions | $3,900 | $3,913 | 100% | $4,040 | $4,347 | 100% |

Total investment securities available-for-sale increased $81.4 million since December 31, 2012. At June 30, 2013, the securities classified as available-for-sale included a net unrealized loss of $29.1 million, which represents the difference between the fair value and amortized cost of securities in the portfolio.

As discussed in Note 8 to the consolidated financial statements presented elsewhere in this report, the Corporation measures fair market values based on the fair value hierarchy established in ASC Topic 820, *Fair Value Measurements and Disclosures*. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Level 3 prices or valuation techniques require inputs that are both significant to the valuation assumptions and are not readily observable in the market (i.e. supported with little or no market activity). These Level 3 instruments are valued based on both observable and unobservable inputs derived from the best available data, some of which is internally developed, and considers risk premiums that a market participant would require.

Approximately $289.7 million of the available-for-sale portfolio was valued using Level 2 pricing, and had net unrealized gains of $7.0 million at June 30, 2013. The remaining $15.0 million of the securities available-for-sale represents the entire CDO portfolio, which was valued using significant unobservable inputs (Level 3 assets). The $22.2 million in unrealized losses associated with this portfolio relates to 17 of the 18 pooled trust preferred securities that comprise the CDO portfolio. Unrealized losses of $14.5 million represent non-credit related OTTI charges on 13 of the securities, while $7.7 million of unrealized losses relates to five securities which have had no credit related OTTI. The unrealized losses on these securities were primarily attributable to continued depression in the marketability and liquidity associated with CDOs.

The following table provides a summary of the trust preferred securities in the CDO portfolio and the credit status of these securities as of June 30, 2013.

### Level 3 Investment Securities Available for Sale

### (Dollars in Thousands)

| Investment Description Deal Class | First United Level 3 Investments Amortized Cost | Fair Market Value | Unrealized Gain/(Loss) | Lowest Credit Rating | Security Credit Status Original Collateral | Deferrals/ Defaults as % of Original Collateral | Performing Collateral | Collateral Support | Collateral Support as % of Performing Collateral | Number of Performing Issuers/Total Issuers |
| --- | ---: | ---: | ---: | --- | ---: | ---: | ---: | ---: | ---: | --- |
| Preferred Term Security I Mezz | 653 | 563 | (90) | C | 303,112 | 19.46% | 77,500 | (10,772) | -13.90% | 9 / 13 |
| Preferred Term Security XI\* B-1 | 1,328 | 502 | (826) | C | 635,775 | 26.31% | 393,605 | (96,825) | -24.60% | 41 / 60 |
| Preferred Term Security XVI\* C | 275 | 426 | 151 | C | 606,040 | 40.13% | 313,500 | (152,996) | -48.80% | 35 / 55 |
| Preferred Term Security XVIII C | 3,039 | 929 | (2,110) | C | 676,565 | 28.69% | 444,843 | (94,226) | -21.18% | 48 / 74 |
| Preferred Term Security XVIII\* C | 2,133 | 619 | (1,514) | C | 676,565 | 28.69% | 444,843 | (94,226) | -21.18% | 48 / 74 |
| Preferred Term Security XIX\* C | 3,056 | 755 | (2,301) | C | 700,535 | 20.01% | 470,731 | (105,359) | -22.38% | 47 / 64 |
| Preferred Term Security XIX\* C | 1,323 | 323 | (1,000) | C | 700,535 | 20.01% | 470,731 | (105,359) | -22.38% | 47 / 64 |
| Preferred Term Security XIX\* C | 1,324 | 323 | (1,001) | C | 700,535 | 20.01% | 470,731 | (105,359) | -22.38% | 47 / 64 |
| Preferred Term Security XIX\* C | 2,220 | 539 | (1,681) | C | 700,535 | 20.01% | 470,731 | (105,359) | -22.38% | 47 / 64 |
| Preferred Term Security XXII\* C-1 | 3,991 | 1,768 | (2,223) | C | 1,386,600 | 24.84% | 922,100 | (127,470) | -13.82% | 61 / 90 |
| Preferred Term Security XXII\* C-1 | 1,597 | 707 | (890) | C | 1,386,600 | 24.84% | 922,100 | (127,470) | -13.82% | 61 / 90 |
| Preferred Term Security XXIII\* C-1 | 2,097 | 787 | (1,310) | C | 1,467,000 | 21.20% | 918,637 | (75,030) | -8.17% | 88 / 112 |
| Preferred Term Security XXIII\* D-1 | 2,292 | 883 | (1,409) | C | 1,467,000 | 21.20% | 918,637 | (188,779) | -20.55% | 88 / 112 |
| Preferred Term Security XXIII\* D-1 | 764 | 294 | (470) | C | 1,467,000 | 21.20% | 918,637 | (188,779) | -20.55% | 88 / 112 |
| Preferred Term Security XXIV\* C-1 | 953 | 279 | (674) | C | 1,050,600 | 33.08% | 650,154 | (204,641) | -31.48% | 56 / 86 |
| Preferred Term Security I-P-I B-2 | 2,000 | 1,311 | (689) | CCC- | 351,000 | 9.26% | 156,000 | 10,910 | 6.99% | 14 / 16 |
| Preferred Term Security I-P-IV B-1 | 3,000 | 1,508 | (1,492) | CCC- | 325,000 | 7.08% | 199,175 | 23,761 | 11.93% | 22 / 24 |
| Preferred Term Security I-P-IV B-1 | 5,000 | 2,514 | (2,486) | CCC- | 325,000 | 7.08% | 199,175 | 23,761 | 11.93% | 22 / 24 |
| Total Level 3 Securities Available for Sale | 37,045 | 15,030 | (22,015) |  |  |  |  |  |  |  |

\* Security has been deemed other-than-temporarily impaired and loss has been recognized in accordance with ASC Section 320-10-35.

The terms of the debentures underlying trust preferred securities allow the issuer of the debentures to defer interest payments for up to 20 quarters, and, in such case, the terms of the related trust preferred securities allow their issuers to defer dividend payments for up to 20 quarters. Some of the issuers of the trust preferred securities in our investment portfolio have defaulted and/or deferred payments ranging from 7.08% to 40.13% of the total collateral balances underlying the securities. The securities were designed to include structural features that provide investors with credit enhancement or support to provide default protection by subordinated tranches. These features include over-collateralization of the notes or subordination, excess interest or spread which will redirect funds in situations where collateral is insufficient, and a specified order of principal payments. There are securities in our portfolio that are under-collateralized, which does represent additional stress on our tranche. However, in these cases, the terms of the securities require excess interest to be redirected from subordinate tranches as credit support, which provides additional support to our investment.

Management systematically evaluates securities for impairment on a quarterly basis. Based upon application of ASC Topic 320 (Section 320-10-35), management must assess whether (a) the Corporation has the intent to sell the security and (b) it is more likely than not that the Corporation will be required to sell the security prior to its anticipated recovery. If neither applies, then declines in the fair value of securities below their cost that are considered other-than-temporary declines are split into two components. The first is the loss attributable to declining credit quality. Credit losses are recognized in earnings as realized losses in the period in which the impairment determination is made. The second component consists of all other losses. The other losses are recognized in other comprehensive income. In estimating OTTI charges, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) adverse conditions specifically related to the security, an industry, or a geographic area, (3) the historic and implied volatility of the security, (4) changes in the rating of a security by a rating agency, (5) recoveries or additional declines in fair value subsequent to the balance sheet date, (6) failure of the issuer of the security to make scheduled interest payments, and (7) the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future. Due to the duration and the significant market value decline in the pooled trust preferred securities held in our portfolio, we performed more extensive testing on these securities for purposes of evaluating whether or not an OTTI has occurred.

The market for these securities as of June 30, 2013 is not active and markets for similar securities are also not active. The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which these securities trade and then by a significant decrease in the volume of trades relative to historical levels. The new issue market is also inactive, as no new CDOs have been issued since 2007. There are currently very few market participants who are willing to effect transactions in these securities. The market values for these securities, or any securities other than those issued or guaranteed by the U.S. Department of the Treasury (the “Treasury”), are very depressed relative to historical levels. Therefore, in the current market, a low market price for a particular bond may only provide evidence of stress in the credit markets in general rather than being an indicator of credit problems with a particular issue. Given the conditions in the current debt markets and the absence of observable transactions in the secondary and new issue markets, management has determined that (a) the few observable transactions and market quotations that are available are not reliable for the purpose of obtaining fair value at June 30, 2013, (b) an income valuation approach technique (i.e. present value) that maximizes the use of relevant unobservable inputs and minimizes the use of observable inputs will be equally or more representative of fair value than a market approach, and (c) the CDO segment is appropriately classified within Level 3 of the valuation hierarchy because management determined that significant adjustments were required to determine fair value at the measurement date.

Management utilizes an independent third party to prepare both the evaluations of OTTI and the fair value determinations for the CDO portfolio. Management does not believe that there were any material differences in the OTTI evaluations and pricing between December 31, 2012 and June 30, 2013.

The approach used by the third party to determine fair value involved 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.

Based upon a review of credit quality and the cash flow tests performed by the independent third party, management determined that no securities had credit-related OTTI during the first six months of 2013.

The risk-based capital ratios require that banks set aside additional capital for securities that are rated below investment grade. Securities rated one level below investment grade require a 200% risk weighting. Additional methods are applicable to securities rated more than one level below investment grade. Management believes that, as of June 30, 2013, we maintain sufficient capital and liquidity to cover the additional capital requirements of these securities and future operating expenses. Additionally, we do not anticipate any material commitments or expected outlays of capital in the near term.

#### Deposits

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

*(In thousands)*

|  | June 30, 2013 |  | December 31, 2012 |  |
| --- | ---: | ---: | ---: | ---: |
| Non-interest bearing demand deposits | $162,671 | 17% | $161,500 | 17% |
| Interest-bearing deposits: |  |  |  |  |
| Demand | 129,020 | 13 | 119,306 | 12 |
| Money Market: |  |  |  |  |
| Retail | 205,846 | 21 | 202,678 | 21 |
| Savings deposits | 114,377 | 12 | 109,740 | 11 |
| Time deposits less than $100,000: |  |  |  |  |
| Retail | 179,854 | 18 | 187,289 | 19 |
| Brokered/CDARS | 1,143 | 0 | 1,052 | 0 |
| Time deposits $100,000 or more: |  |  |  |  |
| Retail | 161,914 | 17 | 164,085 | 17 |
| Brokered/CDARS | 17,834 | 2 | 31,234 | 3 |
| Total Deposits | $972,659 | 100% | $976,884 | 100% |

60

Total deposits decreased $4.2 million during the first six months of 2013 when compared to deposits at December 31, 2012. Non-interest bearing deposits increased $1.2 million. Traditional savings accounts increased $4.6 million due to continued growth in our Prime Saver product. Total demand deposits increased $9.7 million and total money market accounts increased $3.2 million. Time deposits less than $100,000 declined $7.3 million and time deposits greater than $100,000 decreased $15.6 million due to the repayment of a $20.0 million brokered certificate of deposit at its maturity in January 2013.

#### Borrowed Funds

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

*(In thousands)*

|  | June 30, 2013 | December 31, 2012 |
| --- | ---: | ---: |
| Securities sold under agreements to repurchase | $50,954 | $39,257 |
| Total short-term borrowings | $50,954 | $39,257 |
| FHLB advances | $135,974 | $136,005 |
| Junior subordinated debt | 46,730 | 46,730 |
| Total long-term borrowings | $182,704 | $182,735 |

Total short-term borrowings increased by approximately $11.7 million during the first six months of 2013 due to new accounts in our Treasury Management product. Long-term borrowings decreased by $31.0 thousand during the first six months of 2013 due to the scheduled monthly amortization of long-term advances.

#### Liquidity Management

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

- Reliability and stability of core deposits;
- Cash flow structure and pledging status of investments; and
- Potential for unexpected loan demand.

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

It is our policy to manage our affairs so that liquidity needs are fully satisfied through normal Bank operations. That is, the Bank will manage its liquidity to minimize the need to make unplanned sales of assets or to borrow funds under emergency conditions. The Bank will use funding sources where the interest cost is relatively insensitive to market changes in the short run (periods of one year or less) to satisfy operating cash needs. The remaining normal funding will come from interest-sensitive liabilities, either deposits or borrowed funds. When the marginal cost of needed wholesale funding is lower than the cost of raising this funding in the retail markets, the Corporation may supplement retail funding with external funding sources such as:

1\. Unsecured Fed Funds lines of credit with upstream correspondent banks (M&T Bank, Atlantic Central Banker’s Bank, Community Banker’s Bank).

2\. Secured advances with the FHLB of Atlanta, which are collateralized by eligible one to four family residential mortgage loans, home equity lines of credit, commercial real estate loans, and various securities. Cash may also be pledged as collateral.

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

4\. Brokered deposits, including CDs and money market funds, provide a method to generate deposits quickly. These deposits are strictly rate driven but often provide the most cost effective means of funding growth.

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

Management believes that we have adequate liquidity available to respond to current and anticipated liquidity demands and is not aware of any trends or demands, commitments, events or uncertainties that are likely to materially affect our ability to maintain liquidity at satisfactory levels.

#### Market Risk and Interest Sensitivity

Our primary market risk is interest rate fluctuation. Interest rate risk results primarily from the traditional banking activities that we engage in, such as gathering deposits and extending loans. Many factors, including economic and financial conditions, movements in interest rates and consumer preferences affect the difference between the interest earned on our assets and the interest paid on our liabilities. Interest rate sensitivity refers to the degree that earnings will be impacted by changes in the prevailing level of interest rates. Interest rate risk arises from mismatches in the repricing or maturity characteristics between interest-bearing assets and liabilities. Management seeks to minimize fluctuating net interest margins, and to enhance consistent growth of net interest income through periods of changing interest rates. Management uses interest sensitivity gap analysis and simulation models to measure and manage these risks. The interest rate sensitivity gap analysis assigns each interest-earning asset and interest-bearing liability to a time frame reflecting its next repricing or maturity date. The differences between total interest-sensitive assets and liabilities at each time interval represent the interest sensitivity gap for that interval. A positive gap generally indicates that rising interest rates during a given interval will increase net interest income, as more assets than liabilities will reprice. A negative gap position would benefit us during a period of declining interest rates.

At June 30, 2013, we were asset sensitive.

Our interest rate risk management goals are:

- Ensure that the Board of Directors and senior management will provide effective oversight and ensure that risks are adequately identified, measured, monitored and controlled;
- Enable dynamic measurement and management of interest rate risk;
- Select strategies that optimize our ability to meet our long-range financial goals while maintaining interest rate risk within policy limits established by the Board of Directors;
- Use both income and market value oriented techniques to select strategies that optimize the relationship between risk and return; and
- Establish interest rate risk exposure limits for fluctuation in net interest income (“NII”), net income and economic value of equity.

In order to manage interest sensitivity risk, management formulates guidelines regarding asset generation and pricing, funding sources and pricing, and off-balance sheet commitments. These guidelines are based on management’s outlook regarding future interest rate movements, the state of the regional and national economy, and other financial and business risk factors. Management uses computer simulations to measure the effect on net interest income of various interest rate scenarios. Key assumptions used in the computer simulations include cash flows and maturities of interest rate sensitive assets and liabilities, changes in asset volumes and pricing, and management’s capital plans. This modeling reflects interest rate changes and the related impact on net interest income over specified periods.

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

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

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

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

#### Capital Resources

The Bank and First United Corporation are subject to risk-based capital regulations, which were adopted and are monitored by federal banking regulators. These guidelines are used to evaluate capital adequacy and are based on an institution’s asset risk profile and off-balance sheet exposures, such as unused loan commitments and stand-by letters of credit. The regulatory guidelines require that a portion of total capital be Tier 1 capital, consisting of common shareholders’ equity, qualifying portion of trust issued preferred securities, and perpetual preferred stock, less goodwill and certain other deductions. The remaining capital, or Tier 2 capital, consists of elements such as subordinated debt, mandatory convertible debt, remaining portion of trust issued preferred securities, and grandfathered senior debt, plus the ALL, subject to certain limitations.

Under the risk-based capital regulations, banking organizations are required to maintain a minimum total risk-based capital ratio (total qualifying capital divided by risk-weighted assets) of 8% (10% for well capitalized banks), including a Tier 1 ratio of at least 4% (6% for well capitalized banks). The risk-based capital rules have been further supplemented by a leverage ratio, defined as Tier I capital divided by average assets, after certain adjustments. The minimum leverage ratio is 4% (5% for well capitalized banks) for banking organizations that do not anticipate significant growth and have well-diversified risk (including no undue interest rate risk exposure), excellent asset quality, high liquidity and good earnings, and between 4% and 5% for other institutions depending on their particular condition and growth plans. Regulators may require higher capital ratios when warranted by the particular circumstances or risk profile of a given banking organization. In the current regulatory environment, banking organizations must stay well capitalized in order to receive favorable regulatory treatment on acquisition and other expansion activities and favorable risk-based deposit insurance assessments. Our capital policy establishes guidelines meeting these regulatory requirements and takes into consideration current or anticipated risks as well as potential future growth opportunities.

The following table presents our capital ratios:

| Total Capital (to risk-weighted assets) | June 30, 2013 | December 31, 2012 | Required for Capital Adequacy Purposes | Required To Be Well Capitalized |
| --- | ---: | ---: | ---: | ---: |
| Consolidated | 14.84% | 14.13% | 8.00% | 10.00% |
| First United Bank & Trust | 15.57% | 14.63% | 8.00% | 10.00% |
| Tier 1 Capital (to risk-weighted assets) |  |  |  |  |
| Consolidated | 13.15% | 12.54% | 4.00% | 6.00% |
| First United Bank & Trust | 14.27% | 13.35% | 4.00% | 6.00% |
| Tier 1 Capital (to average assets) |  |  |  |  |
| Consolidated | 10.84% | 10.32% | 4.00% | 5.00% |
| First United Bank & Trust | 11.77% | 10.98% | 4.00% | 5.00% |

As of June 30, 2013, the most recent notification from the regulators categorized First United Corporation and the Bank as “well capitalized” under the regulatory framework for prompt corrective action. All capital ratios increased at June 30, 2013 when compared to December 31, 2012.

Basel is a committee of central banks and bank regulators from major industrialized countries that develops broad policy guidelines for use by each country’s regulators with the purpose of ensuring that financial institutions have adequate capital given the risk levels of assets and off-balance sheet financial instruments.

On July 2, 2013, the Federal Reserve approved final rules that substantially amend the regulatory risk-based capital rules applicable to First United Corporation. The FDIC and the OCC have subsequently approved these rules. The final rules were adopted following the issuance of proposed rules by the Federal Reserve in June 2012, and implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. “Basel III” refers to two consultative documents released by the Basel Committee on Banking Supervision in December 2009, the rules text released in December 2010, and loss absorbency rules issued in January 2011, which include significant changes to bank capital, leverage and liquidity requirements.

The rules include new risk-based capital and leverage ratios, which would be phased in from 2015 to 2019, and would refine the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to the Corporation under the final rules would be: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The final rules also establish a “capital conservation buffer” above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital. The capital conservation buffer will be phased-in over four years beginning on January 1, 2016, as follows: the maximum buffer will be 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. This will result in the following minimum ratios beginning in 2019: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. Under the final rules, institutions are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

Basel III provided discretion for regulators to impose an additional buffer, the “countercyclical buffer,” of up to 2.5% of common equity Tier 1 capital to take into account the macro-financial environment and periods of excessive credit growth. However, the final rules permit the countercyclical buffer to be applied only to “advanced approach banks” ( i.e. , banks with $250 billion or more in total assets or $10 billion or more in total foreign exposures), which currently excludes the Corporation. The final rules also implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses, as well as certain instruments that will no longer qualify as Tier 1 capital, some of which will be phased out over time. However, the final rules provide that small depository institution holding companies with less than $15 billion in total assets as of December 31, 2009 (which includes the Corporation) will be able to permanently include non-qualifying instruments that were issued and included in Tier 1 or Tier 2 capital prior to May 19, 2010 in additional Tier 1 or Tier 2 capital until they redeem such instruments or until the instruments mature.

The final rules also contain revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions if their capital levels begin to show signs of weakness. These revisions take effect January 1, 2015. Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions will be required to meet the following increased capital level requirements in order to qualify as “well capitalized:” (i) a new common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased from 6%); (iii) a total capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (increased from 4%).

The final rules set forth certain changes for the calculation of risk-weighted assets, which we will be required to utilize beginning January 1, 2015. The standardized approach final rule utilizes an increased number of credit risk exposure categories and risk weights, and also addresses: (i) an alternative standard of creditworthiness consistent with Section 939A of the Dodd-Frank Act Act; (ii) revisions to recognition of credit risk mitigation; (iii) rules for risk weighting of equity exposures and past due loans; (iv) revised capital treatment for derivatives and repo-style transactions; and (v) disclosure requirements for top-tier banking organizations with $50 billion or more in total assets that are not subject to the “advance approach rules” that apply to banks with greater than $250 billion in consolidated assets. Based on our current capital composition and levels, we believe that we would be in compliance with the requirements as set forth in the final rules if they were presently in effect.

The total risk based capital ratios of First United Corporation include $38.2 million of junior subordinated debentures (“TPS Debentures”) which qualified as Tier 1 capital at June 30, 2013, under guidance issued by the Board of Governors of the Federal Reserve System.

In January 2009, pursuant to the Treasury’s Troubled Asset Relief Program Capital Purchase Program, First United Corporation sold 30,000 shares of its Series A Preferred Stock and a Warrant to purchase 326,323 shares of its common stock, having an exercise price of $13.79 per share, to the Treasury for an aggregate purchase price of $30 million. The proceeds from this transaction count as Tier 1 capital and the Warrant qualifies as tangible common equity. Information about the terms of these securities is provided in Note 10 to the Consolidated Financial Statements.

The terms of the Series A Preferred Stock call for the payment, if declared by the Board of Directors of First United Corporation, of a quarterly cash dividend on February 15th, May 15th, August 15th and November 15th of each year. At the request of the Reserve Bank, First United Corporation deferred the payment of cash dividends on the Series A Preferred Stock beginning with the payment that was due on November 15, 2010. As of June 30, 2013, this deferral election remained in effect and dividends of $.4 million per quarterly dividend period continue to accrue. First United Corporation will be required to pay all accrued and unpaid dividends if and when the Board of Directors declares and pays the next quarterly cash dividend. Management cannot predict whether or when the Board of Directors will resume quarterly cash dividends on the Series A Preferred Stock. First United Corporation’s ability to make dividend payments in the future will depend primarily on our earnings in future periods.

On December 15, 2010, also at the request of the Reserve Bank, the Board of Directors of First United Corporation elected to defer quarterly interest payments under the TPS Debentures beginning with the payments that were due in March 2011. As of June 30, 2013, this deferral election remained in effect and cumulative deferred interest was approximately $5.5 million, which has been fully accrued and must be paid in full when the Board of Directors elects to terminate the deferral. First United Corporation’s ability to resume quarterly interest payments will depend primarily on our earnings in future periods. Accordingly, no assurance can be given as to if or when First United Corporation will resume the payment of interest under the TPS Debentures.

In connection with, and as a result of, the aforementioned deferrals, the Board of Directors of First United Corporation voted to suspend the declaration of quarterly cash dividends on the common stock until further notice. The payment of cash dividends on the common stock is at the discretion of the Board of Directors and is dependent on our earnings in future periods. In addition, cash dividends on the common stock may be paid only if all accrued and unpaid interest due under the TPS Debentures and all accrued and unpaid dividends due under the Series A Preferred Stock have been paid in full. There can be no assurance as to if or when First United Corporation will resume the payment of cash dividends on the common stock.

#### Contractual Obligations, Commitments and Off-Balance Sheet Arrangements

Loan commitments are made to accommodate the financial needs of our customers. Letters of credit commit us to make payments on behalf of customers when certain specified future events occur. The credit risks inherent in loan commitments and letters of credit are essentially the same as those involved in extending loans to customers, and these arrangements are subject to our normal credit policies. Loan commitments and letters of credit totaled $91.2 million and $1.2 million, respectively, at June 30, 2013, compared to $87.1 million and $1.3 million, respectively, at December 31, 2012. We are not a party to any other off-balance sheet arrangements.

See Note 11 to the consolidated financial statements presented elsewhere in this report for further disclosure on Borrowed Funds. There have been no other significant changes to contractual obligations as presented at December 31, 2012.

## Market risk

As filed, 796 characters.

As previously reported in First United Corporation’s SEC reports and as discussed in Item 7 of Part I of this report, the terms of First United Corporation’s Series A Preferred Stock call for the payment, if declared by the Board of Directors of First United Corporation, of a quarterly cash dividend on February 15th, May 15th, August 15th and November 15th of each year. At the request of the Reserve Bank, First United Corporation has not declared or paid cash dividends on its Series A Preferred Stock since August 15, 2010. Dividends of $.4 million per dividend period continue to accrue, aggregating $4.4 million at June 30, 2013. First United Corporation will be required to pay all accrued and unpaid dividends if and when the Board of Directors declares the next quarterly cash dividend.

## Controls and procedures

As filed, 2,246 characters.

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

An evaluation of the effectiveness of these disclosure controls as of June 30, 2013 was carried out under the supervision and with the participation of Management, including the CEO and the CFO. Based on that evaluation, Management, including the CEO and the CFO, has concluded that our disclosure controls and procedures are, in fact, effective at the reasonable assurance level.

During the first six months of 2013, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 331 characters.

The risks and uncertainties to which our financial condition and operations are subject are discussed in detail in Item 1A of Part I of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2012. Management does not believe that any material changes in our risk factors have occurred since December 31, 2012.

Filed Aug 14, 2013.
Source: SEC EDGAR, the filing index for accession 0001144204-13-045971. Last ingested by Listed: Nov 3, 2026, 22:37 ET. No prices; not investment advice.