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UNITED STATES SECURITIES AND EXCHANGE COMMISSION FORM 10-K
WASHINGTON, DC 20549
(Mark One)
XX ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission file number 0-14237
FIRST UNITED CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 52-1380770
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
19 South Second Street
Oakland, Maryland 21550-0009
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (301) 334-9471
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01 per share
(Title of class)
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, and(2) has been subject to such filing
requirements for the past 90 days. Yes No XX
Indicate by check mark if disclosures of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. XX
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 27, 1998: Common Stock $.01 Par Value-$111,735,928
The number of shares outstanding of the registrant's classes of common stock
as of February 27, 1998: 6,250,961 Shares
Documents Incorporated by Reference
Portions of the registrant's definitive proxy statement for the annual
shareholders meeting to be held April 28, 1998, are incorporated by reference
into Part III.
First United Corporation
Table of Contents
PART I
Item 1. Business.......................................................... 3
Item 2. Properties ....................................................... 5
Item 3. Legal Proceedings ................................................ 5
Item 4. Submission of Matters to a Vote of Security Holders............... 5
PART II
Item 5. Market for the Registrant's Common Stock and
Related Shareholder Matters ...................................... 6
Item 6. Selected Financial Data .......................................... 7
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................. 7-20
Item 7A. Quantitative and Qualitative Disclosure About Market Risk .......12
Item 8. Financial Statements and Supplementary Data .................. 21-39
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ......................... 39
PART III
Item 10. Directors and Executive Officers of the Registrant .......... 40-41
Item 11. Executive Compensation ........................................ 41
Item 12. Security Ownership of Certain Beneficial Owners and Management . 41
Item 13. Certain Relationships and Related Transactions ................ 41
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 41
Signatures .............................................................. 43
(2)
PART I
Item 1. BUSINESS
FIRST UNITED CORPORATION
First United Corporation (the "Corporation") headquartered in Oakland,
Maryland, is a one-bank holding com-pany with one non-bank subsidiary. The
Corporation was organized under the laws of the State of Maryland in 1985. In
1995, the Corporation merged two of its three wholly owned banking subsidiaries,
First United Bank of West Virginia, N.A. and Myersville Bank, with its other
wholly owned banking subsidiary, First United National Bank & Trust.
First United National Bank & Trust and Oakfirst Life Insurance Corporation
are the only operating subsidiaries of the Corporation.
FIRST UNITED NATIONAL BANK & TRUST
First United National Bank & Trust is a national banking association
chartered in 1900 and is a member of the Federal Reserve System. The deposits of
First United National Bank & Trust are insured by the Federal Deposit Insurance
Corporation (FDIC).
First United National Bank & Trust operates twenty-three banking offices,
five facilities in Garrett County, Mary-land, six in Allegany County, Maryland,
five in Washington County,Maryland, two in Frederick County, Maryland, two in
Mineral County, West Virginia, one in Hampshire County, West Virginia, one in
Berkeley County, West Virginia and one in Hardy County, West Virginia. First
United also operates a total of twenty-seven Automated Teller Machines (ATM's),
seven of which are located Garrett County, Maryland, nine in Allegany County,
Maryland, four in Washington County, Maryland, three in Frederick County, and
one each Mineral, Hampshire, Berkeley and Hardy County in West Virginia. First
United National Bank & Trust provides a complete range of retail and commercial
banking services to a customer base in Garrett, Allegany, Washington and
Frederick Counties in Maryland, in Mineral, Hampshire, Berkeley and Hardy
Counties in West Virginia and to residents in surrounding regions of
Pennsylvania and West Virginia. The customer base in the aforementioned
geographical area consists of individuals, businesses and various governmental
units. The services provided by First United National Bank & Trust include
checking, savings, NOW and Money Market deposit accounts, business loans,
personal loans, mortgage loans, lines of credit and consumer-oriented financial
services including IRA and KEOGH accounts. In addition, First United National
Bank & Trust provides full brokerage services through a networking arrangement
with PrimeVest Financial Services, Inc., a full service broker-dealer. First
United National Bank & Trust also provides safe deposit and night depository
facilities and a complete line of trust services. As of December 31, 1997, First
United National Bank & Trust had total deposits of $500.06 million and total
loans of $441.39 million. The total market value of assets under the supervision
of the Trust Department was approximately $202.00 million.
OAKFIRST LIFE INSURANCE CORPORATION
Oakfirst Life Insurance Corporation is a reinsurance company that reinsures
credit life and credit accident and health insurance written by U.S. Life Credit
Life Insurance Corporation on consumer loans made by First United National Bank
& Trust. Oakfirst Life Insurance Corporation, which was chartered in 1989, is a
wholly owned subsidiary of the Corporation.
Competition
The Corporation's banking subsidiary, First United National Bank & Trust
competes with various other national banking associations, state banks, branches
of major regional banks, savings and loan associations, savings banks, mortgage
companies and credit unions, as well as other financial service institutions
such as insurance companies, brokerage firms and various other investment firms.
In addition to this local competition, First United National Bank & Trust also
competes for banking business with institutions located outside the States of
Maryland and West Virginia.
(3)
Supervision and Regulation of Banking Entities
The Corporation is a registered bank holding company subject to regulation
and examination by the Board of Governors of the Federal Reserve System under
the Bank Holding Company Act of 1956 (the "Act"). The Corporation is required to
file with the board of governors, quarterly and annual reports and any
additional information that may be required according to the Act. The Act also
requires every bank holding company to obtain the prior approval of the Federal
Reserve Board before acquiring direct or indirect ownership or control of more
than 5% of the voting shares of any bank which is not already majority owned.
The Act also prohibits a bank holding company, with certain exceptions, from
engaging in or acquiring direct or indirect control of more than 5% of the
voting shares of any company engaged in non-banking activities. One of the
principal exceptions to these provisions is for engaging in or acquiring shares
of a company engaged in activities found by the Federal Reserve Board to be so
closely related to banking or managing banks as to be a proper incident thereto.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
was enacted in December 1991. FDICIA was primarily designed to provide
additional financing for the FDIC by increasing its borrowing ability. The FDIC
was given the authority to increase deposit insurance premiums to repay any such
borrowing. In addition, FDICIA identifies capital standard categories for
financial institutions: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized. FDICIA imposes progressively more restrictive constraints on
operations, management and capital distributions depending on the category in
which an institution is classified. Pursuant to FDICIA, undercapitalized
institutions must submit recapitalization plans, and a holding company
controlling a failing institution must guarantee such institution's compliance
with its plan.
During 1995, the Bank Insurance Fund (BIF) reached the funding levels
required by FDICIA. As a result of the well capitalized position of First United
National Bank & Trust, the Bank incurred a reduction in its FDIC premium. As a
result of its continued well capitalized position, the Bank paid no FDIC
premiums in 1997 and 1996.
FDICIA also requires the various regulatory agencies to prescribe certain
non-capital standards for safety and soundness relating generally to operations
and management, asset quality and executive compensation and permits regulatory
action against a financial institution that does not meet such standards. The
statute also imposes limitations on certain mergers and consolidations between
insured depository institutions with different home states.
First United National Bank & Trust is a Federally insured national banking
association. Its operation is subject to Federal and state laws applicable to
commercial banks with trust powers and to regulation by the Comptroller of the
Currency, the Federal Reserve Board, and the FDIC. The Corporation is examined
periodically by the Federal Reserve Board, the national banking subsidiary is
regularly examined by the Office of the Comptroller of the Currency and Oakfirst
Life Insurance Corporation is periodically examined by the Arizona Department of
Insurance.
In accordance with Federal Reserve regulations, the subsidiary bank is
limited as to the amount it may loan affiliates, including the Corporation,
unless such loans are collateralized by specific obligations. Additionally,
banking law limits the amount of dividends that a bank can pay without prior
approval from bank regulators.
Governmental Monetary and Credit Policies and Economic Controls
The earnings and growth of the banking industry and ultimately of First
United National Bank & Trust are affected by the monetary and credit policies of
governmental authorities, including the Federal Reserve System. An important
function of the Federal Reserve System is to regulate the national supply of
bank credit in order to control recessionary and inflationary pressures. Among
the instruments of monetary policy used by the Federal Reserve to implement
these objectives are open market operations in U.S. Government securities,
changes in the discount rate of member bank borrowings, and changes in reserve
requirements against member bank deposits. These means are used in varying
combinations to influence overall growth of bank loans, investments and deposits
and may also affect interest rates charged on loans or paid for deposits. The
monetary policies of the Federal Reserve authorities have had a significant
effect on the operating results of commercial banks in the past and are expected
to continue to have such an effect in the future.
In view of changing conditions in the national economy and in the money
markets, as well as the effect of actions by monetary and fiscal authorities,
including the Federal Reserve System, no prediction can be made as to possible
(4)
future changes in interest rates, deposit levels, loan demand or their effect on
the business and earnings of the Corporation and its subsidiaries.
Employees
At December 31, 1997, the Corporation and its subsidiaries employed
approximately 335 individuals, of whom 59 were officers, 153 were full-time
employees, and 123 part-time employees.
Executive Officers of the Corporation
Information concerning the executive officers of the Corporation is
contained on page 5 of the Corporation's definitive Proxy Statement for the
annual shareholders meeting to be held April 28, 1998, and in Part III, Item 10
of this Annual Report on Form 10-K under the caption "Directors and Executive
Officers of the Registrant."
Item 2. PROPERTIES
The main office of the Corporation and First United National Bank & Trust
occupies approximately 29,000 square feet at 19 South Second Street, Oakland,
Maryland, and is owned by First United National Bank & Trust. First United
National Bank & Trust operates a network of twenty-three banking offices
throughout Garrett, Allegany, Washington and Frederick Counties, Maryland and
Mineral, Hampshire, Berkeley and Hardy Counties, West Virginia. All of the
banking offices of First United National Bank & Trust are owned by the
Corporation except for ten of these offices, which are leased.
The properties of the Corporation which are not owned are held under
long-term leases. Total rent expense for 1997, 1996, and 1995 was $.26, $.23,
and $.22 million, respectively.
Item 3. LEGAL PROCEEDINGS
The Corporation and its subsidiaries are at times, and in the ordinary
course of business, subject to legal actions. Management, upon the advice of
counsel, is of the opinion that losses, if any, resulting from the settlement of
current legal actions will not have a material adverse effect on the financial
condition of the Corporation.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
(5)
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The common stock of First United Corporation is listed on The Nasdaq Stock
Market SM . This listing became effective on September 2, 1992. There are
12,000,000 shares of common stock authorized and the total number of shares
outstanding as of December 31, 1997, was 6,250,961. As of December 31, 1997, the
Corporation had approximately 2,491 holders of record of its common stock. There
are also 2,000,000 shares of preferred stock authorized with no shares
outstanding as of December 31, 1997. The following tables reflect the high and
low trades during the period, as well as the closing price for the years ended
December 31, 1997 and 1996.
1997 High Low Close
1st Quarter ...................................... $17.25 $14.75 $16.00
2nd Quarter ........................................18.50 16.00 17.25
3rd Quarter ........................................18.50 17.00 17.63
4th Quarter ........................................21.00 17.25 20.25
The market value information for 1996 has not been restated because no
significant changes in the stock price occurred due to the 5% stock dividend.
1996 High Low Close
1st Quarter ...................................... $16.19 $12.62 $15.00
2nd Quarter ........................................15.50 12.75 13.69
3rd Quarter ........................................15.75 12.00 15.13
4th Quarter ........................................16.25 14.50 15.00
Cash Dividends
Cash dividends were paid by the Corporation on the dates indicated as follows:
1997 1996
February..................................................... $.14 $.12
May ......................................................... .14 .13
August ...................................................... .14 .13
November .................................................... .14 .13
Quotes for the Stock can be found on The Nasdaq Stock Market SM under the
symbol "FUNC." Market Makers for the Stock are:
Ferris Baker Watts Parker/Hunter Wheat First Union
12 North Liberty St. 14th and Chaplin St. 33 West Franklin Street
Cumberland, MD 21502 700 Riley Building Hagerstown, MD 21740 (
(301) 724-7161 Wheeling, WV 26003 (800) 388-1248
(800) 776-0629 (800) 523-2153
29 North Liberty Street
113 S. Potomac St. Legg Mason Wood Walker Cumberland, MD 21502
Hagerstown, MD 21740 125 West Street, Suite 201 (301) 724-2660
(800) 733-7111 Annapolis, MD 21401
(800) 638-9165 12978 Garrett Highway
Oakland, MD 21550
(301) 334-5806
The Board of Directors declared a 5% stock dividend on January 17, 1996, to
shareholders of record at March 15, 1996, payable March 29, 1996. The dividend
resulted in the issuance of 309,817 shares of common stock.
On July 31, 1996, as part of the Corporation's capital plan, the Board of
Directors authorized the Corporation's officers to repurchase up to 5% of its
outstanding common stock. Purchases of the Corporation's stock under the program
were completed in brokered transactions or directly from the Corporation's
market makers. As of December 31, 1997, 246,695 shares have been repurchased and
retired under the Plan authorized by the Board of Directors.
(6)
Item 6. SELECTED FINANCIAL DATA
(In thousands, except per share data)
1997 1996 1995 1994 1993
Balance Sheet Data
Total Assets............ $569,030 $523,621 $487,169 $459,040 $423,380
Total Deposits ......... 500,060 452,539 424,294 391,650 368,527
Total Net Loans .......... 438,738 380,594 358,464 333,375 314,476
Total Shareholders' Equity .56,714 56,815 55,504 51,131 48,372
Operating Data
Interest Income ......... $ 43,348 $ 39,273 $ 37,274 $ 33,059 $ 32,484
Interest Expense ........ 18,978 16,376 14,721 11,265 11,356
Net Interest Income ..... 24,370 22,897 22,553 21,794 21,128
Other Operating Income .. 6,037 4,869 4,290 3,832 3,488
Provision for Possible
Credit Losses ......... 935 749 0 165 269
Other Operating Expense.... 19,530 17,394 18,390 16,220 15,158
Income Before Tax ........ 9,942 9,623 8,453 9,241 9,189
Income Tax ............... 3,297 3,144 2,849 3,014 3,177
Net Income ............... $ 6,645 $ 6,479 $ 5,604 $ 6,227 $ 6,012
Per Share Data
Net Income ................. $1.05 $1.00 $0.86 $0.96 $0.93
Regular Dividends Paid ..... 0.56 0.51 0.46 0.43 0.35
Book Value ................. $8.94 $8.82 $8.54 $7.87 $7.46
Per Share data has been restated to reflect the 50% stock dividend paid on
February 8, 1994, and the 5% stock dividend paid on March 29, 1996.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section presents management's discussion and analysis of the financial
condition and results of operations of First United Corporation and subsidiaries
(collectively, the "Corporation") including First United National Bank & Trust
(the "Bank"), and Oakfirst Life Insurance Corporation.
This discussion and analysis should be read in conjunction with the
financial statements which appear elsewhere in this report.
On January 17, 1996, the Board of Directors declared a 5% stock dividend to
shareholders on record at March 15, 1996, paid March 29, 1996. The dividend
resulted in the issuance of 309,817 shares. Earnings and dividends per share
have been restated to reflect the stock dividend.
On July 31, 1996, as part of the Corporation's capital plan, the Board of
Directors authorized the Corporation's officers to repurchase up to 5% of its
outstanding common stock. Purchases of the Corporation's stock under this
program were completed in brokered transactions or directly from the
Corporation's market makers. The repurchased stock was retired as required by
Maryland law. As of December 31, 1997, 246,695 shares were repurchased and
retired under the Plan authorized by the Board of Directors.
(7)
EARNINGS ANALYSIS
OVERVIEW
The Corporation's net earnings for 1997 increased to $6.65 million, or 2.56%
over the $6.48 million reported for 1996. Earnings for the year represent a
record level of performance for the Corporation, exceeding the previous record
of $6.48 million achieved in 1996. Return on average assets was 1.21%, 1.29%,
and 1.18% in 1997, 1996, and 1995, respectively.
The return on average shareholders equity for 1997 increased to 11.70% from
the 11.28% reported in 1996. The return on average equity was 10.47% in 1995.
The earnings per share increased to $1.05 in 1997 from $1.00 in 1996, compared
with $0.86 in 1995.
During the first and second quarter of 1997 the Company engaged the services
of Alex Sheshunoff Management Services, Inc., a highly respected financial
consulting group, to facilitate a process improvement program. Based on the
recommendations of the Alex Shesunoff Management Group, Inc., and the vision of
the executive management, several positions in the organization were changed,
new positions were created, and a few positions were eliminated. All employees
were offered a severance package during the restructuring process, and 63
employees chose to accept this package. Throughout this process First United
National Bank & Trust maintained its tradition of no lay-offs affecting its
employees. For those employees accepting the voluntary severance package, the
Board of Directors authorized a total of $554,000 to be charged against earnings
during the first six months of 1997.
Forward-Looking Statements
The Corporation has made certain "forward-looking" statements with respect
to this discussion. Such statements should not be construed as guarantees of
future performance. Actual results may differ from "forward-looking" information
as a result of any number of unforeseeable factors, which include, but are not
limited to, the effect of prevailing economic conditions, the overall direction
of government policies, unforeseeable changes in the general interest rate
environment, competitive factors in the marketplace, and business risk
associated with credit extensions and trust activities. These and other factors
could lead to actual results which differ materially from management's
statements regarding future performance.
Net Interest Income
The primary source of earnings continued to be net interest income-the
difference between interest income and related fees on earning assets, and the
interest expense incurred on deposits and other borrowed funds. This segment of
earnings is affected by changes in interest rates, account balances and the
mix of earning assets and interest bearing funding sources.
Total interest income for 1997 increased 10.38% over 1996, from $39.27
million to $43.35 million, primarily due to growth in earning assets. Total
interest expense at $18.98 million represented an increase of 15.89% from $16.38
in 1996. This increase was the result of growth in our depository accounts as
well as the effect of higher rates being paid. The net effect of these changes
was a 6.43% improvement in net interest income to $24.37 million in 1997 from
$22.90 million in 1996. This compares to $22.55 million in 1995. The improvement
in 1996 represents an increase of 1.53% over 1995's net interest income. Table 3
analyzes the changes in net interest income attributable to volume and rate
components.
For analytical purposes, net interest income is adjusted to a taxable
equivalent basis. This adjustment facilitates performance comparisons between
taxable and tax-exempt assets by increasing tax-exempt income by an amount
equal to the federal income taxes which would have been paid if this income were
taxable at the statutorily applicable rate.
The taxable equivalent net interest margin decreased to 4.83% in 1997 from
4.97% in 1996, compared with 5.19% in 1995. Table 2 compares the components of
the net interest margin and the changes occurring between 1997, 1996 and 1995.
Allowance for Loan Losses
The allowance for loan losses 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.
During 1997, management continued to place emphasis on procedures for credit
analysis, problem loan detection, and delinquency follow-ups. As a result of
these efforts, the provision for credit losses in 1997 was $0.94 million or
0.21% of gross loans. The provision for credit losses was $.75 and $.00 for the
years ended December 31, 1996 and 1995, respectively. Gross charge-offs for the
years ended December 31, 1997, 1996, and 1995 totaled $.64, $.85, and $.41
million, respectively.
Table 8 presents the activity in the allowance for loan losses by major loan
category for the past five years. Table 9 presents management's allocation of
the allowance for loan losses by major loan catagory. Specific allocations in
any particular category may be reallocated in the future to reflect current
conditions. Accordingly, the entire allowance is considered available to absorb
losses in any category.
(8)
Other Operating Income
Non-interest income for 1997, at $6.04 million, increased 23.99% over the
$4.87 million earned in 1996. In 1997, the Corporation experienced an increase
in income from insurance premiums, Trust and Fiduciary activities, service
charges on depository accounts and real estate appraisal services. The
Corporation and its Subsidiaries continue to seek ways of obtaining additional
other operating income. Throughout 1997, the Corporation implemented many new
fee structures which should enhance income for years to come. The growth in our
nontraditional services mentioned above accounted for most of the 1996 increase
of 13.50% in non-interest income over the $4.29 million earned in 1995.
Other Operating Expense
Non-interest expense increased $2.14 million or 12.28% from $17.39 million
in 1996 to $19.53 million in 1997. As previously mentioned, First United had one
time restructuring costs of $.854 million in 1997, $.554 million of which were
related to severance payments to employees incurred during the first six months
of 1997. Other expenses contributing to the increase were costs to increase
market awareness through various advertising campaigns, developing an office
supply inventory, restructuring of a our data processing network, and expenses
incurred in the closing of certain loan campaigns. While some of these expenses
will continue, others represent investments in future efficiencies.
The Corporation incurred an increase of $.59 million in salary and employee
benefits including the severance costs expense. This increase can primarily be
attributed to the $.554 million severance package as discussed above.
The Corporation incurred a slight decrease in 1997 of $.01 million in
occupancy expense of premises to $.99 million. Occupancy expense of premises was
comparable at $1.00 million and $.84 million in 1996 and 1995, respectively.
Expenditures to further increase the role of technology in improving the
efficiency of customer service delivery and internal processing activities
accounted for much of the increase in equipment expenses. An expansion in the
Customer Service Center also contributed to an increase in equipment related
expenses. It is anticipated that the long run efficiencies gained by projects
such as these will be a net benefit to the earnings performance of the
Corporation.
Impact of Year 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Corporation's computer programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send customer statements, or engage in similar normal business activities.
The majority of the Corporation's transaction processing is provided by a
third party processor. Based on a recent assessment, the Corporation determined
that it and its third party processor will be required to modify or replace
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. The Corporation presently
believes that with modifications to existing software and conversions to new
software, the Year 2000 Issue will not pose significant operational problems for
its computer systems. However, if such modifications and conversions are not
made, or are not completed timely, the Year 2000 Issue could have a material
impact on the operations of the Corporation.
The Corporation has initiated formal communications with all of its
suppliers and third party processors to deter-mine the extent to which the
Corporation's interface systems are vulnerable to those third parties' failure
to remediate their own Year 2000 Issues. The Corporation's total Year 2000
project cost and estimates to complete include the estimates costs and time
associated with the impact of third party Year 2000 Issues based on presently
available information. However, there can be no guarantee that the systems of
other companies on which the Corporation's systems rely will be timely converted
and would not have an adverse effect on the Corporation's systems.
The Corporation will utilize both internal and external resources to
reprogram, or replace, and test the software for Year 2000 modifications. The
Corporation anticipates completing the Year 2000 project within one year but not
later than December 31, 1998, which is prior to any anticipated impact on its
operating systems. The total cost of the Year 2000 project is estimated at
$100,000.00 and is being funded through operating cash flows. Costs attributable
to the purchase of new software will be capitalized, and other costs will be
expensed as incurred.
The costs of the project and the date on which the Corporation believes it
will complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, and
similar uncertainties.
Applicable Income Taxes
Applicable income taxes are detailed in Note 9 of the Corporation's audited
consolidated financial statements.
(9)
Income tax expense amounted to $3.30 million in 1997 as compared with $3.14
million in 1996 and $2.85 million in 1995. These amounts represented effective
tax rates of 33.16%, 32.67%, and 33.70% for 1997, 1996, and 1995, respectively.
Investment Securities
Investment securities classified as available-for-sale are held for an
indefinite period of time and may be sold in response to changing market and
interest rate conditions as part of the asset/liability management strategy.
Available-for- sale securities are carried at market value, with unrealized
gains and losses excluded from earnings and reported as a separate component of
stockholders' equity net of income taxes. Investment securities classified as
held-to-maturity are those securities that management has both the positive
intent and the ability to hold to maturity, and are reported at amortized cost.
The Corporation does not currently follow a strategy of making security
purchases with a view to near-term resales and therefore, does not own trading
securities. For additional information, see Notes 1 and 3 to the Corporation's
audited consolidated financial statements.
Total investment securties decreased $15.47 million or 14.05% in 1997 from
$110.07 million in 1996 to $94.60 million in 1997. The Corporation reported an
decrease of $10.35 million or 50.29% during 1997 in its U.S. Treasury securities
from $20.58 million in 1996 to $10.23 million in 1997. Total obligations of
state and political subdivision investments increased $.24 million or 1.57% in
1997 to $15.56 million as a result of efforts by management to extend the
maturity of the portfolio and to obtain a higher yield. The decline in
investment securities was primarily due to the extraordinary loan growth
experienced by the Corporation in 1997 and the resulting liquity needs. Total
investment securities were $96.15 million as of December 31, 1995.
The Corporation manages its investment portfolios utilizing policies which
seek to achieve desired levels of liquidity, manage interest rate sensitivity
risk, meet earnings objectives and provide required collateral support for
deposit activities. Excluding the U.S. Government and U.S. Government sponsored
agencies, the Corporation had no concentrations of investment securities from
any single issues that exceeded 10% of shareholders' equity. Table 4 exhibits
the distribution, by type, of the investment portfolio for the three years ended
December 31, 1997, 1996 and 1995, respectively.
Loan Portfolio
The Corporation, through its Bank, is actively engaged in originating loans
to customers primarily in Garrett, Allegany, Washington and Frederick Counties
in Maryland; Mineral, Hardy, Berkeley and Hampshire Counties in West Virginia
and the surrounding regions of West Virginia and Pennsylvania. The Corporation
has policies and procedures designed to mitigate credit risk and to maintain the
quality of the Corporation's loan portfolio. These policies include underwriting
standards for new credits and the continuous monitoring and reporting of asset
quality and the adequacy of the reserve for loan losses. These policies, coupled
with ongoing training efforts, have provided an effective check and balance
for the risk associated with the lending process. Lending authority is based on
the level of risk, size of the loan and the experience of the lending officer.
Table 5 presents the composition of the Corporation's loan portfolio.
The Corporation's policy is to make the majority of its loan commitments in
the market area it serves. This tends to reduce risk because management is
familiar with the credit histories of loan applicants, has an in-depth knowledge
of the risk to which a given credit is subject, and is familiar with the local
economies. The Corporation had no foreign loans in its portfolio as of December
31, 1997.
During 1997, gross loans increased $58.61 million or 15.31% to a total of
$441.39 million. In comparison, gross loans at year-end 1996 increased $22.20
million or 6.15% to a total of $382.78 million as compared to the 1995 balances.
Mortgage lending continued to be the primary source of loan growth in 1997. A
portion of the mortgage growth includes a 38.43% increase in our Home Equity
product. Home Equity loans increased from $20.74 million from year-end 1996 to
$28.71 million at year-end 1997. We anticipate our Home Equity product to
continue to expe-rience growth as more of our customers look for tax advantages
associated with this product. Small business loans also contributed to the
overall growth of mortgage portfolio increasing $10.41 million or 21.45% by year
end 1997. The Corporation also experienced particularly strong growth in our
installment portfolio. The growth of the indirect install-ment loan portfolio
accounted for most of the $20.25 million growth in installment loans.
Managment believes this product line should continue to see growth for years to
come. Table 5 details the dollar amount and percentage distribution of the
various key categories of credit in the loan portfolio.
Funding for loan growth during 1997 and 1996 was provided by increased
levels of deposits from within our market area as well as borrowings from
Federal Home Loan Bank of Atlanta ("FHLB") and our upstream correspon-dent
banks.
It is the policy of the Corporation to place a loan in non-accrual status
whenever there is substantial doubt about the ability of a borrower to pay
principal or interest on any outstanding credit. Management considers such
factors as payment history, the nature of the collateral securing the loan and
the overall economic situation of the borrower when making a non-accrual
decision. Non-accrual loans are closely monitored by management. A non-accruing
loan is
(10)
restored to accrual status when principal and interest payments have been
brought current, it becomes well-secured or is in the process of collection and
the prospects of future contractual payments are no longer in doubt. At December
31, 1997, the Corporation had $.56 million of non-accrual loans. Table 7 details
the historical activity of non-accural loans.
As of December 31, 1997, the Corporation had $6.00 million in loans for
which payments were current, but the borrowers were experiencing financial
difficulties. The corresponding total for year-end 1996 was $2.87 million. These
loans are subject to ongoing management attention and their classifications are
reviewed monthly.
Deposit and Other Funding
Deposit liabilities increased to $500.06 million in 1997 from $452.54
million at the end of 1996, or an increase of 10.50%. The $47.52 million in
deposit growth compares favorably to the $28.25 million growth in deposits
experienced in 1996. Time deposits continue to be the main source of deposit
growth during both 1997 and 1996. The Corporation continues to experience strong
competition for deposits from other commercial banks, credit unions, and the
stock market and mutual funds. Table 10 displays the average balances and
average rates paid on all major deposit classifications for 1997, 1996, and
1995. In addition to deposits, the Corporation also has available a line of
credit with the Federal Home Loan Bank ("FHLB") of Atlanta in an amount up to
$75 million. The total borrowings from FHLB equaled $6.08 million and $8.00
million for the years ended December 31, 1997 and 1996, respectively.
Capital Resources
The Bank and the Corporation itself are subject to risk-based capital
regulations which were adopted by Federal banking regulators and became fully
phased in on December 31, 1992. 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 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, and grandfathered senior debt, plus the allowance for credit
losses, subject to certain limitations.
Under the risk-based capital regulations, banking organizations are required
to maintain a minimum 8% (10% for well capitalized banks) total risk-based
capital ratio (total qualifying capital divided by risk-weighted assets),
including a Tier 1 ratio of 4%. The risk-based capital rules have been further
supplemented by a leverage ratio, defined as Tier 1 capital divided by average
assets, after certain adjustments. The minimum leverage ratio is 3% 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. Other banking
organizations not in this category are expected to have ratios of at least 4-5%,
depending on their particular condition and growth plans. Higher capital ratios
could be required if warranted by the particular circumstances or risk profile
of a given banking organization. In the current regulatory environment, banking
companies must stay well capitalized in order to receive favorable regulatory
treatment on acquisition and other expansion activities and favorable risk-based
deposit insurance assessments. The Corporation's capital policy establishes
guidelines meeting these regulatory requirements, and takes into account current
or anticipated risks and future growth opportunities.
On December 31, 1997, the Corporation's total risk-based capital ratio was
14.82%, well above the regulatory minimum of 8%. The risk-based capital ratios
for year-end 1996 and 1995 were 17.92% and 18.63%, respectively.
Total shareholder's equity remained stable, dropping slightly from $56.82
million at year-end 1996 to $56.71 million at year-end 1997. The main reasons
for the lack of growth are the Corporation's participation in the stock buyback
program and increases in the dividends paid to shareholders. Total shareholders'
equity at December 31, 1995 was $55.5 million. The equity to assets ratio at
December 31, 1997, was 9.97%, compared with 10.84% and 11.39% at year-end 1996
and 1995.
On July 31, 1996, as part of the Corporation's capital plan, the Board of
Directors also authorized the Corporation's officers to repurchase up to 5% of
its outstanding common stock. Purchases of the Corporation's stock under the
program were completed in brokered transactions or directly from the
Corporation's market makers. As of December 31, 1997, 246,695 or 3.79% shares
have been repurchased and retired under the Plan authorized by the Board of
Directors.
Cash dividends of $.56 per share were paid during 1997, compared with $.51
and $.46 in 1996 and 1995. This represents a dividend payout rate (dividends per
share divided by net income per share) of 53.33%, 51.00%, and 53.49% for 1997,
1996, and 1995, respectively.
ASSET AND LIABILITY MANAGEMENT
Introduction
The Investment and Funds Management Committee of the Corporation seeks to
assess and manage the risks associated with fluctuating interest rates while
maintaining adequate liquidity. This is accomplished by formulating
(11)
and implementing policies that take into account the sources and uses of funds,
maturity and repricing distributions of assets and liabilities, pricing
strategies, and marketability of assets.
Liquidity
The objective of liquidity management is to assure that the withdrawal
demands of depositors and the legitimate credit needs of the Corporation's
delineated market areas are accommodated. Total liquid assets, represented by
cash, investment securities (available-for-sale and held-to-maturity maturing
within one year) and loans maturing within one year, amounted to $90.427
million, or 15.89% of total assets at December 31, 1997. This compares with
$111.35 million, or 21.26% of 1996 year-end assets, and $96.26 million, or
19.76% of 1995 year-end assets.
Additional liquidity of $91 million is available from unused lines of credit
at various upstream correspondent banks and the FHLB of Atlanta.
INTEREST RATE SENSITIVITY
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
assets and liabilities. Management seeks to avoid fluctuating net interest
margin, and to enhance consistent growth of net interest income through periods
of changing interest rates. The Corporation 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 the Corporation
during a period of declining interest rates.
In order to manage interest sensitivity risk, management of the Corporation
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 income over specified periods. Management does not use derivative financial
instruments to effect its interest rate sensitivity. At December 31, 1997, the
static gap analysis prepared by management indicated that the Corporation was
liability sensitive over the next year. In computing the effect on pre-tax
income of changes in interest rates, management has assumed that any changes
would immediately effect earnings. Normally when an organization is liability
sensitive there is a positive impact to income when interest rates decline.
The simulation analysis shown below shows a negative impact when interest rates
decline 100 or 200 basis points. Management explains this affect due to the
current position of interest rates, whereby certain liability accounts are
currently priced at a level where management feels they cannot be reduced
further in rate, therefore, the full impact of repricing liabilities in the
declining rate environment is not realized. Based on the simula-tion analysis
performed at year end, the Corporation estimates the following changes in income
before taxes assuming the indicated interest rate changes:
+200 basis point increase .............................. ($1.143 million)
+100 basis point increase ................................ (.572 million)
- -100 basis point decline ................................. (.286 million)
- -200 basis point decline ................................. (.571 million)
This estimate is based on assumptions that may be affected by unforeseeable
changes in the general interest rate environment and any number of unforeseeable
factors. Rates on different assets and liabilities within a single maturity
category adjust to changes in interest rates to varying degrees and over varying
periods of time. The relationships between prime rates and rates paid on
purchased funds are not constant over time. Management can respond to current or
anticipated market conditions by lengthening or shortening the Corporation's
sensitivity through loan repricings or changing its funding mix. The rate of
growth in interest-free sources of funds will influence the level of interest-
sensitive funding sources. In addition, the absolute level of interest rates
will affect the volume of earning assets and funding sources. As a result of
these limitations, the interest-sensitive gap is only one factor to be
considered in estimating the net interest margin.
Table 13 presents the Corporation's interest rate gap position at December
31, 1997. This is a one-day position which is continually changing and is not
necessarily indicative of the Corporation's position at any other time.
(12)
Distribution of Assets, Liabilities and Shareholders' Equity
Interest Rates and Interest Differential-Tax Equivalent Basis
( In thousands )
Table 1
For the Years Ended December 31,
1997 1996 1995
Average Annual Average Annual Average Annual
Balance Interest Rate Balance Interest Rate Balance Interest Rate
Federal funds sold.$ 2,506 $ 181 7.22% $ 3,219 $ 182 5.65% $ 3,376 $ 208 6.16%
Investments:
Taxable ........... 85,288 5,347 6.27 93,073 5,663 6.08 78,162 4,985 6.38
Non taxable........ 14,146 1,056 7.47 11,139 856 7.68 4,836 685 9.33
Total investment
securities .... 99,434 6,403 6.44 104,212 6,519 6.26 82,998 5,670 6.83
Loans ............. 415,663 37,365 8.99 364,309 33,113 9.09 352,720 31,866 9.03
Total earning assets 517,603 43,949 8.50% 471,740 39,814 8.44% 443,086 37,744 8.51
Reserve for possible
credit losses . (2,343) (2,122) (2,283)
Other non-earning
assets ......... 33,665 33,867 29,450
Total non-earning
assets ......... 31,322 31,745 27,167
Total Assets ...... $548,925 $503,485 $470,253
Liabilities and
Shareholders' Equity
Deposits:
Noninterest-bearing
deposits....... $51,807 $ 0 0.00% $48,097 $ 0 0.00% $46,114 $ 0 0.00%
Interest-bearing
demand deposit. 103,627 2,934 2.83 97,809 2,781 2.84 95,959 2,628 2.74
Savings deposits. 63,522 1,135 1.79 77,811 1,783 2.29 70,699 2,045 2.89
Time deposits
$100,00 or more 46,417 2,663 5.74 33,158 1,927 5.81 29,283 1,600 5.46
Time deposits less
than $100,000 214,376 11,933 5.57 180,684 9,787 5.42 166,877 8,296 4.97
Short-term
borrowings .. . 7,211 313 4.34 3,532 98 2.77 3,674 152 4.14
Total deposits and
short-term
borrowings 486,960 18,978 3.90% 441,091 16,376 3.71% 412,606 14,721 3.62
Other liabilities..... 5,154 5,976 3,960
Shareholders' equity 56,811 56,418 53,687
Total Liabilities and
Shareholders'
Equity $548,925 $503,485 $470,253
**The above table reflects the average rates earned or paid stated on a tax
equivalent basis assuming a tax rate of 34%. The average balances of non-accrual
loans for the years ended December 31, 1997, 1996, and 1995, which were reported
in the average loan balances for these years, were $617, $1,244, and $1,006,
respectively. The fully taxable equivalent adjustments for the years ended
December 31, 1997, 1996, and 1995 were $601, $541, and $470, respectively.
(13)
Net Interest Margin
( In thousands )
Table 2 1997 1996 1995
Tax Tax Tax
Average Equivalent Average Equivalent Average Equivalent
Balance Rate Balance Rate Balance Rate
Earning Assets $517,603 8.50% $471,740 8.44% $443,086 8.51%
Interest-bearing
Liabilities 435,154 3.90% 392,994 3.71% 366,492 3.62%
Net Benefit of Noninterest-bearing
Sources 0.46% 0.45% 0.45%
Average Cost of Funds 3.67% 3.47% 3.32%
NET INTEREST MARGIN 4.83% 4.97% 5.19%
The above table reflects the average rates earned or paid stated on a tax
equivalent basis assuming a tax rate of 34%.
Interest Variance Analysis (1)
( In thousands )
Table 3
1997 COMPARED TO 1996 1996 COMPARED TO 1995
INCREASE INCREASE
(DECREASE) DUE TO (DECREASE) DUE TO
Volume Rate Net Volume Rate Net
Interest income:
Loans ................ $4,616 ($364) $4,252 $1,053 $ 194 $1,247
Taxable Investments.. (488) 172 (316) 907 (229) 678
Non-Taxable Investments. 225 (24) 201 484 (313) 171
Federal Funds Sold .... . (51) 50 (1) (9) (17) (26)
Total Interest Income. $4,302 ($166) $4,136 $2,435 ($ 365) $2,070
Interest expense:
Interest-bearing ..... $ 165 ($ 12) $ 153 $ 53 $ 100 $ 153
Savings................ (255) (393) (648) 163 (425) (262)
Time Deposits ........ 1,875 271 2,146 748 743 1,491
Time Deposits $100,000
or more ............. 761 (25) 736 225 102 327
Other borowings ...... 160 55 215 (4) (50) (54)
Total Interest Expense $2,706 ($104) $2,602 $1,185 $ 470 $1,655
Net Interest Income .. $1,596 ($ 62) $1,534 $1,534 ($ 835) $ 415
(1) The change in interest income/expense due to both volume and rate has been
allocated to volume and rate changes in proportion to the relationship of the
absolute dollar amounts of the change in each.
The above table is compiled on a tax equivalent basis. The fully taxable
equivalent adjustments for the years ended December 31, 1997 and 1996 were $601
and $541, respectively.
(14)
Investment Security Maturities, Yields, and Market Values
( In thousands )
Table 4
December 31, 1997
U.S. Federal State &
Treasury Yield Agencies Yield Municipal Yield Other Yield Total Yield
Maturity Book Value
Available-for-Sale
Within One Year $ 5,003 5.62% $18,338 5.76% $ 843 6.78% $ 7,470 5.67% $31,654 5.74%
One to Five Years 5,133 6.42% 8,871 6.51% 4,914 7.28% 7,554 6.62% 26,472 6.66%
Five to Ten Years... 0 0% 4,089 6.51% 329 6.93% 758 6.71% 5,176 6.56%
Over Ten Years ..... 0 0% 0 0% 163 6.81% 1,135 7.70% 1,298 7.59%
Book Value........ $10,136 $31,298 $6,249 $16,917 $64,600 6.22%
Taxable Equivalent
Yield .......... 6.02% 6.07% 7.18% 6.27% 6.23%
Held-to-Maturity
Within One Year ...... $ 0 0.00% $ 0 0% $ 538 7.69% $ 7,367 5.28% $ 7,905 5.44%
One to Five Years .. .. 0 0% 0 0% 3,506 6.81% 9,908 6.45% 13,414 6.54%
Five to Ten Years..... 0 0% 0 0% 1,509 7.27% 0 0% 1,509 7.27%
Over Ten Years ......... 0 0% 0 0% 3,649 7.68% 3,065 6.89% 6,714 7.32%
Book Value ..... ..... $ 0 $ 0 $9,202 $20,340 $29,542 6.46%
Taxable Equivalent
Yield ..... 0.00% 0.00% 7.28% 6.09% 6.46%
Total Book Value.. $10,136 $31,298 $15,451 $37,257 $94,142
Market Value ..... $10,225 $31,468 $15,741 $37,419 $94,853
December 31,1996
Book Value .... $20,488 $37,510 $15,254 $36,467 $109,719
December 31,1995
Book Value .... $11,712 $36,657 $8,476 $38,992 $95,837
The above yields have been adjusted to reflect a tax equivalent basis assuming a
tax rate of 34%.
(15)
Summary of Loan Portfolio
( In thousands )
Table 5
Loans Outstanding as of December 31,
1997 1996 1995 1994 1993
Commercial, Financial, &
Agricultural ..... $ 67,399 $ 56,325 $ 56,893 $47,111 $38,351
Real Estate-Construction . 11,716 21,097 10,696 19,838 10,902
Real Estate-Mortgage ..... 287,153 249,389 242,789 220,991 220,228
Installment .............. 75,124 55,969 50,206 47,785 47,301
TOTAL............. $441,392 $382,780 $360,584 $335,725 $316,782
Percentage of Portfolio as of December 31,
1997 1996 1995 1994 1993
Commercial, Financial, &
Agricultural........ 15.27% 14.72% 15.78% 14.03% 12.11%
Real Estate-Construction ... 2.65% 5.51% 2.97% 5.91% 3.44%
Real Estate-Mortgage ....... 65.06% 65.15% 67.33% 65.83% 69.52%
Installment ................ 17.02% 14.62% 13.92% 14.23% 14.93%
TOTAL.............. 100.00% 100.00% 100.00% 100.00% 100.00%
Maturities of Loan Portfolio
(In thousands)
Table 6 December 31, 1997
MATURING
MATURING AFTER ONE MATURING
WITHIN BUT WITHIN AFTER FIVE
ONE YEAR FIVE YEARS YEARS TOTAL
Commercial, Financial
& Agricultural .......... $ 8,411 $ 56,05 1 $ 2,937 $ 67,399
Real Estate-Construction ... 0 11,716 0 11,716
Real Estate-Mortgage ....... 8,486 36,849 241,818 287,153
Installment ................ 19,579 50,250 5,295 75,124
Total ................. $36,476 $154,866 $250,050 $441,392
Classified by Sensitivity to Change in Interest Rates
Fixed-Interest Rate Loans
and final maturity on ARMS.. $27,629 $115,954 $ 72,610 $216,193
Adjustable-Interest Rate Loans 8,847 38,912 177,440 225,199
Total ................ $36,476 $154,866 $250,050 $441,392
(16)
Risk Elements of Loan Portfolio
( In thousands )
Table 7 For the Years Ended December 31
1997 1996 1995 1994 1993
Non-accrual Loans ........ $562 $ 976 $1,075 $1,027 $438
Accruing Loans Past
Due 90 Days or More ... 563 659 963 489 1,243
Information with respect to non-accrual loans at December 31,1997 and 1996 is
as follows: 1997 1996
Interest income that would have been recorded
under original terms ................................ $ 40 $ 0
Interest income recorded during the period ................ 20 33
Activity of Loan Loss Provision
Table 8
( In thousands )
Summary of Loan Loss Experience
For the Years Ended December 31
1997 1996 1995 1994 1993
Balance at Beginning of Period. $ 2,186 $ 2,120 $ 2,350 $ 2,306 $ 2,798
Loans Charged Off:
Commercial, Financial,
and Agricultural .............. 135 476 19 35 469
Real Estate-Construction ...... 0 0 0 0 0
Real Estate-Mortgage .......... 211 135 205 164 359
Installment ................... 292 236 186 121 264
TOTAL CHARGED OFF ........... 638 847 410 320 1,092
Recoveries of Loans:
Commercial, Financial,
and Agricultural .............. 52 29 59 39 135
Real Estate-Construction ........ 0 0 0 0 0
Real Estate-Mortgage ............ 39 8 31 35 97
Installment ..................... 80 127 90 125 99
TOTAL RECOVERIES ................ 171 164 180 199 331
Net Loans Charged Off ........... 467 683 230 121 761
Provision Charged to Operations . 935 749 0 165 269
Balance at the End of Period .... 2,654 2,186 2,120 2,350 2,306
Loans Net of Unearned
Income at End of Period .......$441,392 $382,780 $360,584 $335,725 $316,782
Daily Average Balance of Loans $415,663 $364,309 $352,720 $324,140 $308,804
Allowance for Possible Loan
Loss to Loans Outstanding .... 0.60% 0.57% 0.59% 0.70% 0.73%
Net Charge Offs to Average
Loans Outstanding ............ 0.11% 0.19% 0.07% 0.04% 0.24%
(17)
Allocation of Allowance for Loan Losses
( In thousands )
Table 9 1997 1996 1995 1994 1993
Commercial ............... $ 784 $ 509 $ 301 $ 457 $ 448
Real Estate-Mortgage ..... 1,095 923 1,214 661 649
Home Equity............... 93 73 48 11 11
Consumer.................. 443 201 206 223 219
Commitments .............. 239 180 171 78 77
Unallocated .............. 0 300 180 920 902
Total ................$2,654 $2,186 $2,120 $2,350 $2,306
Average Deposit Balances
Table 10 ( In thousands )
Deposits by Major Classification for the Years Ended December 31,
1997 1996 1995
Average Average Average
Balance Yield Balance Yield Balance Yield
Noninterest-bearing demand
deposits .............. $ 51,807 $ 48,097 $ 46,114
Interest-bearing
demand deposits ........ 103,627 2.83% 97,809 2.84% 95,959 2.74%
Savings deposits ....... 63,522 1.79% 77,811 2.29% 70,699 2.89%
Time deposits
$100,000 or more ..... 46,417 5.74% 33,158 5.81% 29,283 5.46%
Time deposits less
than $100,000 ....... 214,376 5.57% 180,684 5.42% 166,877 4.97%
Total ................. $479,749 $437,559 $408,932
(18)
Maturity of Time Deposits
( In thousands )
Table 11 December 31, 1997
Greater than Less Than
$100,000 $100,000
Maturities
3 Months or Less ............................. $ 16,425 $15,465
3 - 6 Months ................................. 29,623 10,910
6-12Months ................................... 64,503 13,900
Over 1 Year .................................. 92,557 16,553
Total ........................................ $203,108 $56,828
Summary of Significant Ratios
Table 12 1997 1996 1995
Return on Average Assets ............... 1.21% 1.29% 1.18%
Return on Average Equity ...............11.70% 11.28% 10.47%
Dividend Payout Ratio ................. 53.33% 51.00% 53.49%
Total Equity to Total
Assets at Year End ................. 9.97% 10.84% 11.39%
Tier I Capital to Risk Weighted Assets 14.16% 17.26% 17.94%
Total Risk-based Capital Ratio ........ 14.82% 17.92% 18.63%
Tier I Capital to Average Asse......... 10.33% 11.31% 11.48%
(19)
Summary of Interest Sensitivity Analysis
Table 13 (In thousands)
As of December 31, 1997
0-90 91-365 1-5 Over 5
Days Days Years Years TOTAL
Assets
Rate Sensitive
Securities
(Available-for-Sale
& Held-to-Maturity) (1) $ 22,859 $ 16,404 $ 41,848 $13,484 $ 94,595
Loans (2) ............... 83,309 97,810 227,434 32,839 441,392
TOTAL RATE SENSITIVE ...... $106,168 $114,214 $269,282 $46,323 $535,987
Liabilities
Rate Sensitive Deposits
Savings ................... $ 64,811 $ 0 $ 0 $ 0 $ 64,811
Investors' Choice ............ 7,952 0 0 0 7,952
Time Deposits Less
Than $100,000 ............. 16,425 94,126 92,557 0 203,108
Time Deposits
$100,000 or More .......... 15,465 24,810 16,553 0 56,828
IMMA, PMA & Trust DDA ....... 52,642 0 0 0 52,642
ONE & Now Accounts .......... 59,909 0 0 0 59,909
Fed Funds Purchased and Other
Borrowed Funds ............ 6,225 0 0 0 6,225
TOTAL RATE SENSITIVE (3) ...$223,429 $118,936 $109,110 $ 0 $451,475
GAP ( Rate Sensitive Assets less Rate
Sensitive Liabilities ). ($117,261) ($ 4,722) $160,172 $46,323 $84,512
GAP to TOTAL Assets ......... -20.61% -0.83% 28.15% 8.14% 14.85%
(1) Securities are based on estimated maturities at book value.
(2) Adjustable Rate Loans are shown in the time frame corresponding to the next
contractual interest rate adjustment.
(3) Transaction Accounts such as IMMA, ONE, and NOW are generally assumed to be
subject to repricing within one year. This is based on the Corporation's
historical experience with respect to such accounts.
(20)
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) The following audited consolidated financial statements and related
documents are set forth in this Annual Report on Form 10-K on the following
pages: Page Number
Independent Auditors' Report .................................. 23
Consolidated Statements of Financial Condition ................ 24
Consolidated Statements of Income.............................. 25
Consolidated Statements of Changes in Shareholders' Equity .... 26
Consolidated Statements of Cash Flows ......................... 27
Notes to Consolidated Financial Statements ................. 28-39
(b) The following supplementary data is set forth in this Annual Report on Form
10-K on the following pages:
Quarterly Results of Operations ............................... 39
(21)
Report of Management
Financial Statements
First United Corporation (the "Corporation") is responsible for the preparation,
integrity and fair presentation of its published financial statements as of
December 31, 1997, and for the year then ended. The consolidated financial
statements of the Corporation have been prepared in accordance with generally
accepted principles and, as such, include some amounts that are based on
judgments and estimates of management.
Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining effective internal
control over financial reporting presented in conformity with generally accepted
accounting principles and the instructions to the Consolidated Financial
Statements for Bank Holding Companies with Total Consolidated Assets of $150
million or More (FR Y-9 C instructions). The system contains monitoring
mechanisms, and actions are taken to correct deficiencies identified. There are
inherent limitations in the effectiveness of an internal control including the
possibility of human error and the circumvention or overriding of controls.
Accordingly, even effective internal control can provide only reasonable
assurance with respect to financial statement preparation. Further, because of
changes in conditions, the effectiveness of internal control may vary over time.
Management assessed the Corporation's internal control over financial
reporting presented in conformity with generally accepted accounting principles
and FR Y-9 C instructions as of December 31, 1997. This assessment was based on
criteria for effective internal control over financial reporting described in
"Internal Control-Integrated Frame-work" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
believes that the Corporation maintained effective internal control over
financial reporting presented in conformity with generally accepted accounting
principles and FR Y-9 C instructions as of December 31, 1997.
Compliance with Laws and Regulations
Management is responsible for compliance with the federal and state laws and
regulations concerning dividend restrictions and federal laws and regulations
concerning loans to insiders designated by the FDIC as safety and soundness
laws and regulations. Management has assessed compliance by First United
National Bank & Trust ("the Bank") with the designated laws and regulations
relating to safety and soundness. Based on this assessment, management believes
that the Bank complied, in all significant respects, with the designated laws
and regulations related to safety and soundness for the year ended December 31,
1997.
William B. Grant Robert W. Kurtz
Chairman and Chief Executive Officer President and Chief Financial Officer
First United Corporation First United Corporation
and and
First United National Bank & Trust First United National Bank & Trust
(22)
Report of Independent Auditors
Board of Directors and Shareholders
First United Corporation
We have audited the accompanying consolidated statements of financial
condition of First United Corporation and subsidiaries as of December 31, 1997
and 1996, the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of First United
Corporation and subsidiaries at December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Baltimore, Maryland
February 6, 1998
(23)
First United Corporation and Subsidiaries
Consolidated Statements of Financial Condition
(In thousands, except per share amounts)
December 31
1997 1996
Assets
Cash and due from banks ................................. $ 17,586 $ 15,307
Investments:
Available-for-sale securities (market value-cost-$64,600 and
$83,362 at December 31, 1997 and 1996, respectively) ..... 65,053 83,711
Held-to-maturity securities (market-value-$29,800 and
$26,724 at December 31, 1997 and 1996, respectively) ..... 29,542 26,357
Total investment securities ............................... 94,595 110,068
Federal funds sold ........................................ 0 900
Loans .................................................... 441,392 382,780
Reserve for possible credit losses ........................ (2,654) (2,186)
Net loans ................................................ 438,738 380,594
Bank premises and equipment .............................. 9,250 9,331
Accrued interest receivable and other assets ............. 8,861 7,421
Total Assets .............................................$569,030 $523,621
Liabilities and Shareholders' Equity
Liabilities:
Noninterest-bearing deposits ............................$ 51,309 $ 52,530
Interest-bearing deposits................................ 448,751 400,009
Total deposits ........................................... 500,060 452,539
Federal funds purchased and other borrowed money ......... 6,225 8,000
Reserve for taxes, interest and other liabilities ........ 5,094 5,365
Dividends payable ........................................ 937 902
Total Liabilities ........................................ 512,316 466,806
Shareholders' Equity:
Preferred stock-no par value Authorized and unissued
2,000 shares Capital stock-par value $.01 per share
Authorized 12,000 shares, issued and outstanding 6,260
and 6,442 shares at December 31, 1997 and 1996,
respectively ............................................ 63 64
Surplus .................................................. 23,461 26,661
Retained Earnings......................................... 32,913 29,877
Unrealized gain on available-for-sale securities,
net of tax............................................. 277 213
Total Shareholders' Equity ............................... 56,714 56,815
Total Liabilities and Shareholders' Equity .............. $569,030 $523,621
See notes to consolidated financial statements.
(24)
First United Corporation and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share amounts)
Year ended December 31
1997 1996 1995
Interest income
Interest and fees on loans ............. $ 37,125 $32,865 $31,630
Interest on investment securities:
Taxable ................................ 5,347 5,663 4,985
Exempt from federal income taxes .......... 695 563 451
6,042 6,226 5,436
Interest on federal funds sold .............. 181 182 208
Total interest income .................... 43,348 39,273 37,274
Interest expense
Interest on deposits:
Savings ................................ 1,135 1,783 2,045
Interest-bearing transaction accounts ...2,934 2,781 2,628
Time, $100,000 or more ................. 2,663 1,927 1,600
Other time ............................ 11,933 9,787 8,296
Interest on federal funds purchased and
other borrowed funds..................... 313 98 152
Total interest expense ................... 18,978 16,376 14,721
Net interest income ...................... 24,370 22,897 22,553
Provision for possible credit losses ..... 935 749 0
Net interest income after provision
for possible credit losses ............. 23,435 22,148 22,553
Other operating income
Trust Department income.................... 1,275 1,200 1,175
Service charges on deposit accounts ....... 2,322 1,759 1,593
Insurance premium income .................. 295 318 283
Security gains and (losses) ............... 91 24 (20)
Other income ............................. 6,037 4,869 4,290
Other operating expense
Salaries and employee benefits ............ 9,229 8,916 9,144
Occupancy expense of premises ............. 985 997 835
Equipment expense ......................... 1,656 1,503 1,300
Data processing expense ................... 581 561 643
Deposit assessment and related fees ....... 164 109 585
Restructuring costs ....................... 554 273 1,085
Other expense ............................. 6,361 5,035 4,798
19,530 17,394 18,390
Income before income taxes ................ 9,942 9,623 8,453
Applicable income taxes ................... 3,297 3,144 2,849
Net income .............................. $ 6,645 $ 6,479 $ 5,604
Earnings per share ........................ $1.05 $1.00 $0.86
See notes to consolidated financial statements.
(25)
First United Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
(In thousands, except per share amounts)
Unrealized Total
Capital Retained Gains Shareholders'
Stock Surplus Earnings (Losses) Equity
Balance at January 1, 1995 $62 $23,141 $29,435 $ (1,507) $51,131
Change in unrealized gains
(losses), net of tax of $121 1,700 1,700
Net income for the year 5,604 5,604
Dividend reinvestment and stock
purchase plan 43 43
Cash dividends-$.46 per share (2,974) (2,974)
Balance at December 31, 1995 $62 $23,184 $32,065 $ 193 $55,504
Change in unrealized gains
(losses), net of tax of $134 20 20
Net income for the year 6,479 6,479
Dividend reinvestment and stock
purchase plan 28 28
Aquisition and retirement of
common stock (1) (972) (973)
Cash dividends-$.51
per share (4,243) (4,243)
5% stock dividend 3 4,421 (4,424) 0
Balance at December 31, 1996 $64 $26,661 $29,877 $ 213 $ 56,815
Change in unrealized gains
(losses), net of tax of $174 64 64
Net income for the year 6,645 6,645
Aquisition and retirement of
common stock (1) (3,200) (3,201)
Cash dividends-$.56
per share (3,609) (3,609)
Balance at December 31, 1997 $63 $23,461 $32,913 $ 277 $56,714
( ) indicate deduction
See notes to consolidated financial statements.
(26)
First United Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Year ended December 31
1997 1996 1995
Operating activities
Net income ................................. $ 6,645 $ 6,479 $ 5,604
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible credit losses .... 935 749 0
Provision for depreciation .............. 1,460 1,299 1,145
Net accretion and amortization of investment
security discounts and premiums ....... (116) 345 399
(Gain) loss on sale of
investment securities ................. (91) (24) 20
(Increase) in accrued interest receivable
and other assets ...................... (1,440) (483) (782)
(Decrease) increase in reserve for taxes,
interest and other liabilities ........ (236) 1,896 (515)
Net cash provided by operating activities .. 7,157 10,261 5,871
Investing activities
Proceeds from maturities and sales of investment
securities available for sale ............. 74,960 59,489 105,834
Purchases of available for sale
investment securities ..................... (56,774) (65,444) (103,911)
Purchases of investment securities
held-to-maturity .......................... (8,490) (13,041) (7,597)
Proceeds from maturities of investment
securities held-to-maturity ............... 6,048 4,777 6,423
Net (increase) in loans .................... (59,079) (22,879) (25,089)
Purchase of premises and equipment ......... (1,379) (1,025) (1,396)
Net cash used in investing activities ...... (44,714) (38,123) (25,736)
Financing activities
Net increase (decrease) in demand deposits, NOW
accounts and savings accounts ............. 5,367 (623) 3,765
Net increase in certificates of deposit..... 42,154 28,869 28,879
(Decrease) increase in federal funds purchased
and other borrowed funds .................. (1,775) 5,000 (8,373)
Cash dividends paid or declared ............ (3,609) (4,243) (2,974)
Proceeds from issuance of common stock ..... 0 28 43
Aquisition and retirement of common stock .. (3,201) (973) 0
Net cash provided by financing activities .. 38,936 28,058 21,340
Increase in cash and cash equivalents ...... 1,379 196 1,475
Cash and cash equivalents at beginning of year 16,207 16,011 14,536
Cash and cash equivalents at end of year ..... $17,586 $16,207 $16,011
See notes to consolidated financial statements.
(27)
First United Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except per share amounts)
1. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying financial statements of First United Corporation
(Corporation) include the accounts of its wholly owned subsidiaries, First
United National Bank & Trust (Bank) and Oakfirst Life Insurance Corporation
(Non-Bank). All significant intercompany accounts and transactions have been
eliminated.
Business
First United Corporation is a registered bank holding company, incorporated
under the laws of Maryland. It is the parent company of First United National
Bank & Trust and Oakfirst Life Insurance Corporation. First United National Bank
& Trust provides a complete range of retail and commercial banking services to a
customer base serviced by a network of twenty-three offices and twenty-seven
automated teller machines. This customer base includes individuals, businesses
and various governmental units. Oakfirst Life Insurance Corporation is a
reinsurance company that reinsures credit life and credit accident and health
insurance written by U.S. Life Credit Life Insurance Corporation on consumer
loans made by First United National Bank & Trust.
Basis of Presentation
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted ac-counting principles that require the
Corporation to make estimates and assumptions that affect the reported amounts
of certain assets and liabilities at the date of the financial statements as
well as the reported amount of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
Investments
Securities held-to-maturity and available-for-sale: Management determines
the appropriate classification of debt securities at the time of purchase and
reevaluates such designation as of each balance sheet date. Debt securities are
classified as held-to-maturity when the Corporation has the positive intent and
ability to hold the securities to maturity. Held-to-maturity securities are
stated at amortized cost.
Debt securities not classified as held-to-maturity and marketable equity
securities are classified as available-for-sale. Available-for-sale securities
are stated at fair value, with the unrealized gains and losses, net of tax,
reported as a separate component of shareholders' equity.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization is included in interest income
from investments. Interest and dividends are included in interest income from
investments. Realized gains and losses, and declines in value judged to be other
than temporary are included in net securities gains (losses). The cost of
securities sold is based on the specific identification method.
At December 31, 1997, there were no securities held in the investment
portfolio which were classified as trading.
Interest on Loans
Interest on loans is recognized based upon the principal amount outstanding.
It is the Corporation's policy to discontinue the accrual of interest on loans
(including impaired loans) when circumstances indicate that collection of
principal or interest is doubtful. After a loan is placed on non-accrual,
interest is recognized only to the extent of cash received and principal is not
in doubt.
Bank Premises and Equipment
Bank premises and equipment are carried at cost, less accumulated provision
for depreciation. The provision for depreciation for financial reporting
generally has been made by using the straight-line method based on the estimated
useful lives of the assets, which range from 18 to 50 years for buildings and 4
to 20 years for equipment. The provision for depreciation for general tax
purposes and for the Alternative Minimum Tax generally has been made using the
double-declining balance method and the ACRS method based on the estimated
useful lives of the assets which range from 18 to 50 years for buildings and 4
to 10 years for equipment.
Reserve for Possible Credit Losses
For financial reporting purposes, management regularly reviews the loan
portfolio and determines a provision for possible credit losses based upon the
impact of economic conditions on the borrower's ability to repay, past
collection
(28)
1. Summary of Significant Accounting Policies (continued)
experience, the risk characteristics of the loan portfolio, estimated fair value
of underlying collateral for collateral dependent loans, and such other factors
which, in management's judgement, deserve current recognition. Management's
evaluation is inherently subjective as it requires estimates concerning the
underlying collateral values on impaired loans that may be susceptible to
change.
Income Taxes
The provision for income taxes is based on income and expense amounts
reported in the Consolidated Statements of Income adjusted for the effects of
the Alternative Minimum Tax. Under the liability method, the deferred tax
liability or asset is determined based on the difference between the financial
statement and tax bases of assets and liabilities (temporary differences) and is
measured at the enacted tax rates that will be in effect when these differences
reverse. Deferred tax expense is determined by the change in the liability or
asset for deferred taxes adjusted for changes in any deferred tax asset
allowance.
Statement of Cash Flow
The Corporation has defined cash and cash equivalents as those amounts
included in the balance sheet captions "Cash and due from banks" and "Federal
funds sold." The Corporation paid $18,978, $16,376, and $14,721 in interest on
deposits and other borrowed money for the years ending December 31, 1997, 1996,
and 1995, respectively.
Earnings Per Share
Earnings per share ("basic") was computed based on the weighted average
number of common shares outstanding of 6,343, 6,492, and 6,503 for 1997, 1996,
and 1995, respectively. The Corporation does not have any common stock
equivalents.
For comparative purposes, earnings per share, dividends per share and
weighted average shares outstanding for the year ended December 31, 1995, have
been restated to reflect the 5% stock dividend paid on March 29, 1996.
New Accounting Pronouncements
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (Statement No. 130), and Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (Statement No. 131), were issued. Statement No. 130
establishes standards for the reporting and disclosure of comprehensive income
and its components in the financial statements. Statement No. 131 establishes
standards for the disclosure of selected information pertaining to operating
segments of a public company in its interim and annual financial statements.
These statements are effective for financial statements for periods beginning
after December 15, 1997, and will not have a significant on the Corporation's
consolidated financial statements.
2. Regulatory Capital Requirements
The Corporation and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Corporation and the Bank must meet specific capital guidelines that involve
measures of its assets, liabilites, and certain off-balance sheet items as
calculated under regulatory accounting practices. The capital amounts and
classification are also subject to qualitive judgments by the regulators about
components, risk-weightings, and other factors.
Quantitative measures established by regulation to ensure capital adquacy
require the Corporation and the Bank to maintain minimum amounts and ratios of
total and Tier I capital to risk-weighted assets, and Tier I capital to average
assets (leverage ). Management believes, as of December 31, 1997, that the
Corporation and the Bank meet all capital adquacy requirements to which it is
subject.
As of December 31, 1997 , the Corporation and the Bank were well capitalized
under the regulatory framework for prompt corrective action. To be catagorized
as well capitalized, minimum total risk-based, Tier I risk based, and Tier I
leverage ratios must be maintained. Management is not aware of any condition or
event which has caused the well capitalized position to change.
(29)
2. Regulatory Capital Requirements (continued)
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
December 31, 1997
Total Capital (to Risk Weighted Assets)
Consolidated ............. $59,368 14.82% $32,048 8.00% $40,059 10.00%
First United National Bank 47,622 11.96% 31,858 8.00% 39,823 10.00%
Tier I Capital (to Risk Weighted Assets)
Consolidated ............. 56,714 14.16% 16,024 4.00% 24,036 6.00%
First United National Bank 44,968 11.29% 15,929 4.00% 23,894 6.00%
Tier I Capital (to Average Assets)
Consolidated .............. 56,714 10.33% 16,468 3.00% 27,446 5.00%
First United National Bank 44,968 8.34% 16,176 3.00% 26,960 5.00%
December 31, 1996
Total Capital (to Risk Weighted Assets)
Consolidated ............. $59,001 17.92% $26,339 8.00% $32,924 10.00%
First United National Bank 46,035 14.10% 26,124 8.00% 32,655 10.00%
Tier I Capital (to Risk Weighted Assets)
Consolidated ............. 56,815 17.26% 13,170 4.00% 19,754 6.00%
First United National Bank 43,849 13.43% 13,062 4.00% 19,593 6.00%
Tier I Capital ( Average Assets )
Consolidated.............. 56,815 11.31% 20,090 3.00% 25,113 5.00%
First United National Bank 43,849 9.37% 19,660 3.00% 24,574 5.00%
3. Investment Securities
The following is a comparison of book and market values of available-for-
sale securities and held-to-maturity securities:
Available-for-Sale Securities
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1997 (In thousands)
U. S. Treasury securities and obligations
of U. S. government agencies...... $41,434 $267 $ 8 $41,693
Obligations of states and political
subdivisions ........................ 6,249 111 0 6,360
Mortgage-backed securities .......... 16,917 108 25 17,000
Total debt securities ............... $64,600 $486 $ 33 $65,053
Held-to-Maturity Securities
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1997 (In thousands)
Obilgations of states and political
subdivisions..........................$9,203 $178 $0 $9,381
U.S. Corporate Securities............. 15,896 83 3 15,976
Total debt securities................. 25,099 261 3 25,357
Equity securities..................... 4,443 0 0 4,443
Totals............................... $29,542 $261 $3 $29,800
(30)
3. Investment Securities (continued)
Available-for-Sale Securities
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1996 (In thousands)
U. S. Treasury securities and obligation
s of U. S. government agencies..$56,480 $341 $ 63 $56,758
Obligations of states and
political subdivisions ......... 6,892 89 25 6,956
Mortgage-backed securities ..... 19,990 104 97 19,997
Total debt securities ..........$83,362 $534 $185 $83,711
Held-to-Maturity Securities
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1996 (In thousands)
U. S. Treasury securities and obligations
of U. S. government agencie.. $ 1,518 $ 0 $ 18 $ 1,500
Obligations of states and
political subdivisions ...... 8,362 336 6 8,692
U. S. Corporate securities .... 13,559 72 17 13,614
Total debt securities.......... 23,439 408 41 23,806
Equity Securities.............. 2,918 0 0 2,918
Totals ........................ $26,357 $408 $ 41 $ 26,724
During the years ended December 31, 1997, 1996, and 1995, available-for-sale
securities with a fair value at the date of sale of $4.83, $4.74, and $8.70
million were sold. The gross realized gains on such sales totaled $.091, $.024,
and $.002 million. The gross realized losses on the sales were $.003, $0, and
$.022 million.
The amortized cost and estimated fair value of debt and marketable
securities at December 31, 1997, by contractual maturity, are shown below.
Actual maturities will differ from contractual maturities because of issuers of
(31)
3. Investment Securities ( continued )
the securities may have the right to prepay obligations without prepayment
penalties. Equity securities consist of Federal Reserve Bank and Federal Home
Loan Bank Stock. These securities have no maturity and therefore are classified
in the "Due after 10 years" maturity line.
Available-for-Sale Securities
Amortized Market
Cost Value
Due in one year or less .......................... $31,654 $31,634
Due after one year through five years ............. 26,472 26,826
Due after five years through ten years ............. 5,176 5,266
Due after ten years ................................ 1,298 1,327
$64,600 $65,053
Held-to-Maturity Securities
Amortized Market
Cost Value
Due in one year or less .......................... $ 7,905 $ 7,911
Due after one year through five years ............ 13,414 13,525
Due after five years through ten years ........... 1,509 1,550
Due after ten years .............................. 6,714 6,814
$29,542 $29,800
At December 31, 1997, investment securities with a book value of $34.90
million were pledged to secure public and trust deposits as required or
permitted by law.
4. Reserve for Possible Credit Losses
Activity in the reserve for possible credit losses is summarized as follows:
1997 1996 1995
Balance at January 1 .......................... $2,186 $2,120 $2,350
Provision charged to operating expense ........ 935 749 0
3,121 2,869 2,350
Gross credit losses ........................... (638) (847) (410)
Recoveries .................................... 171 164 180
Net credit losses ............................. (467) (683) (230)
Balance at December 31 ........................ $2,654 $2,186 $2,120
Non-accruing loans were $562, $976, and $1,075 at December 31, 1997, 1996,
and 1995, respectively. Interest income not recognized as a result of
non-accruing loans was $20, $37, and $68 during the years ended December 31,
1997, 1996, and 1995, respectively.
5. Loans and Concentrations of Credit Risk
The Corporation through its banking subsidiary is active in originating
loans to customers primarily in Garrett, Allegany, Washington and Frederick
counties in Maryland; and Mineral, Hardy, Berkeley and Hampshire Counties in
West Virginia, and the surrounding regions of West Virginia and Pennsylvania.
The following table presents the Corporation's composition of credit risk by
significant concentration.
(32)
5. Loans and Concentrations of Credit Risk ( continued )
December 31, 1997
Loan
Loans Commitments Total
Commercial, financial and agricultural .. $ 65,988 $25,087 $91,075
Real estate-construction ................. 11,716 3,889 15,605
Real estate-mortgage...................... 287,153 16,416 303,569
Installment .............................. 75,124 3,403 78,527
Letters of credit......................... 1,411 773 2,184
$441,392 $49,568 $490,960
December 31, 1996
Loan
Loans Commitments Total
Commercial, financial and agricultural . $ 54,115 $15,497 $ 69,612
Real estate-construction ............... 21,097 9,750 30,847
Real estate-mortgage.................... 249,389 16,202 265,591
Installment ............................ 55,969 4,703 60,672
Letters of credit....................... 2,210 713 2,923
$382,780 $46,865 $429,645
Loan commitments are made to accommodate the financial needs of the
Corporation's customers. Letters of credit commit the Corporation to make
payments on behalf of customers when certain specified future events occur.
Letters of credit are issued to customers to support contractual obligations and
to insure job performance. Historically, more than 99 percent of letters of
credit expire unfunded. Loan commitments and letters of credit have credit risk
essentially the same as that involved in extending loans to customers and are
subject to normal credit policies. Collateral is obtained based on management's
credit assessment of the customer.
Commercial, financial and agricultural loans are collateralized by real
estate and equipment, and the loan-to-value ratios generally do not exceed 75
percent. Real estate mortgage loans are collateralized by the related property,
and the loan-to-value ratios generally do not exceed 85 percent.
Any consumer real estate mortgage loan exceeding a loan-to-value ratio of 85
percent will require private mortgage insurance. Installment loans are typically
collateralized with loan-to-value ratios which are established based on
historical experience and the financial condition of the borrower and generally
range from 80 percent to 90 percent of the amount of the loan. The Corporation
will also make unsecured consumer loans to qualified borrowers meeting the
underwriting standards of the Corporation.
6. Bank Premises and Equipment
The composition of Bank premises and equipment is as follows:
1997 1996
Bank premises ................................... $ 8,773 $ 8,653
Equipment ....................................... 12,235 11,289
21,008 19,942
Less accumulated depreciation ................... (11,758) (10,611)
Total ........................................... $ 9,250 $ 9,331
The Corporation recorded depreciation expense of $1,460, $1,299 and $1,145
in 1997, 1996, and 1995, respectively.
7. Fair Value of Financial Instruments
As required by the Statement of Financial Accounting Standards ("SFAS") No.
107, "Disclosures about Fair Value of Financial Instruments," the Corporation
has presented fair value information about financial instruments, whether or
(33)
7. Fair value of Financial Instuments (continued)
not recognized in the statement of financial condition, for which it is
practicable to estimate that value. 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 flow or other valuation techniques. As a result,
the Corporation's ability to actually realize these derived values cannot be
assumed.
The fair values disclosed under SFAS No. 107 may vary significantly between
institutions based on the estimates and assumptions used in the various
valuation methodologies. SFAS No. 107 excludes disclosure of non financial
assets such as buildings as well as certain financial instruments such as
leases. Accordingly, the aggregate fair values presented do not represent the
underlying value of the Corporation.
The actual carrying amounts and estimated fair values of the Corporation's
financial instruments that are included in the statement of financial condition
at December 31 are as follows:
1997 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and due from banks ........... $ 17,586 $ 17,586 $ 15,307 $ 15,307
Investment securities ............. 94,595 94,853 110,068 110,435
Loans ............................. 441,392 441,613 382,780 382,458
Deposits .......................... 500,060 498,393 452,539 451,112
Federal funds purchased and other
borrowed funds .................. 6,225 6,225 8,000 8,000
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments:
Cash and Cash Equivalents: The carrying amounts as reported in the statement
of financial condition for cash and short-term instruments approximate those
assets' fair values.
Investment Securities: Fair values for investment securities are based on
quoted market values.
Loans Receivable: For variable rate loans that reprice frequently or "in one
year or less," and with no significant change in credit risk, fair values are
based on carrying values. Fair values for fixed rate loans and loans that do not
reprice frequently are estimated using a discounted cash flow calculation that
applies current interest rates being offered on the various loan products.
Federal Funds Purchased and Other Borrowed Funds: Federal funds purchased
and other borrowed funds include federal funds purchased, Federal Home Loan Bank
borrowings and other short-term borrowings. The fair value of short-term
borrowings approximates the carrying value of these instruments based upon their
short-term nature.
Deposit Liabilities: The fair values disclosed for demand deposits (e.g.,
interest and non-interest checking, savings, and certain types of money market
accounts) are, by definition, equal to the amount payable on demand at the
reporting date (i.e., their carrying amounts). The carrying amounts for variable
rate certificates of deposit approximate their fair values at the reporting
date. Fair values for fixed rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on the various certificates of deposit to the cash flow stream.
Off-Balance-Sheet Financial Instruments: In the normal course of business,
the Corporation makes commitments to extend credit and issues standby letters
of credit. As a result of excessive costs, the Corporation considers estimation
of fair values for commitments and standby letters of credit to otherwise be
impracticable. The Corporation's estimate of impairment due to collectibility
concerns related to these off-balance-sheet financial instruments is included in
the reserve for possible credit losses. The Corporation does not have any
derivative financial instruments at December 31, 1997.
(34)
8. Federal Home Loan Bank (FHLB) Advances and Other Borrowings (continued)
Borrowings consist of the following:
December 31, 1997
FHLB advances payable to FHLB Atlanta,
secured by all FHLB advances
and certain first mortgage loans:
Due January 5, 1998 @ 5.81% ................................... $1,075
Due September 24, 2002 @ 5.66% ................................. 5,000
Correspondent Bank borrowings
Due January 2, 1998 @ 6.00% ..................................... 150
Total ...................................................... $6,225
December 31, 1996
FHLB advances payable to FHLB Atlanta,
secured by all FHLB advances and certain first mortgage loans:
Due January 3, 1997 @ 5.70% ................................... $3,500
Due January 6, 1997 @ 5.65% .................................... 2,200
Due January 7, 1997 @ 5.63% .................................... 2,300
Total ...................................................... $8,000
The Corporation, through its banking subsidiary, First United National Bank
& Trust, has a credit agreement with FHLB of Atlanta in an amount up to $75
million. The line of credit is secured with the first lien on the 1-4 family
mortgage portfolio totaling $213.90 million on December 31, 1997.
The Corporation's banking subsidiary First United National Bank & Trust has
established various unsecured lines of credit totaling $8 million at various
upstream correspondent banks. The Bank has also established a $8 million reverse
repurchase lines of credit with correspondent banks. As of December 31, 1997,
the Corporation had borrowings totaling $.150 million at a rate of 6.00% with
these correspondent banks. This borrowing was due January 2, 1998. The
Corporation utilizes the lines to meet daily liquidity requirements and does not
rely on lines as a source of long term liquidity.
9. Income Tax
A reconciliation of the statutory income tax at the applicable rates to the
income tax expense included in the statement of income is as follows:
Liability
Method
1997 1996 1995
Income before income taxes ..................... $9,942 $9,623 $8,453
Statutory income tax rate ...................... 34% 34% 34%
Income tax ..................................... 3,380 3,272 2,874
State franchise tax, net of federal tax benefit 257 274 233
Effect of nontaxable interest and loan income .. (390) (360) (249)
Effect of TEFRA interest limitation ............ 37 31 27
Other .......................................... 13 (73) (36)
Income tax expense for the year ................ $3,297 $3,144 $2,849
Taxes currently payable ........................ 3,568 3,309 2,862
Deferred taxes (benefit) ....................... (271) (165) (13)
Income tax expense for the year ................ $3,297 $3,144 $2,849
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Corporation's deferred tax assets and liabilities as of December 31 are as
follows:
(35)
9. Income tax ( continued )
1997 1996
Deferred tax assets:
Reserve for possible credit losses ................... $685 $407
Deferred loan origination fees ....................... 194 228
Pension expense ...................................... 91 120
Merger costs ......................................... 132 122
Unrealized loss on real property ..................... 122 120
Accrued expenses ..................................... - 89
Other ................................................ 12 32
Total deferred tax assets ........................ 1,236 1,118
Valuation allowance ................................... (132) (122)
Total deferred tax assets less valuation allowance ... 1,104 996
Deferred tax liabilities:
Market discount ...................................... (72) (19)
Excess depreciation .................................. (378) (546)
Employee compensation................................. (38) (37)
Unrealized gain on investment securities ............. (174) (134)
Prepaid expenses ..................................... (53) (100)
Other ................................................ (6) (8)
Total deferred tax liability .......................... (721) (844)
Net deferred tax asset ................................ $383 $152
The Corporation made income tax payments of $2,920, $3,529, and $2,675 for
the years ending December 31, 1997, 1996 and 1995, respectively.
10. Employee Benefit Plans
The Bank sponsors a noncontributory pension plan covering substantially all
full-time employees who qualify as to age and length of service.
Pension expense charged to operations was $110, $240, and $711 in 1997,
1996, and 1995,respectively. The benefits are based on years of service and the
employees compensation during the last five years of employment. The
Corporation's funding policy is to make annual contributions in amounts
sufficient to meet the current year's funding requirements.
The following table sets forth the plan's consolidated funded status and
amounts recognized in the Corporation's financial statements for the years ended
December 31:
1997 1996
Actuarial present value of accumulated benefit obligations:
Accumulated benefit obligation, including
vested benefits of $5,506 in 1997 and $5,534 in 1996 ..... ($5,607) ($5,655)
Projected benefit obligation for service rendered to date . (7,143) (7,480)
Plan assets at fair value, primarily listed stocks
and fixed income securities .............................. 8,502 7,477
Projected benefit obligation in excess of plan assets ..... 1,359 (3)
Unrecognized net loss ..................................... (539) 644
Unrecognized prior service cost arising from amendment
effective January 1, 1991 ................................ (30) (32)
Unrecognized net asset arising at transition at January 1 . (683) (723)
Accrued pension cost ...................................... $107 $ (114)
(36)
10. Employee Benefit Plans (continued)
1997 1996 1995
Net pension cost included the following components:
Service costs-benefits earned during the year .. $259 $301 $270
Interest cost on projected benefit obligation .. 494 523 475
Actual return on plan assets .................. (1,097) (545) (1,087)
Net amortization and deferral .................... 453 (39) 640
Charge associated with early retirement window.... 0 0 413
Net pension expense included in employee benefits $110 $240 $711
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.5% for 1997, 1996, and 1995. The
expected long-term rate of return on plan assets was 8.0% in 1997, 1996 and
1995. Salaries were assumed to increase at 4% in 1997, 1996 and 1995.
401(k) Profit Sharing Plan
The First United National Bank & Trust 401(k) Profit Sharing Plan ("the
401(k) Plan") is a defined contribution plan that is intended to qualify under
section 401(k) of the Internal Revenue Code. The 401(k) Plan covers
substantially all employees of the Corporation. Eligible employees can elect to
contribute, through payroll deductions, up to 10% of their base salary, with
contributions up to 6% of base salary matched on a 50% basis by the Corporation.
Expense charged to operations for the 401(k) Plan was $120, $105, and $92 in
1997, 1996, and 1995, respectively.
11. Federal Reserve Requirements
The banking subsidiaries are required to maintain reserves with the Federal
Reserve Bank. During 1997, the daily average amount of these required reserves
was approximately $7,122.
12. Restrictions on Subsidiary Dividends, Loans or Advances
Banking law limits the amount of dividends which a bank can pay without
obtaining prior approval from bank regulators. Under this law the banking
subsidiaries could, without regulatory approval, declare additional dividends in
1997 of approximately $848 plus an additional amount equal to the net profits
for 1998 up to the date of any such dividend declaration.
Under Federal Reserve regulations, the banking subsidiaries are also limited
to the amount they may loan to their affiliates, including the Corporation,
unless such loans are collateralized by specified obligations. Although no
trans-fers were made, $5,937 in funds were available for transfer from the bank
to the Corporation in the form of loans as of December 31, 1997.
13. Parent Company Financial Information (Parent Company Only)
Condensed Statements of Financial Condition
December 31,
1997 1996
Assets
Cash .............................................. $ 544 $ 2,127
Investment securities ............................. 6,572 6,966
Investment in bank subsidiary ..................... 44,774 43,693
Dividend receivable and other assets............... 106 112
Investment in non-bank subsidiary ................. 5,478 5,564
Total Assets .................................. $57,474 $58,462
Liabilities and Shareholder's Equity
Reserve for taxes, interest and other liabilities.. $ 30 $ 918
Dividends payable ................................. 937 902
Shareholders' equity .............................. 56,507 56,642
Total Liabilities and Shareholder's Equity ..........$57,474 $58,462
(37)
13. Parent Company Financial Information ( Parent Compamny Only ) ( continued )
Year ended December 31
Condensed Statement of Income 1997 1996 1995
Income:
Dividend income from subsidiaries ..........$ 5,335 $ 6,170 $ 5,000
Other income ............................... 334 329 200
Total income ............................... 5,669 6,499 5,200
Expense:
Other expenses ............................. 10 13 23
Total expense ............................... 10 13 23
Income before income taxes and equity in
undistributed net income of subsidiaries ... 5,659 6,486 5,177
Equity in undistributed net income of subsidiaries:
Bank.......................................... 681 (326) 95
Non-bank ..................................... 313 324 332
Less income tax .............................. (8) (5) 0
Net income ...................................$6,645 $6,479 $5,604
Condensed Statement of Cash Flows
Year ended December 31
1997 1996 1995
Operating activities
Net income ................................. $ 6,645 $6,479 $5,604
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in dividends payable ............ 35 902 0
Undistributed equity in subsidiaries:
Bank.................................... (681) 326 (95)
Non-bank ............................... (313) (324) (332)
Increase in other assets ................. 6 (47) 17
(Decrease) increase in other liabilities . (888) 872 36
Net cash provided by operating activities .. 4,804 8,208 5,230
Investing activities
Purchase of investment securities .......... (205) (2,962) (1,006)
Proceeds from investment maturities ........ 628 0 0
Net cash used in investing activities ...... 423 (2,962) (1,006)
Financing activities
Cash dividends.............................. (3,609) (4,243) (2,974)
Proceeds from issuance of common stock ..... 0 28 43
Acquisition and retirement of common stock . (3,201) (972) 0
Net cash used by financing activities ...... (6,810) (5,187) (2,931)
Increase in cash and cash equivalents ...... (1,583) 59 1,293
Cash and cash equivalents at beginning of year 2,127 2,068 775
Cash and cash equivalents at end of year ... $ 544 $2,127 $2,068
14. Commitments and Contingent Liabilities
The Corporation and its subsidiaries are at times, and in the ordinary
course of business, subject to legal actions. Management, upon the advice of
counsel, is of the opinion that losses, if any, resulting from the settlement of
current legal actions will not have a material adverse effect on the financial
condition of the Corporation.
Oakfirst Life Insurance Corporation, a wholly owned subsidiary of the
Corporation, had $9.968 million of life, accident and health insurance in force
at December 31, 1997. In accordance with state insurance laws, this subsidiary
is capitalized at $5,491.
(38)
None.15. Related Party Transactions
In the ordinary course of business, executive officers and directors of the
Corporation, including their families and companies in which certain directors
are principal owners, were loan customers of the Corporation and its
subsidiaries. Pursuant to the Corporation's policy, such loans were made on the
same terms, including collateral, as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than the normal risk
of collectibility. Changes in the dollar amount of loans outstanding to
officers, directors and their associates were as follows for the years ended
December 31:
1997 1996 1995
Balance, January 1 ............................ $7,981 $6,626 $7,477
Loans or advances ............................. 5,239 2,775 144
Repayments .................................... (5,174) (1,420) (995)
Balance, December 31 .......................... $8,046 $7,981 $6,626
16. Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the
years ended December 31, 1997 and 1996.
Three months ended
March 31 June 30 September 30 December 31
1997
Interest income ............... $10,381 $10,603 $11,025 $11,339
Interest expense .............. 4,397 4,548 4,887 5,146
Net interest income ........... $ 5,984 $ 6,055 $ 6,138 $ 6,193
Provision for possible
credit losses ............... 124 123 376 312
Other income .................. 1,200 1,757 1,577 1,503
Other expenses ................ 5,003 5,202 4,852 4,473
Income before income taxes .... $ 2,057 $ 2,487 $2,487 $2,911
Applicable income taxes ....... 681 790 838 988
Net income .................... $ 1,376 $ 1,697 $ 1,649 $ 1,923
Earnings per share ............ $0.21 $0.27 $0.26 $0.31
Three months ended
1996 March 31 June 30 September 30 December 31
Interest income ............... $9,585 $9,652 $9,890 $10,146
Interest expense .............. 3,972 3,928 4,131 4,345
Net interest income ........... $5,613 $5,724 $5,759 $ 5,801
Provision for possible
credit losses .............. 99 99 158 393
Other income .................. 1,080 1,199 1,312 1,278
Other expenses ................ 4,176 4,385 4,268 4,565
Income before income taxes .... $2,418 $2,439 $2,645 $ 2,121
Applicable income taxes ....... 819 821 839 665
Net income .................... $1,599 $1,618 $1,806 $ 1,456
Earnings per share ............ $0.25 $0.25 $0.28 $0.22
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
(39)
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to Directors of the Registrant is incorporated
by reference from the Registrant's definitive Proxy Statement for the annual
shareholders meeting to be held April 28, 1998, from pages 2 through 6.
Executive Officers of the Registrant are:
NAME POSITION AGE
William B. Grant Chairman of the Board and 44
Chief Executive Officer
Robert W. Kurtz President, 51
Chief Financial Officer and
Secretary/Treasurer
Benjamin W. Ridder Executive Vice President and 56
Director of Retail Banking
Jeannette R. Fitzwater Senior Vice President and 37
Director of Human Resources
Philip D. Frantz Senior Vice President and 37
Director of Operations & Support
Steven M. Lantz Senior Vice President and 41
Director of Lending
Eugene D. Helbig, Jr. Senior Vice President 45
Senior Trust Officer
Frederick A. Thayer IV Senior Vice President 39
Director of Sales and CRA Officer
As defined by the rules and regulations of the Securities and Exchange
Commission, family relationships exist among Directors, Nominees and Executive
Officers. Director Frederick A. Thayer III is the father of Senior Vice
President Frederick A. Thayer IV. Director I. Robert Rudy is the brother of
Senior Vice President Jeanette Rudy Fitzwater. No other family relationships
exist.
All officers are elected annually by the Board of Directors and hold office at
the pleasure of the Board.
Mr. Grant has been Chairman of the Board and Chief Executive Officer since 1996.
Previously, he had been Secretary of First United Corporation since 1990 and
Executive Vice-President of First United National Bank & Trust since 1987.
Mr. Kurtz has been President of First United Corporation since 1996 and Chief
Financial Officer, Secretary, and Treasurer since 1997. Previously, he had been
Chief Operating Officer of First United Corporation since 1996, Treasurer of
First United Corporation since 1990 and Executive Vice-President of First United
National Bank & Trust since 1987.
Mr. Ridder has been Executive Vice President and Director of Retail Banking of
First United Corporation since 1997. Previously, he had been Senior Vice
President of the Corporation since 1987.
Mrs. Fitzwater was appointed Senior Vice President and Director of Human
Resources in 1997. She had been First Vice President, Director of Marketing and
Regional Sales Manager of First United National Bank & Trust since 1994.
Mr. Frantz was appointed Senior Vice President in 1993 and previously had been
the Controller of the organization since 1988. He was appointed Director of
Operations & Support of the Corporation in 1997.
Mr. Lantz was appointed Senior Vice President and Director of Lending of the
Corporation in 1997. He had been First Vice President and Commercial Services
Manager of First United National Bank & Trust since 1993.
(40)
Item 10. Directors and Executive Officers of the Registrant ( continued )
Mr. Helbig was appointed Senior Vice President in 1997 and Senior Trust Officer
in 1993. He had been a First Vice President since 1993.
Mr. Thayer was appointed Senior Vice President and Director of Sales in 1997.
Previously, he had been First Vice President, Regional Executive Officer and
Regional Sales Manager of First United National Bank & Trust since 1995.
Item 11. EXECUTIVE COMPENSATION
Information required by Item 11 is incorporated by reference from pages 4
and 5 of the definitive Proxy Statement of the Corporation for the annual
meeting of shareholders to be held on April 28, 1998.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by Item 12 is incorporated by reference from pages 2
and 3 of the definitive Proxy Statement of the Corporation for the annual
meeting of shareholders to be held on April 28, 1998.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from page 6
of the definitive Proxy Statement of the Corporation for the annual meeting of
shareholders to be held on April 28, 1998, and from Note 15 on page 39 of this
Form 10-K. There are no other relationships required to be disclosed in this
item pursuant to the instructions for this report.
PART IV.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) and (2) Financial Statements and Financial Statement Schedules.
The consolidated financial statements of the Corporation are listed on pages
24-27 of the Annual Report on Form 10-K. All schedules applicable to the
Corporation are shown in the financial statements or in the notes thereto
included in this Annual Report on Form 10-K.
All other schedules to the consolidated financial statements required by
Article 9 of Regulation S-X and all other schedules to the financial statements
of the Registrant required by Article 5 of Regulation S-X are not required under
the related instructions or are inapplicable and, therefore, have been omitted.
(3) Listing of Exhibits.
3 (ii) Bylaws of the Corporation, as amended and restated on December 17,
1997.
21.1-Subsidiaries of the Corporation, incorporated by reference on pages 3
of this Form 10-K.
(b) The Registrant filed no reports on Form 8-K during the quarter ended
December 31, 1997.
(41)
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
First United Corporation
By:
William B. Grant
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated.
(David J. Beachy) Director
(Donald M. Browning) Director
(Rex W. Burton) Director
(Richard D. Dailey, Jr.) Director
(Paul Cox, Jr.) Director
(Frederick A. Thayer, III) Director
(Robert W. Kurtz) Director
(Maynard G. Grossnickle) Director
(Raymond F. Hinkle) Director Signatures
(Dr. Andrew E. Mance) Director
(Donald E. Moran) Director
(Richard G. Stanton) Director
(I. Robert Rudy) Director
(Robert G. Stuck) Director
(James F. Scarpelli, Sr.) Director
(Karen F. Myers) Director
(Elaine L. McDonald) Director
(44)
Exhibit 3(ii)
BYLAWS
AS AMENDED AND RESTATED
on December 17, 1997
ARTICLE I
Stockholders
SECTION 1. Annual Meeting. The annual meeting of the stockholders of the
Corporation shall be held on a day duly designated by the Board of Directors in
the month of April in each year for the purpose of electing directors to succeed
those whose terms shall have expired as of the date of such annual meeting, and
for the transaction of such other corporate business as may come before the
meeting.
SECTION 2. Special Meetings. Special meetings of the stockholders may be
called at any time for any purpose or purposes by the Chairman or the President,
or by a majority of the Board of Directors, and shall be called by the Chairman,
the President, or the Secretary upon the request in writing of holders of a
majority of all the shares outstanding and entitled to vote on the business to
be transacted at such meeting. Such request shall state the purpose or purposes
of the meeting. The person to whom such request was made shall provide an
estimate of the cost of the mailing and, upon payment of such cost, the notice
of the meeting shall be mailed by the Corporation.
If the person to whom such request in writing is made shall fail to issue a
call for such meeting within ten (10) days after receipt of such request, then a
majority of the Board of Directors or the stockholders owning of record a
majority in amount of the stock of the Corporation, issued, outstanding and
entitled to vote, may do so by giving ten (10) days' prior written notice of the
time, place and object of the meeting in the manner set forth in Article 1,
Section 4 hereof. Business transacted at all special meetings of stockholders
shall be confined to the purpose or purposes stated in the notice of the
meeting,
SECTION 3. Place of Holding Meetings. All meetings of stockholders shall be
held at the principal office of the Corporation or elsewhere in the United
States as designated by the Board of Directors.
SECTION 4. Notice of Meetings. Written notice of each meeting of the
stockholders shall be mailed, postage pre-paid by the Secretary, to each
stockholder entitled to vote thereat at his post office address, as it appears
upon the books of the Corporation, at least ten (10) days but not more than
ninety (90) days before, the meeting.
Each such notice shall state the place, day, and hour at which the meeting
is to be held and, in the case of any special meeting, shall state briefly the
purpose or purposes thereof.
SECTION 5. Quorum. The presence in person or by proxy of the holders of
record of a majority of the shares of the capital stock of the Corporation
issued and outstanding and entitled to vote thereat shall constitute a quorum at
all meetings of the stockholders, except as otherwise provided by law, by the
Articles of Incorporation or by these Bylaws. If less than a quorum shall be in
attendance at the time for which the meeting shall have been called, the meeting
may be adjourned from time to time by a majority vote of the stockholders
present or represented, without any notice other than by announcement at the
meeting, until a quorum shall attend. At any adjourned meeting at which a quorum
shall attend, any business may be transacted which might have been transacted if
the meeting had been held as originally called.
SECTION 6. Conduct of Meetings. Meetings of stockholders shall be presided
over by the Chairman of the Board, or by a chairman to be elected by the Board
of Directors prior to the meeting. The Secretary of the Corporation, or if he is
not present, any Assistant Secretary shall act as Secretary of such meetings; in
the absence of the Secretary and any Assistant Secretary, the presiding officer
may appoint a person to act as Secretary of the meeting.
SECTION 7. Voting. At all meetings of stockholders, every stockholder
entitled to vote thereat shall have one (1) vote for each share of stock
standing in his name on the books of the Corporation on the date for the
determination of stockholders entitled to vote at such meeting. Such vote may be
either in person or by proxy appointed by an instrument in writing subscribed by
such stockholder or his duly authorized attorney, bearing a date not more than
dated, but need not be sealed, witnessed or acknowledged. All elections shall be
had and all questions shall be decided by a majority of the votes cast at a duly
constituted meeting, except as otherwise provided by law, in the Articles of
Incorporation or by these Bylaws.
If the chairman of the meeting shall so determine, a vote by ballot may be
taken upon any election or matter, and the vote shall be so taken upon request
of the holders of a majority of the stock entitled to vote on such election or
matter. In either of such events, the proxies and ballots shall be received and
be taken in charge and all questions touching the qualification of voters and
the validity of proxies and the acceptance or rejection of votes, shall be
decided by the judge. Such judge shall be appointed by the Board of Directors
prior to the meeting.
ARTICLE II
Board of Directors
SECTION 1. General Powers. The property and business of the Corporation
shall be managed by the Board of Directors of the Corporation.
SECTION 2. Number of Directors. The number of directors shall be three (3)
or such other number, but not less than three (3) nor more than twenty-five
(25), as may be designated from time to time by resolution of a majority of the
entire Board of Directors.
SECTION 3. Election and Term of Office. The Board of Directors shall be
divided into classes as described in the Articles of Incorporation. Each
Director shall hold office until the expiration of the term for which the
Director is elected, except as otherwise
[1]
Exhibit 3(ii) (continued)
stated in these Bylaws, and thereafter until his or her successor has been
elected and qualifies. Election of Directors need not be by written ballot,
unless required by these Bylaws.
SECTION 4. Nomination of Directors. Nomination for election of members of
the Board of Directors may be made by the Board of Directors or by any
stockholder of any outstanding class of capital stock of the Corporation
entitled to vote for the election of Directors. Notice by a stockholder of
intention to make any nominations shall be made in writing and shall be
delivered or mailed to the Chairman of the Board or the President of the
Corporation not less than 150 days nor more than 180 days prior to the date of
the meeting of stockholders called for the election of Directors which, for
purposes of this provision, shall be deemed to be on the same date as the annual
meeting of stockholders for the preceding year. Such notification shall contain
the following information to the extent known by the notifying stockholder (a)
the name and address of each proposed nominee; (b) the principal occupation of
each proposed nominee; (c) the number of shares of capital stock of the
Corporation owned by each proposed nominee; (d) the name and residence address
of the notifying stockholder; (e) the number of shares of capital stock of the
Corporation owned by the notifying stockholder; (f) the consent in writing of
the proposed nominee as to the proposed nominee's name being placed in
nomination for Director; and (g) all information relating to such proposed
nominee that would be required to be disclosed by Regulation 14A under the
Securities Exchange Act of 1934, as amended, and Rule 14a-11 progmulated
thereunder, assuming such provisions would be appicable to the solicition of
proxies for such proposed nominee. Nominations are not made in accordance
herewith shall be disregarded and, upon the Chairman's instructions the Judge
shall direguard all votes cast for each nominee.
Section 5. Filling Vacancies. In the case of any vacancy in the Board of
Directors through death, resignation, disqualification, removal or other cause,
the remaining directors, by affirmative vote of the majority thereof, may elect
a successor to hold office for the unexpired term of a director whose place
shall be vacant unitl the election of his successor or unitil he shall be
removed prior thereto by an affirmitive vote of the holders of the holders of a
majority of the stock.
Similarly and in the event of the number of directors being increased as
provided in these Bylaws, the additional directors so provided for shall be
elected by the directors already in office, and shall hold office until the next
annual meeting of stockholdersand therafter unitl his or their successors shall
be elected.
A director of the Corporation may only be removed during the director's term
of office for cause, which means criminal convictionof a felony, unsound mind,
adjudiction of bankruptcy, or conduct prejudicial to the interest of the
Corporation, by the affirmativevote of a majority of the entire Board of
Directors of the Corporation ( exclusive of the director being considered for
removal) or by the affirmative vote of a majority of the outstanding capital
stock of the Corporation entitiled to vote for the election of directors.
Stockholders shall not have the right to remove directors without such
cause. Any attempt or special meeting of stockholders to remove a director for
cause shall be permitted only after notice to the director describing the
specific charges constituting cause thereunder, and a hearing at which the
director has a full opportunity to refute the charges.
Section 6. Place of Metting. The Board of Directors may hold their meetings
and have one or more ofiices, and keep the books of the Corporation, either
within or outside the State of Maryland, at such place or places as they may
from time to time determine by resolution or by written consent of the
directors. The Board of Directors may hold their meetings by conference
telephone or other similar electronic communications equipment in accordance
with the provisions of Maryland General Corporations Law.
Section 7. Regular Meetings. Regular meetings of the Board of Directors may
be held without notice at such time and place as shall from time to time be
determined by resolution of the Board, provided that notice of every resolution
of the Board fixing or changing the time or place for the holding of regular
meetings of the Board shall be mailed to each director at least three (3) days
before the first meeting held in pursuance therof. The annual meeting of the
Board of Directors shall be held at the next regularly scheduled meeting of the
Board following the annual stockholders' meeting at which a Board of Directors
is elected.Any business may be transacted at regular meetings of the Board.
Section 8. Special Meetings. Special meetings of the Board of Directors
shall be held whenever called by direction of the Chairman or the President, and
must be called by the Chairman, the President or the Secretary upon written
request of of a majority of the Board of Directors, by mailing the same at least
two (2) days prior to the meeting , or by personal delivery, facsimile
transmission,telegraphing or telephoning the same on the day before the meeting,
to each director; but such notice may be waived by any other director. Unless
otherwise limited in the notice thereof, any and all business may be transacted
at any special meetings. At any meeting at which every director shall be
present, even though without notice, any business may be transacted and any
director may in writing waive notice of the time, place and objects of any
special meeting.
SECTION 9. Quorum. A majority of the whole number of directors shall
constitute a quorum for the transaction of business at all meetings of the Board
of Directors, but, if at any meeting less than a quorum shall be present, a
majority of those present may adjourn the meeting from time to time. The act of
a majority of the directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors except as may be otherwise
specifically provided by law or by the Corporation's Articles of Incorporation
or by these Bylaws.
SECTION 10. Compensation of Directors. Directors shall be entitled to
receive from the Corporation reimbursement of the expenses incurred in attending
any regular or special meeting of the Board. The Board of Directors, by
resolution of the Board, may provide for compensation to be paid to directors
for their services, and may set a fixed sum for attendance at each regular or
special meeting of the Board and of any committee of the Board on which
directors serve. Such reimbursement and compensation shall be payable whether or
not an adjournment be had because of the absence of a quorum. Nothing herein
contained shall be construed to preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor; provided,
however, that directors who are employees of the Corporation shall not be
entitled to any additional compensation for their services as directors.
SECTION 11. Executive Committee. The Board of Directors may appoint from
among its members, by resolution passed by a majority of the whole Board, an
Executive Committee, to consist of two or more of the directors of the
Corporation. Except to the extent specified by resolution of the Board, the
Executive Committee shall have and may exercise the powers of the Board of
Directors, and may authorize the seal of the Corporation to be affixed to all
papers which may require it.
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Exhibit 3(ii) (continued)
The Executive Committee shall be responsible for reviewing and recommending
changes to the Corporation's insurance pro-gram, overseeing compliance with the
Corporation's Bylaws and Articles of Incorporation, supervising the
Corporation's CEO, recommending to the Board a compensation policy for the CEO
and other executive officers of the Corporation and its subsidiaries,
recommending changes to the CEO's compensation package based on performance
reviews, monitoring the performance of the Corporation and its subsidiaries,
recommending changes to the Corporation's and subsidiaries' personnel policies,
serving as a director nomination committee, and shall function with the
authority of the full Board between meetings of the Board.
The Executive Committee shall consist of the Chairman of the Board, the
President, and such other directors as may be deter-mined by the Board. The
Executive Committee shall meet at such time as may be fixed by the Committee or
upon call of the Chairman of the Board. A majority of members of the Executive
Committee shall have and exercise the authority of the Board of Directors in the
interval between the meetings of the Board of Directors as permitted by
applicable law.
SECTION 12. Audit Committee. The Board of Directors shall appoint from among
its members, by resolution passed by a majority of the whole Board, an Audit
Committee, to consist of two or more of the directors of the Corporation, none
of whom shall be officers or employees of the Corporation and each of whom shall
be independent of management of the Corporation. The duties of this committee
shall be to review annually of the affairs of the Corporation and to report to
the Board of Directors on its review, including whether adequate internal audit
controls and procedures are being maintained, and make recommendations to the
Board of Directors regarding changes in the manner of doing business, all as
shall be deemed advisable. The Audit Committee shall also recommend to the Board
of Directors on the selection of the firm of independent certified public
accountants to audit the books and records of the Corporation. The Audit
Committee shall review significant audit and accounting principles, policies and
practices, meet with the Corporation's auditors to review the Corporation's
internal auditing functions, meet with the Corporation's independent auditors to
review the results of the annual examination, and review the recommendations of
the auditors.
SECTION 13. Other Committees. The Board of Directors from time to time
establish other committees of the Board to consist of two or more of the
directors of the Corporation, and, by resolution passed by a majority of the
whole Board, provide for such committees to have and to exercise such powers and
authority and to perform such duties as may be assigned to it by the Board. Such
committee or committees shall have such names as may be assigned to them by the
Board. The members of any such committees shall be appointed by the Chairman of
the Board and approved by the Board.
ARTICLE III
Officers
SECTION 1. Election and Tenure. The officers of the Corporation shall be the
Chairman of the Board, a President, one or more Vice-Presidents (if so elected
by the Board of Directors), a Secretary and a Treasurer, and such other officers
as the Board of Directorsfrom time to time may consider necessary for the proper
conduct of the business of the Corporation. The officers shall be elected
annually by the Board of Directors at its first meeting following ath annual
meeting of stockholders. The Chairman of the Board and the President shall be
directors and the other officers may, but need not be, directors. any two or
more of the above offices, exceptthose of President and Vice President, may be
held by the same person, but no officer shall execute, acknowledge or verify any
instrument in more than one capcity if such instument is required by law or by
these Bylaws to be executed, acknowledged or verified by any two or more
offices.
Except where otherwise expressly provided in a contract duly authorized by
the Board of Directors, all officers and agents of the Corporation shall be
subject to removal at any time by the affirmative vote of a majority of the
whole board of Directors, and all officers, agents, and employees, other than
officers appointed by the Board of Directors, shall hold office at the
discretion of the Board of Directors and/or of the officers appointing them.
Section 2. Powers and Duties of the Chairman of the Board. The Chairman of
the Board shall be the chief executive officer of the Corporation and shall have
general charge and control of all its business affairs and properties. He shall
preside at all meetings of the stockholders and the Board of Directors, except
as provided in Article 1 section 6. the Chairman of the Board shall have all
general powers conferred by these Bylaws or by law, including the power to sign,
execute and deliver in the name and onbehalf of the Corporation all authorized
bonds, contracts and other obligations of the Corporation. He shall the general
powersand duties of supervision and management usally vested in the chief
executive officer. The Chairman shall be ex-officio a member of all the standing
committees, except any audit or examining committee. He shall do and perform
such other duties as as may, from time to time, be assigned to
him by the Board of Directors.
Section 3. Powers and Duties of the President. The President shall supervise
the carrying out of the policies adopted or approved by the Board of Directors.
He shall have general executive powers as well as specific powers and duties as
may be conferred upon or assigned to him by the Board of Directors. In the case
of the absence or disability of the Chairman, the duties of that offices shall
be performed by the President.
Section 4. Powers and Duties of the Vice President. The Board of Directors
may elect one or more Vice Presidents.Any Vice President 9 inless otherwise
provided by resolution of the Board of Directors) may sign and execute all
authorized bonds, contracts, or other obligations in the name of the
Corporation. Each Vice President shall have such other powers and shall perform
such other duties as may be assigned to him by the Board of Directors, by the
Chairman, or by the President. In case of the absence or disability of the
President, the duties of that office shall be performed by any Vice President.
Any Vice President may, in the discretion of the Board of Directors, be
designated as " executive," "senior," or by departmental or functional
classification.
Section 5. Powers and Duties of the Secretary. the Secretary shall give , or
cause to be given, notice of all meetings of stockholders and directors and all
other notices required by law or by these Bylaws, and in case of hi absence or
refusal or neglect to do so, any such notice may be given by any person
thereunto directed by the Chairman, or by the directors or stockholders upon
whose written requistion the meeting is calledas provided in these Bylaws. The
Secretary shall record all the proceeding of the meetings of the
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[Corporation and shall affix the same to all instruments requiring it, when
authorized by the Board of Directors, the Chairman or the President, and attest
the same. In general, the Secretary shall perform all the duties generally
incident to the office of Secretary, subject to the control of the Board of
Directors, the Chairman and the President.
SECTION 6. Powers and Duties of Treasurer. The Treasurer shall have custody
of all the funds and securities of the Corporation, and he shall keep full and
accurate account of receipts and disbursements in books belonging to the
Corporation. He shall deposit all moneys and other valuables in the name and to
the credit of the Corporation in such depository or depositories as may be
designated by the Board of Directors. The Treasurer shall disburse the funds of
the Corporation as may be ordered by the Board of Directors, taking proper
vouchers for such disbursements. He shall render to the Chairman, the President
and the Board of Directors, whenever any of them so requests, an account of all
his transactions as Treasurer and of the financial condition of the Corporation.
The Treasurer shall give the Corporation a bond, if required by the Board of
Directors, in a sum, and with one or more sureties, satisfactory to the Board of
Directors, for the faithful performance of the duties of his office and for the
restoration to the Corporation in case of his death, resignation, retirement or
removal from office of all books, papers, vouchers, moneys and other properties
of whatever kind in his possession or under his control belonging to the
Corporation. The Treasurer shall perform all the duties generally incident to
the office of the Treasurer, subject to the control of the Board of Directors,
the Chairman and the President.
SECTION 7. Powers and Duties of Other Assistant Officers. Each assistant
officer shall assist in the performance of the duties of the officer to whom he
is assistant and shall perform such duties in the absence of the officer. He
shall perform such additional duties as the Board of Directors, the Chairman,
the President, or the officer to whom he is assistant may from time to time
assign him. Such officers may be given such functional titles as the Board of
Directors shall from time to time determine.
ARTICLE IV
Capital Stock
SECTION 1. Issue of Certificates of Stock. The certificates for shares of
the stock of the Corporation shall be of such form not inconsistent with the
Certificate of Incorporation, or its amendments, as shall be approved by the
Board of Directors. All certificates shall contain the manual or facsimile
signature of the Chairman or the President and the Secretary or an Assistant
Secretary, and shall contain the seal of the Corporation. All certificates for
each class of stock shall be consecutively numbered. The name of the person
owning the shares issued and the address of the holder shall be entered in the
Corporation's books. All certificates surrendered to the Corporation for
transfer shall be canceled and no new certificates representing the same number
of shares shall be issued until the former certificate or certificates for the
same number of shares shall have been so surrendered, and canceled, unless a
certificate of stock be lost or destroyed, in which event another may be issued
in its stead upon proof of such loss or destruction, provided that the
Corporation may require, in its discretion, the giving of a bond of indemnity
satisfactory to the Corporation. Both such proof and such bond shall be in a
form approved by the general counsel of the Corporation and by the Transfer
Agent of the Corporation and by the Registrar of the stock.
SECTION 2. Transfer of Shares. Shares of the capital stock of the
Corporation shall be transferred on the books of the Corporation only by the
holder thereof in person or by his attorney upon surrender and cancellation of
certificates for a like number of shares as hereinbefore provided.
SECTION 3. Registered Stockholders. The Corporation shall be entitled to
treat the holder of record of any share or shares of stock as the holder in
fact thereof and accordingly shall not be bound to recognize any equitable or
other claim to or interest in such share in the name of any other person,
whether or not it shall have express or other notice thereof, save as expressly
provided by the laws of the State of Maryland.
SECTION 4. Closing Transfer Books. The Board of Directors may fix the
period, not exceeding twenty (20) days, during which time the books of the
Corporation shall be closed against transfers of stock, or, in lieu thereof,
the directors may fix a date not less than ten (10) days nor more than ninety
(90) days preceding the date of any meeting of stockholders or any dividend
payment date or any date for the allotment of rights, as a record date for the
determination of the stockholders entitled to notice of and to vote at such
meeting or to receive such dividends or rights as the case may be; and only
stockholders of record on such date shall be entitled to notice of and to vote
at such meeting or to receive such dividends or rights as the case may be.
ARTICLE V
Bank Accounts and Loans
SECTION 1. Bank Accounts. Such officers or agents of the Corporation as from
time to time shall be designated by the Board of Directors shall have authority
to deposit any funds of the Corporation in such banks or trust companies as
shall from time to time be designated by the Board of Directors and such
officers or agents as from time to time authorized by the Board of Directors may
withdraw any or all of the funds of the Corporation so deposited in any bank or
trust or trust company, upon checks, drafts or other instruments or orders for
the payment of money, drawn against the account or in the name or behalf of this
Corporation, and made or signed by such officers or agents; and each bank or
trust company with which funds of the Corporation are so deposited is
authorized to accept, honor, cash and pay, without limit as to amount, all
checks, drafts or other instruments or orders for the payment of money, when
drawn, made or signed by officers or agents so designated by the Board of
Directors until written notice of the revocation of the authority of such
officers or agents by the Board of Directors shall have been received by such
bank or trust company. There shall from time to time be certified to the banks
or trust companies in which funds of the Corporation are deposited, the
signature of the officers
[4]
Exhibit 3(ii)
or agents of the Corporation so authorized to draw against the same. In the
event that the Board of Directors shall fail to designate the persons by whom
checks, drafts and other instruments or orders for the payment of money shall
be signed, as hereinabove provided in this Section, all of such checks, drafts
and other instruments or orders for the payment of money shall be signed by the
Chairman, the President or a Vice President and counter-signed by the Secretary
or Treasurer or an Assistant Secretary or an Assistant Treasurer of the
Corporation.
SECTION 2. Loans. Such officers or agents of the Corporation as from time to
time shall be designated by the Board of Directors shall have authority to
effect loans, advances or other forms of credit at any time or times for the
Corporation from such banks, trust companies, institutions, corporations, firms
or persons as the Board of Directors shall from time to time designate, and as
security for the repayment of such loans, advances, or other forms of credit to
assign, transfer, endorse, and deliver, either originally or in addition or
substitution, any or all stock, bonds, rights, and interests of any kind in or
to stocks or bonds, certificates of such rights or interests, deposits,
accounts, documents covering merchandise, bills and accounts receivable and
other commercial paper and evidences or debt at any time held by the
Corporation; and for such loans, advances, or other forms of credit to make,
execute and deliver one or more notes, acceptances or written obligations of
the Corporation on such terms, and with such provisions as to the security or
sale or disposition thereof as such officers or agents shall deem proper; and
also to sell to, or discount or rediscount with, such banks, trust companies,
institutions, corporations, firms or persons any and all commercial paper, bills
receivable, acceptances and other instruments and evidences of debt at any time
held by the Corporation, and to that end to endorse, transfer and deliver the
same. There shall from time to time be certified to each bank, trust company,
institution, corporation, firm or person so designated the signature of the
officers or agents so authorized; and each bank, trust company, institution,
corporation, firm or person is authorized to rely upon such certification
until written notice of the revocation by the Board of Directors of the
authority of such officers or agents shall be delivered to such bank, trust
company, institution, corporation, firm or person.
ARTICLE VI
Miscellaneous Provisions
SECTION 1. Fiscal Year. The fiscal year of the Corporation shall begin on
the first day of January of each year.
SECTION 2. Notices. Whenever, under the provisions of these Bylaws, notice
is required to be given to the Corporation or to any director, officer or
stockholder, unless otherwise provided in these Bylaws, such notice shall be
deemed duly given if in writing, and personally delivered, or sent by telefax,
or telegram, or by mail, by depositing the same in the U. S. mails, postage
postpaid, addressed to the Corporation at its principal executive office, and to
each director, officer or stockholder to whom such notice is given at his or
her address as it appears on the books of the Corporation, or in default of any
other address, to such director, officer or stockholder at the general post
office in the City of Oakland, Maryland. Such notice shall be deemed to be given
at the time the same is so personally delivered, telefaxed, telegraphed or so
mailed. Any person may waive any notice required to be given under these Bylaws.
SECTION 3. Voting Upon Stocks. Unless otherwise ordered by the Board of
Directors, the Chairman, the President and the Vice President, or either of
them, shall have full power and authority on behalf of the Corporation to attend
and to vote and to grant proxies to be used at any meetings of stockholders of
any corporation in which the Corporation may hold stock.
ARTICLE VII
Amendment of Bylaws
The Board of Directors shall have full power to amend, alter or repeal these
Bylaws, or any provision thereof, and may from time to time make additional
Bylaws, upon approval thereof by a majority of the Board.
ARTICLE VIII Indemnification
SECTION 1. As used in this Article VIII, any word or words that are defined
in Section 2-418 of the Corporations and Associations Article of the Annotated
Code of Maryland (the "Indemnification Section"), as amended from time to time,
shall have the same meaning as provided in the Indemnification Section.
SECTION 2. Indemnification of Directors and Officers. The Corporation shall
indemnify and advance expenses to a director or officer of the Corporation in
connection with a proceeding to the fullest extent permitted by and in
accordance with the Indemnification Section. Notwithstanding the foregoing, the
Corporation shall be required to indemnify a director or officer in connection
with a proceeding commenced by such director or officer against the Corporation
or its directors or officers only if the proceeding was authorized by the Board
of Directors.
SECTION 3. Indemnification of Other Agents and Employees. With respect to an
employee or agent, other than a director or officer of the Corporation, the
Corporation may, as determined by and in the discretion of the Board of
Directors of the Corporation, indemnify and advance expenses to such employees
or agents in connection with a proceeding to the extent permitted by and in
accordance with the Indemnification Section.
END OF BYLAWS
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