FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended September 30, 2003
Commission file number 0-14237
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First United Corporation
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(Exact name of registrant as specified in its charter)
Maryland 52-1380770
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(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification no.)
19 South Second Street, Oakland, Maryland 21550-0009
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(address of principal executive offices) (zip code)
(301) 334-4715
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Registrant's telephone number, including area code
Not Applicable
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Former name, address and former fiscal year, if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
-- --
Indicate by check mark whether the registrant is an accelerated filer (As
defined in Rule 12b-2 of the Exchange Act). Yes X No
-- --
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 6,087,433 shares of common
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stock, par value $.01 per share, as of October 31, 2003.
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INDEX TO REPORT
FIRST UNITED CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 2003 (unaudited) and December
31, 2002.
Consolidated Statements of Income (unaudited) - For the three and nine
months ended September 30, 2003 and 2002.
Consolidated Statements of Cash Flows (unaudited) - For the nine months
ended September 30, 2003 and 2002.
Notes to Unaudited Consolidated Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Item 2. Changes in Securities.
Item 3. Defaults upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
SIGNATURES
2
PART I. FINANCIAL INFORMATION
FIRST UNITED CORPORATION
Consolidated Balance Sheets
(In thousands, except per share amounts)
September 30, December
2003 31, 2002
(unaudited)
--------------- --------------
Assets
Cash and due from banks $23,143 $18,242
Federal funds sold 2,350 -
Interest-bearing deposits in banks 8,978 6,207
Investment securities: available for sale
Obligations of U.S. government agencies 87,813 30,695
Obligations of state and local government 29,657 31,354
Other investments 120,685 153,187
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Total investment securities 238,155 215,236
Federal Home Loan Bank stock, at cost 8,548 9,158
Loans and leases 778,587 665,826
Allowance for probable loan and lease losses (6,170) (6,068)
--------------- --------------
Net loans 772,417 659,758
Bank premises and equipment 15,877 13,163
Goodwill and other intangible assets 15,578 788
Accrued interest receivable and other assets 34,282 31,125
--------------- --------------
Total Assets $1,119,328 $953,677
=============== ==============
Liabilities and Shareholders' Equity
Liabilities
Non-interest bearing deposits $100,313 $ 72,789
Interest bearing deposits 735,167 577,071
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Total deposits 835,480 649,860
Accrued taxes, interest, and other liabilities 7,176 9,211
Federal Home Loan Bank borrowings
and other borrowed funds 192,783 214,261
Dividends payable 1,064 1,062
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Total Liabilities 1,036,503 874,394
Shareholders' Equity
Preferred stock -no par value
Authorized and unissued; 2,000 Shares
Capital Stock -par value $.01 per share:
Authorized 25,000 shares; issued and outstanding
6,087 shares at September 30, 2003, 6,081
outstanding at December 31, 2002 61 61
Surplus 20,324 20,199
Retained earnings 60,500 55,743
Accumulated other comprehensive income 1,940 3,280
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Total Shareholders' Equity 82,825 79,283
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Total Liabilities and Shareholders' Equity $1,119,328 $953,677
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3
FIRST UNITED CORPORATION
Consolidated Statement of Income
(in thousands, except per share data)
Nine Months Ended
September 30,
2003 2002
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(unaudited)
Interest income
Interest and fees on loans and leases $ 36,931 $ 36,458
Interest on investment securities:
Taxable 5,201 5,142
Exempt from federal income tax 1,085 1,037
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6,286 6,179
Interest on federal funds sold 28 54
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Total interest income 43,245 42,691
Interest expense
Interest on deposits:
Savings 161 200
Interest-bearing transaction accounts 1,487 1,352
Time, $100 or more 2,979 3,077
Other time 5,453 8,406
Interest on Federal Home Loan Bank
borrowings and other borrowed funds 7,835 6,018
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Total interest expense 17,915 19,053
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Net interest income 25,330 23,638
Provision for probable loan and lease losses 696 1,261
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Net interest income after provision for
probable loan and lease losses 24,634 22,377
Other operating income
Trust department income 1,905 1,814
Service charges on deposit accounts 2,253 1,990
Insurance premium income 997 892
Security gains (losses) 349 (6)
Other income 2,862 2,445
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Total other operating income 8,366 7,135
Other operating expenses
Salaries and employee benefits 11,818 10,364
Occupancy expense of premises 978 947
Equipment expense 1,776 1,566
Data processing expense 870 872
Deposit assessments and related fees 133 128
Amortization of goodwill 116 -
Other expense 6,212 5,617
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Total other operating expenses 21,903 19,494
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Income before income taxes 11,097 10,018
Applicable income taxes 3,144 2,778
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Net income $7,953 $7,240
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Earnings per share $1.31 $1.19
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Dividends per share $0.525 $0.51
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4
FIRST UNITED CORPORATION
Consolidated Statement of Income
(in thousands, except per share data)
Three Months Ended
September 30,
2003 2002
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(unaudited)
Interest income
Interest and fees on loans and leases $ 12,529 $ 12,191
Interest on investment securities:
Taxable 1,632 1,938
Exempt from federal income tax 358 363
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1,990 2,301
Interest on federal funds sold 15 10
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Total interest income 14,534 14,502
Interest expense
Interest on deposits:
Savings 60 70
Interest-bearing transaction accounts 567 584
Time, $100 or more 993 920
Other time 1,679 2,637
Interest on Federal Home Loan Bank
borrowings and other borrowed funds 2,620 2,204
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Total interest expense 5,919 6,415
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Net interest income 8,615 8,087
Provision for probable loan and lease losses 357 45
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Net interest income after provision for probable
loan and lease losses 8,258 8,042
Other operating income
Trust department income 635 450
Service charges on deposit accounts 807 755
Insurance premium income 394 342
Security (losses) gains 12 -
Other income 938 870
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Total other operating income 2,786 2,417
Other operating expenses
Salaries and employees benefits 3,980 3,549
Occupancy expense of premises 333 323
Equipment expense 624 513
Data processing expense 284 306
Deposit assessments and related fees 43 42
Amortization of goodwill 116 -
Other expense 2,612 2,162
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Total other operating expenses 7,992 6,895
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Income before income taxes 3,052 3,564
Applicable income taxes 872 1,021
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Net income $2,180 $2,543
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Earnings per share $0.36 $0.42
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Dividends per share $0.175 $0.17
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5
FIRST UNITED CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended
September 30,
2003 2002
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(Unaudited)
Operating activities
Net Income $ 7,953 $ 7,240
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for probable loan and lease losses 696 1,261
Provision for depreciation 1,547 1,300
Net accretion and amortization of investment (1,587) (380)
security discounts and premiums
Realized (gain)/loss on sale of investment
securities (349) 6
(Increase)/decrease in accrued interest
receivable and other assets (3,294) 1,856
Amortization expense 116 -
Decrease in accrued taxes, interest and other
liabilities (2,035) (622)
-------------------- --------------
Net cash (used in)/provided by operating
activities 3,047 10,661
Investing activities
Net increase in interest bearing deposits (2,771) (837)
Proceeds from maturities of available-for-
sale securities 257,089 50,667
Purchases of available-for-sale securities (278,889) (140,738)
Net increase in loans (64,513) (23,808)
Net increase of premises and equipment (2,921) (2,041)
Net cash provided by acquisition 66,040 -
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Net cash used in investing activities (25,965) (116,757)
Financing activities
(Decrease)/increase in Federal Home Loan
Bank borrowings and other borrowed money (21,478) 79,716
Net increase in demand deposit accounts and
savings accounts 58,679 52,898
Net increase/(decrease) in certificates of
deposits (3,961) (39,897)
Cash dividends paid or declared (3,196) (3,105)
Proceeds from issuance of common stock 125 -
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Net cash provided by financing
activities 30,169 89,612
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Cash and cash equivalents at beginning of the
year 18,242 32,702
Increase/(decrease) in cash and cash
Equivalents 7,251 (16,484)
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Cash and cash equivalents at end of period $25,493 $16,218
==================== ==============
6
FIRST UNITED CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
Nine Months Ended
September 30,
2003 2002
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(Unaudited)
Supplemental information:
Interest paid $ 1,569 $ 2,017
=============== =============
Income taxes paid 4,735 3,300
=============== =============
Acquisition of a business:
Fair value of assets acquired:
Loans 48,841 0
Premises and equipment 1,340 0
Goodwill and other identified intangibles 14,682 0
Fair value of liabilities assumed:
Demand deposit accounts and savings accounts (79,611) 0
Certificates of deposits (51,292) 0
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Net cash provided by acquisition $66,040 $0
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7
Note to Unaudited Consolidated Financial Statements
September 30, 2003
Note A -- Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly, they
do not include all the information and footnotes required for complete financial
statements. In the opinion of management, all adjustments considered necessary
for a fair presentation, consisting of normal recurring items have been
included. Operating results for the three-month and nine-month periods ended
September 30, 2003 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2003. The enclosed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and footnotes thereto included in the Annual Report of
First United Corporation (the "Company") on Form 10-K for the year ended
December 31, 2002.
Earnings per share are based on the weighted average number of shares
outstanding of 6,086,154 for the nine months ended September 30, 2003 and
6,080,589 for the nine months ended September 30, 2002. Earnings per share are
based on the weighted average number of shares outstanding of 6,087,433 for the
three months ended September 30, 2003 and 6,080,589 for the three months ended
September 30, 2002. The company does not have any common stock equivalents.
Note B - Comprehensive Income
Accumulated other comprehensive income represents the unrealized gains and
losses on the Company's available-for-sale securities, net of income taxes.
During the first nine months of 2003 and 2002, total comprehensive income, net
income plus the change in unrealized gains (losses) on available-for-sale
securities, net of income taxes, amounted to $6.61 million and $7.24 million,
respectively. During the third quarter of 2003 and 2002, total comprehensive
income amounted to $.26 million and $3.78 million, respectively.
Note C - Consolidation of Variable Interest Entities
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities" ("VIEs"), an interpretation of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements", to
improve financial reporting of special purpose and other entities. A VIE is a
partnership, limited liability company, trust or other legal entity that does
not have sufficient equity to permit it to finance its activities without
additional subordinated financial support from other parties, or whose investors
lack certain characteristics associated with owning a controlling financial
interest. Business enterprises that represent the primary beneficiary of a VIE
must consolidate the entity in its financial statements. Prior to the issuance
of FIN 46, consolidation generally occurred when an enterprise controlled
another entity through voting interests. The consolidation provisions of FIN 46
apply to VIEs entered into after January 31, 2003, and for preexisting VIEs in
the first interim reporting period after December 15, 2003.
With respect to other interests in entities subject to FIN 46, the Company
has initially determined that the provisions of FIN 46 may require
de-consolidation of the Company's subsidiary trusts, which issued mandatorily
redeemable preferred capital securities to third-party investors. At adoption of
FIN 46, the grantor trusts may be de-consolidated and the junior subordinated
debentures of the Company will be reported in the Consolidated Balance Sheets as
"Long-term debt", while the Company's equity interest in the trusts will be
reported as "Other assets". For regulatory reporting purposes, the Federal
Reserve Board has indicated that the preferred securities will continue to
qualify as Tier 1 Capital until further notice.
8
Note D - Completed Business Combination
On July 28, 2003, the Company consummated, through its bank subsidiary,
First United Bank & Trust, the acquisition of four banking offices and a
commercial banking center located in Berkeley County, West Virginia from
Huntington Bancshares Incorporated and its bank subsidiary, The Huntington
National Bank. The acquisition was accounted for under the purchase method of
accounting. As a result of the transaction, $130.93 million in deposits and
$48.97 million in loans were purchased. The premium paid on the deposits was
11%. Also, approximately $66 million in cash was received. The Company invested
$56 million of these funds in short-term security investments. As a result of
the transaction, $5.1 million of core deposit intangibles was recorded and will
be amortized over 7.31 years. Additionally, the fair value adjustments required
by purchase method accounting rules consisted of $1.05 million for deposits,
which will be amortized over an estimated 4 years, and $.51 million for loans,
which will be amortized over an estimated 3 years. The resulting goodwill
arising from the transaction totaled $9.7 million, which will be accounted for
in accordance with Financial Accounting Standards Board Statement 142, Goodwill
and Other Intangible Assets. The acquisition cost has been preliminarily
allocated to the assets acquired and liabilities assumed according to estimated
fair values and is subject to adjustment when additional information concerning
asset and liability valuations are finalized.
Pro forma combined historical results of operations for the current year up
to the most recent interim statement of financial condition date as though
Huntington had been acquired at the beginning of the periods are presented
below. These unaudited condensed pro forma combined statements of operations are
presented as if the acquisition had been effective on January 1, 2003 and 2002,
respectively.
Nine months ended Nine months ended
September 30, 2003 September 30, 2002
(in thousands, except per share data)
Net Interest Income $25,822 $24,270
Net Income $ 7,610 $ 6,825
Net Income per share $ 1.25 $ 1.12
Three months ended Three months ended
September 30, 2003 September 30, 2002
(in thousands, except per share data)
Net Interest Income $ 8,685 $ 8,298
Net Income $ 2,114 $ 2,404
Net Income per share $ .35 $ .40
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report of the Company filed on Form 10-Q may contain
forward-looking statements within the meaning of The Private Securities
Litigation Reform Act of 1995. Readers of this report should be aware of the
speculative nature of "forward-looking statements." Statements that are not
historical in nature, including those that include the words "anticipate,"
"estimate," "should," "expect," "believe," "intend," and similar expressions,
are based on current expectations, estimates and projections about, among other
things, the industry and the markets in which the Company operates, and they are
not guarantees of future performance. Whether actual results will conform to
expectations and predictions is subject to known and unknown risks and
uncertainties, including risks and uncertainties discussed in this report;
general economic, market, or business conditions; changes in interest rates,
deposit flow, the cost of funds, and demand for loan products and financial
services; changes in the Company's competitive position or competitive actions
by other companies; changes in the quality or composition of loan and investment
portfolios; the ability to manage growth; changes in laws or regulations or
policies of federal and state regulators and agencies; and other circumstances
beyond the Company's control. Consequently, all of the forward-looking
statements made in this document are qualified by these cautionary statements,
and there can be no assurance that the actual results anticipated will be
realized, or if substantially realized, will have the expected consequences on
the Company's business or operations. For a more complete discussion of these
risk factors, see "Risk Factors" in Part I, Item 1 of the Company's Annual
Report on Form 10-K for the year ended December 31, 2002. Except as required by
applicable laws, the Company does not intend to publish updates or revisions of
any forward-looking statements it makes to reflect new information, future
events or otherwise.
The following discussion should be read and reviewed in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operation set forth in the Company's Annual Report on Form 10-K for the year
ended December 31, 2002.
THE COMPANY
The Company, headquartered in Oakland, Maryland, is a one-bank financial
holding company with four non-bank subsidiaries. The Company was organized under
the laws of the State of Maryland in 1985.
The direct subsidiaries of the Company include First United Bank & Trust, a
Maryland chartered trust company (the "Bank"), Oakfirst Life Insurance Company,
an Arizona reinsurance company, OakFirst Loan Center, Inc., a West Virginia
finance company, OakFirst Loan Center, LLC, a Maryland finance company, and
First United Capital Trust, a Delaware statutory business trust (the "Trust").
The Company maintains an Internet site at www.mybankfirstunited.com on
which it makes available, free of charge, its Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments
to the foregoing on its Internet site as soon as reasonably practicable after
these reports are electronically filed with, or furnished to, the Securities and
Exchange Commission (the "SEC").
FINANCIAL CONDITION
The Company's total assets were $1.12 billion at September 30, 2003
compared to $953.68 million at December 31, 2002, increasing $165.76 million or
17.4%. The large percentage increase was primarily a result of the acquisition
of the Huntington branches as referenced in Note D, page 9. Total assets
increased $114.88 million or 11.4% from the $1.00 billion reported at June 30,
2003. Earning assets increased $140.11 million or 15.7% to $1.03 billion at
September 30, 2003, from $890.36 million at December 31, 2002. During the third
quarter of 2003, earning assets increased $94.25 million or 10.1%.
Growth in net loans for the first nine months of 2003 was $112.66 million
or 17.1% to a total of $772.42 million. Commercial loans, including mortgage
loans, installment loans, and lines of credit increased $71.01 million during
the first nine months of 2003. Consumer installment loans increased $23.54
10
million. Home equity loans increased $13.18 million. Residential mortgage loans
increased $3.88 million during the first nine months of 2003. The OakFirst Loan
Centers, the Company's consumer finance companies, contributed $1.05 million in
growth in the first nine months of 2003. Net loans increased during the first
nine months of 2003 by $112.7 million. Growth in net loans for the third quarter
of 2003 was $65.79 million. Net loans acquired from the Huntington branch
acquisition totaled $48.97 million.
Table 1 - Analysis of Gross Loans and Leases
The following table presents the trends in the composition of the gross loan and
lease portfolio at the dates indicated:
(In thousands) September 30, 2003 % December 31, 2002 %
- --------------------------------------------------------------------------------
Commercial $ 314,165 40.35% $ 242,470 36.42%
Residential-Construction 13,471 1.73% 11,072 1.66%
Residential-Mortgage 249,395 32.03% 233,887 35.13%
Installment 198,761 25.53% 173,578 26.07%
Lease Financing 2,795 0.36% 4,819 0.72%
---------- ------- ---------- -------
Total Loans and Leases $ 778,587 100.00% $ 665,826 100.00%
The investment portfolio that consists solely of available-for-sale
securities increased $22.92 million during the first nine months of 2003. Within
the investment portfolio, the category "Other investments" decreased $41.97
million during the first nine months of 2003. This decrease is attributable
primarily to the sale of several mortgage-backed securities that were exhibiting
accelerated payback and, thus, resulting in reduced yield for the Company. The
proceeds from these sales were reinvested in agency securities in which the
underlying collateral is consumer mortgage loans originated at lower interest
rates; therefore, being less likely to experience accelerated payback. The
Company accepted a slightly lower coupon on the securities and extended the
average life of the investments to slightly greater than four years as compared
to the average life of one year for the original investments.
Table 2 - Analysis of Investment Portfolio
The following table presents the trends in the composition of the investment
portfolio at the dates indicated:
(In thousands) September 30, 2003 % December 31, 2002 %
- --------------------------------------------------------------------------------
U.S. Treasury $ 302 0.13% $ 305 0.14%
Federal Agencies 87,511 36.75% 30,390 14.12%
State Municipal 29,657 12.45% 31,354 14.57%
Other 120,685 50.67% 153,187 71.17%
---------- ------- -------- -------
Total Investment Securities $ 238,155 100.00% $ 215,236 100.00%
Deposits totaled $835.48 million at September 30, 2003. This is an increase
of $185.62 million, or $54.69 million excluding the acquisition of the
Huntington branches, from the December 31, 2002 total of $649.86 million.
Non-interest bearing deposits increased $27.52 million in the first nine months
of 2003. Interest bearing deposits grew $158.10 million for the same time
period. This increase in interest bearing deposits includes net-brokered deposit
growth of $35.0 million. Deposit growth during the third quarter of 2003 was
$124.95 million. Excluding the acquisition of the Huntington branches, however,
total deposits declined $6.0 million during the third quarter of 2003, most of
which is attributed to the decreasing rate environment and maturities in the
certificates of deposit portfolio.
11
Table 3 - Analysis of Average Deposits
The following table presents the trends in the composition of average deposits
at the dates indicated:
(In thousands) September 30, 2003 % December 31, 2002 %
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing demand deposits $ 78,376 10.75% $ 65,284 10.55%
Interest-bearing demand deposits 239,913 32.91% 178,572 28.86%
Savings deposits 51,891 7.12% 43,655 7.05%
Time deposits $100,000 or more 142,227 19.51% 102,201 16.52%
Time deposits $100,000 or less 216,601 29.71% 229,114 37.02%
--------- ------- ---------- -------
Total Average Deposits $ 729,008 100.00% $ 618,826 100.00%
MARKET RISK MANAGEMENT
The Company's principal market risk exposure is to interest rates. The
Company intends to effectively manage the adverse effects of changing interest
rates on earnings, long-term shareholder value, and liquidity through the use of
a simulation model. The simulation model captures optionality factors such as
call features and interest rate caps and floors imbedded in investment and loan
portfolio contractual obligations. As of September 30, 2003, the simulation
analysis shows that net interest income would decline by 10.2% or $3.75 million
over a twelve-month period given an interest rate decrease of 100 basis points.
For a net interest income change of greater than 5.0% but less than 15.0%, the
Asset/Liability Committee must be informed at the next regularly scheduled
quarterly meeting. An increase in interest rates impacts the Company's net
interest income favorably. In terms of the economic value of equity which
measures the long-term risk in the balance sheet by valuing the bank's assets
and liabilities at "market", given an interest rate decrease of 100 basis
points, the fair value of the Company's capital would decrease 17.7% or $21.25
million as compared to a policy limit of 10.0%. A change in the fair value of
equity of greater than 10.0% but less than 20.0% requires that the
Asset/Liability Committee be informed at the next regularly scheduled quarterly
meeting. An increase in interest rates would increase the fair value of the
Company's capital.
LIQUIDITY AND CAPITAL MANAGEMENT
The Company derives liquidity through increased customer deposits,
maturities in the investment portfolio, loan repayments and income from earning
assets. To the extent that deposits are not adequate to fund customer loan
demand, liquidity needs can be met in the short-term funds markets through
arrangements with the Company's correspondent banks or through the purchase of
brokered certificates of deposit. The Company's bank subsidiary, First United
Bank (the "Bank"), is also a member of the Federal Home Loan Bank of Atlanta,
which provides another source of liquidity. There are no known trends or
demands, commitments, events or uncertainties of which management is aware that
will materially affect the Company's ability to maintain liquidity at
satisfactory levels.
The Company has a total risk-based capital ratio of 11.6% at September 30,
2003 as compared to 14.3% at December 31, 2002. The Tier 1 risk-based capital
ratio was 10.0% at September 30, 2003 as compared to 11.4% at December 31, 2002.
The decrease in ratios is a direct result of the increase in assets and goodwill
attributable to the acquisition of the Huntington branches. Capital adequacy was
well-above regulatory requirements. The regulatory requirements for total
risk-based capital and Tier 1 capital are 8.0% and 4.0%, respectively, to
maintain capital adequacy. Shareholder's Equity at September 30, 2003 was $82.83
million as compared to $79.28 million at December 31, 2002.
The Company paid a cash dividend of $.175 per share on August 1, 2003. On
September 17, 2003, the Company declared another dividend of an equal amount, to
be paid November 1, 2003, to shareholders of record at October 17, 2003.
12
RESULTS OF OPERATIONS
Consolidated net income for the first nine months of 2003 totaled $7.95
million or $1.31 per share compared to $7.24 million or $1.19 per share for the
same period of 2002. This is a net income increase of 9.8% and earnings per
share increase of 10.1%. Net income for the three months ended September 30,
2003 was $2.18 million or $.36 per share compared to $2.54 million or $.42 per
share for the same period of 2002.
The Company's performance ratios remain stable. Annualized Returns on
Average Equity ("ROAE") were 13.1% and 13.0% for the nine-month periods ending
September 30, 2003 and September 30, 2002, respectively. The ROAE for the year
ended December 31, 2002 was 12.8%. Annualized Returns on Average Assets ("ROAA")
were 1.0% and 1.2% for the first nine months of 2003 and 2002, respectively.
This ratio was 1.1% for the year ended December 31, 2002.
The Company uses a non-GAAP traditional efficiency ratio as a key measuring
tool for profitability and operating efficiency. A lower ratio equals higher
profitability and operating efficiencies. This ratio is used by management as
part of its evaluation of its management of non-interest expenses. This ratio is
not a substitute for an analysis of performance based on GAAP measures. The
traditional and GAAP based efficiency ratios are presented and reconciled in
Table 4.
Table 4 - GAAP based and traditional efficiency ratios
Nine Months Ended
September 30,
---------------------------
(in thousands) 2003 2002
--------- -----------
Noninterest expenses - GAAP based $ 21,903 $ 19,493
Net interest income plus noninterest income-
GAAP based 33,696 30,773
Efficiency ratio - GAAP based 65.00% 63.34%
======== =========
Noninterest expenses - GAAP based 21,903 19,493
Less non-GAAP adjustments:
Amortization of intangible assets 116 -
Noninterest expenses-traditional ratio 21,787 19,493
Net interest income plus noninterest income-
GAAP based 33,696 30,773
Plus non-GAAP adjustment:
Tax-equivalency 694 628
Less non-GAAP adjustments:
Securities gains (losses) 349 (6)
------- -------
Net interest income plus noninterest
Income - traditional ratio 34,041 31,407
Efficiency ratio - traditional 64.00% 62.07%
======= =======
13
Despite decreasing rates in the market, the Company's net interest income
for the three- and nine-month periods ended September 30, 2003 was $8.62 million
and $25.33 million, respectively, representing increases of $.53 million and
$1.69 million, respectively, over the $8.09 million and $23.64 million reported
for comparable periods in 2002. In 2003, interest expense decreased $1.10
million. Average earning assets totaled $1.04 billion and $777.49 million at
September 30, 2003 and September 30, 2002, respectively. The yield on earning
assets for those same time periods was 6.1%, and 7.4%, respectively. The average
cost of funds for the period ending September 30, 2003 was 2.5% as compared to
3.3% at September 30, 2002. The net interest margin decreased from 4.1% at
September 30, 2002 to 3.6% at September 30, 2003.
For the three and nine months ended September 30, 2003, the provision for
probable loan and lease losses was $.36 million and $.70 million, respectively.
For the same periods in 2002, the provision for probable loan and lease losses
was $.05 million and $1.26 million, respectively. Net charge-offs for the
nine-month period ended September 30, 2003 were $.90 million as compared to
$1.03 million for the same time period in 2002. In comparing the three months
ended September 30, 2003 and 2002, net charge offs were $.27 million and $.19
million, respectively. During the nine-month period ending September 30, 2003,
the provision for probable loan and lease losses declined by $.565 million from
the prior nine-month comparable period in 2002. Although the balance of loans
increased with the acquisition of the Huntington branches discussed in Note D
(with the transfer of a related reserve for these loans of $.301 million) and
internal growth in loans, the Company's loss charge-off experience relative to
outstanding loans has declined. This improvement in loss ratios has been
considered in management's assessment of the allowance for loan and lease
losses. Additionally, based upon a re-evaluation in the second quarter f 2003 of
the collateral for a large commercial loan that was in non-accrual status proved
that the Bank was in a secure collateral position relative to the loan balance
resulting in a $.250 million special allocation for that loan facility being
removed from the reserve.
The over 30-day delinquency ratio was 1.4% at September 30, 2003 as
compared to 1.0% at September 30, 2002. This same ratio was 1.1% at December 31,
2002. Non-performing loans were .42% of gross loans as of September 30, 2003,
and the Company's reserve for probable loan and lease losses was .81% of gross
loans representing 274.0% of non-performing loans. Non-performing loans were
..50% of gross loans as of December 31, 2002, and the Company's reserve for
probable loan and lease losses was .91% of gross loans representing 184.1% of
non-performing loans. An analysis of loan and lease losses can be found below in
the table entitled "Analysis of the Reserve for Probable Loan and Lease Losses".
For the three and nine months ended September 30, 2003, other operating
income was $2.79 million and $8.37 million, respectively, compared to $2.42
million and $7.14 million, respectively, for the same periods in 2002. As a part
of other operating income, trust services income was $.64 million and $1.91
million for the three- and nine-month periods ended September 30, 2003,
respectively, up from the $.45 million and $1.81 million, respectively, recorded
for comparable periods in 2002. The performance of the equity and bond markets
continues to affect trust financial performance. The Bank's Trust Department
managed accounts whose market values were $341.76 million at September 30, 2003
as compared to $300.25 million at December 31, 2002. Also, in the category other
operating income, service charges on deposit accounts resulted in $.81 million
and $2.25 million for the three and nine months ended September 30, 2003 as
compared to $.76 million and $2.0 million, respectively, for the same periods in
2002.
Other operating expense for the third quarter of 2003 totaled $7.99
million, compared to $6.89 million for the same period in 2002, representing an
increase of $1.10 million or 16.0%. For the nine months ended September 30,
2003, other operating expense totaled $21.90 million, compared to $19.49 million
for the nine months ended September 30, 2002. The largest item in this category,
salaries and employee benefits, increased $.43 million or 12.1% and $1.45
million or 14.0% during the three- and nine-month periods ended September 30,
2003, respectively, over the comparable periods in 2002. Increased incentive
payments related to employee performance contributed to these increases as did
increased pension costs. Other items that contributed to the increase in other
operating expense are the additional expenses related to the acquisition of the
four Huntington branches which increased compensation and other expenses by $.27
million for the two month period subsequent to the acquisition, along with $.116
million of amortization of intangible assets, equipment purchases resulting
increased in equipment depreciation expense of $.10 million, increase in real
estate owned expenses of $.10 due to a loss on a property located in Keyser,
14
West Virginia, increase in other expenses of $.11 million due to the loss on a
check cashed by the Bank, and $.10 due to reconciliation differences which the
Company has concluded are not recoverable. The Company anticipates recovering
$.09 million of the loss on the check write-off from the company responsible and
will record the recovery when received.
Income tax expense for the three and nine months ended September 30, 2003
was $.87 million and $3.14 million, respectively, compared to $1.02 million and
$2.78 million, respectively, for the same periods in 2002. The effective tax
rate for the first nine months of 2003 increased to 28.3% as compared to 27.7%
for the first nine months of 2002.
15
Summary of Loan and Lease Loss Experience
ANALYSIS OF THE ALLOWANCE FOR PROBABLE LOAN AND LEASE LOSSES
For the nine months ended
September 30,
2003 2002
------ ------
Balance, January 1 $6,068 $5,752
Charge-offs:
Commercial 5 197
Real estate - mortgage 26 92
Installment loans to individuals 1,218 1,232
------ ------
1,249 1,521
------ ------
Recoveries:
Commercial 5 171
Real estate - mortgage 14 7
Installment loans to individuals 335 312
------ ------
354 490
------ ------
Net charge-offs 895 1,031
------- ------
Provision for probable loan and lease losses 696 1,261
Adjustment for acquisition of Huntington 301
------- ------
Balance at end of period $6,170 $5,982
======= ======
Ratio of net charge-offs during the period to average
loans outstanding during the period, annualized .15% .22%
======= ======
Risk Elements of Loan Portfolio
The following table provides a comparison of the Risk Elements of the Loan
Portfolio in the format prescribed by Item III-C of Industry Guide 3. The Bank
has no foreign loans. The Bank has a single commercial loan defined as a
troubled debt restructuring with an outstanding balance of $.56 million. The
status of the restructured debt at September 30, 2003 is current. Management
believes that because the restructured debt is fully collateralized, there will
be no loss on the loan. Further, the Bank has no knowledge of any potential
problem loans other than those in the table below. As of September 30, 2003, the
Company's non-accrual loans decreased $.06 million from the year-end total of
$1.85 million.
16
September 30 December 31
2003 2002
--------------------------------
Non-accrual loans $1,791 $1,847
Accruing loans past due 90 days or more 780 1,458
Information with respect to non-accrual loans at September 30, 2003 and
December 31, 2002, are as follows:
Non-accrual Loans $1,791 $1,847
Interest income that would have been
recorded under original terms 33 25
Interest income recorded during the period 7 1
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is discussed under "Market Risk
Management" in Part I, Item 2 "Management's Discussion and Analysis of Financial
Condition and Results of Operation."
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's reports
filed under the Securities Exchange Act of 1934 with the SEC, such as this
Quarterly Report, is recorded, processed, summarized and reported within the
time periods specified in those rules and forms, and that such information is
accumulated and communicated to the Company's management, including the Chief
Executive Officer ("CEO") and the Chief Financial Officer ("CFO"), as
appropriate, to allow for timely decisions regarding required disclosure. A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake. Additionally, controls can be circumvented
by the individual acts of some persons, by collusion of two or more people, or
by management override of the control. The design of any system of controls also
is based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions; over time, control may
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate.
An evaluation of the effectiveness of these disclosure controls, as of
September 30, 2003, was carried out under the supervision and with the
participation of the Company's management, including the CEO and the CFO. Based
on that evaluation, the Company's management, including the CEO and the CFO, has
concluded that the Company's disclosure controls and procedures are effective.
During the third quarter of 2003, there was no change in the Company's
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation (incorporated
by reference to Exhibit 3.1 of the Company's Quarterly Report
on Form 10-Q for the period ended June 30, 1998)
3.2 Amended and Restated By-Laws (incorporated by reference to
Exhibit 3(ii) of the Company's Annual Report on Form 10-K for
the year ended December 31, 1997)
10.1 First United Bank & Trust Supplemental Executive Retirement
Plan ("SERP") (incorporated by reference to Exhibit 10.1 of
the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 2003)
10.2 Form of SERP Participation Agreement between the Bank and each
of William B. Grant, Robert W. Kurtz, Jeannette R. Fitzwater,
Phillip D. Frantz, Eugene D. Helbig, Jr., Steven M. Lantz,
Robin M. Murray, Frederick A. Thayer, IV (incorporated by
reference to Exhibit 10.2 of the Company's Quarterly Report on
Form 10-Q for the period ended June 30, 2003)
10.3 Endorsement Split Dollar Agreement between the Bank and
William B. Grant (incorporated by reference to Exhibit 10.3 of
the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 2003)
10.4 Endorsement Split Dollar Agreement between the Bank and Robert
W. Kurtz (incorporated by reference to Exhibit 10.4 of the
Company's Quarterly Report on Form 10-Q for the period ended
June 30, 2003)
10.5 Endorsement Split Dollar Agreement between the Bank and
Jeannette R. Fitzwater (incorporated by reference to Exhibit
10.5 of the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 2003)
10.6 Endorsement Split Dollar Agreement between the Bank and
Phillip D. Frantz (incorporated by reference to Exhibit 10.6
of the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 2003)
10.7 Endorsement Split Dollar Agreement between the Bank and Eugene
D. Helbig, Jr. (incorporated by reference to Exhibit 10.7 of
the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 2003)
18
10.8 Endorsement Split Dollar Agreement between the Bank and Steven
M. Lantz (incorporated by reference to Exhibit 10.8 of the
Company's Quarterly Report on Form 10-Q for the period ended
June 30, 2003)
10.9 Endorsement Split Dollar Agreement between the Bank and Robin
M. Murray (incorporated by reference to Exhibit 10.9 of the
Company's Quarterly Report on Form 10-Q for the period ended
June 30, 2003)
10.10 Endorsement Split Dollar Agreement between the Bank and
Frederick A. Thayer, IV (incorporated by reference to Exhibit
10.10 of the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 2003)
10.11 First United Corporation Executive and Director Deferred
Compensation Plan (filed herewith)
31.1 Certifications of the CEO pursuant to Section 302 of the
Sarbanes-Oxley Act (filed herewith)
31.2 Certifications of the CFO pursuant to Section 302 of the
Sarbanes-Oxley Act (filed herewith)
32.1 Certifications of the CEO and of the CFO pursuant to 18
U.S.C.ss.1350 (furnished herewith)
(b) Reports on Form 8-K
On July 15, 2003, the Company filed a Current Report on Form
8-K in which it announced that Frank Russell Company had added
the Company to the Russell 3000(R) Index.
On July 31, 2003, the Company filed a Current Report on Form
8-K in which it announced the completion of the acquisition of
four banking offices and a commercial banking center located
in Berkeley County, West Virginia from Huntington Bancshares
Incorporated.
On August 11, 2003, the Company filed a Current Report on Form
8-K in which it furnished results of operations for the second
quarter of 2003.
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST UNITED CORPORATION
Date: November 13, 2003 /s/ William B. Grant
----------------------------------------
William B. Grant, Chairman of the Board
and Chief Executive Officer
Date November 13, 2003 /s/ Robert W. Kurtz
----------------------------------------
Robert W. Kurtz, President and Chief
Financial Officer
19
EXHIBIT INDEX
3.1 Amended and Restated Articles of Incorporation (incorporated
by reference to Exhibit 3.1 of the Company's Quarterly Report
on Form 10-Q for the period ended June 30, 1998)
3.2 Amended and Restated By-Laws (incorporated by reference to
Exhibit 3(ii) of the Company's Annual Report on Form 10-K for
the year ended December 31, 1997)
10.1 First United Bank & Trust Supplemental Executive Retirement
Plan ("SERP") (incorporated by reference to Exhibit 10.1 of
the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 2003)
10.2 Form of SERP Participation Agreement between the Bank and each
of William B. Grant, Robert W. Kurtz, Jeannette R. Fitzwater,
Phillip D. Frantz, Eugene D. Helbig, Jr., Steven M. Lantz,
Robin M. Murray, Frederick A. Thayer, IV (incorporated by
reference to Exhibit 10.2 of the Company's Quarterly Report on
Form 10-Q for the period ended June 30, 2003)
10.3 Endorsement Split Dollar Agreement between the Bank and
William B. Grant (incorporated by reference to Exhibit 10.3 of
the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 2003)
10.4 Endorsement Split Dollar Agreement between the Bank and Robert
W. Kurtz (incorporated by reference to Exhibit 10.4 of the
Company's Quarterly Report on Form 10-Q for the period ended
June 30, 2003)
10.5 Endorsement Split Dollar Agreement between the Bank and
Jeannette R. Fitzwater (incorporated by reference to Exhibit
10.5 of the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 2003)
10.6 Endorsement Split Dollar Agreement between the Bank and
Phillip D. Frantz (incorporated by reference to Exhibit 10.6
of the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 2003)
10.7 Endorsement Split Dollar Agreement between the Bank and Eugene
D. Helbig, Jr. (incorporated by reference to Exhibit 10.7 of
the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 2003)
10.8 Endorsement Split Dollar Agreement between the Bank and Steven
M. Lantz (incorporated by reference to Exhibit 10.8 of the
Company's Quarterly Report on Form 10-Q for the period ended
June 30, 2003)
10.9 Endorsement Split Dollar Agreement between the Bank and Robin
M. Murray (incorporated by reference to Exhibit 10.9 of the
Company's Quarterly Report on Form 10-Q for the period ended
June 30, 2003)
10.10 Endorsement Split Dollar Agreement between the Bank and
Frederick A. Thayer, IV (incorporated by reference to Exhibit
10.10 of the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 2003)
10.11 First United Corporation Executive and Director Deferred
Compensation Plan (filed herewith)
31.1 Certifications of the CEO pursuant to Section 302 of the
Sarbanes-Oxley Act (filed herewith)
31.2 Certifications of the CFO pursuant to Section 302 of the
Sarbanes-Oxley Act (filed herewith)
32.1 Certifications of the CEO and of the CFO pursuant to 18
U.S.C.ss.1350 (furnished herewith)