Attached files
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EX-32 - FIRST UNITED CORP/MD/ | v165036_ex32.htm |
EX-31.2 - FIRST UNITED CORP/MD/ | v165036_ex31-2.htm |
EX-31.1 - FIRST UNITED CORP/MD/ | v165036_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT PURSUANT TO
SECTION
13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
quarterly period ended September 30, 2009
Commission
file number 0-14237
First United
Corporation
(Exact
name of registrant as specified in its charter)
Maryland
|
52-1380770
|
|
(State
or other jurisdiction of
|
(I.
R. S. Employer Identification No.)
|
|
incorporation
or organization)
|
19 South Second Street, Oakland,
Maryland 21550-0009
(Address
of principal executive offices)
(Zip Code)
(800)
470-4356
(Registrant's
telephone number, including area code)
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter periods that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days. Yes R No
£
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files). Yes £ No £ (Not
Applicable)
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer or a smaller reporting company. See definition of “large accelerated
filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
accelerated filer £
|
Accelerated
filer R
|
Non-accelerated
filer £ (Do not
check if a smaller reporting company)
|
Smaller
reporting company £
|
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes
£ No R
Indicate the number of shares
outstanding of each of the issuer’s classes of common stock, as of the latest
practicable date: 6,132,448 shares of common
stock, par value $.01 per share, as of October 31, 2009.
INDEX
TO QUARTERLY REPORT
FIRST UNITED
CORPORATION
PART
I. FINANCIAL INFORMATION
|
||
|
||
Item
1.
|
Financial
Statements (unaudited)
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3
|
|
||
Consolidated
Statements of Financial Condition –September 30, 2009 and December 31,
2008
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3
|
|
|
||
Consolidated
Statements of Operations - for the nine months and three months ended
September 30, 2009 and 2008
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4
|
|
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||
Consolidated
Statements of Changes in Shareholders’ Equity - for the nine months ended
September 30, 2009 and year ended December 31, 2008
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6
|
|
|
||
Consolidated
Statements of Cash Flows - for the nine months ended September 30, 2009
and 2008
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7
|
|
|
||
Notes
to Consolidated Financial Statements
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8
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|
Item
2.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
25
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Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
39
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Item
4.
|
Controls
and Procedures
|
40
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PART
II. OTHER INFORMATION
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||
Item
1.
|
Legal
Proceedings
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40
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Item
1A.
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Risk
Factors
|
40
|
Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
|
40
|
Item
3.
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Defaults
Upon Senior Securities
|
40
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Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
40
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Item
5.
|
Other
Information
|
40
|
Item
6.
|
Exhibits
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41
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SIGNATURES
|
42
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EXHIBIT
INDEX
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43
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2
PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements
FIRST
UNITED CORPORATION
Consolidated
Statements of Financial Condition
(In
thousands, except per share and percentage data)
September
30,
2009
|
December
31,
2008
|
|||||||
(Unaudited)
|
||||||||
Assets
|
||||||||
Cash
and due from banks
|
$ | 63,096 | $ | 18,423 | ||||
Interest
bearing deposits in banks
|
36,575 | 882 | ||||||
Cash
and cash equivalents
|
99,671 | 19,305 | ||||||
Investment
securities - trading (at fair value)
|
183 | - | ||||||
Investment
securities - available-for-sale (at fair value)
|
317,887 | 354,595 | ||||||
Federal
Home Loan Bank stock, at cost
|
13,861 | 13,933 | ||||||
Loans
|
1,138,366 | 1,134,546 | ||||||
Allowance
for loan losses
|
(16,929 | ) | (14,347 | ) | ||||
Net
loans
|
1,121,437 | 1,120,199 | ||||||
Premises
and equipment, net
|
32,363 | 31,124 | ||||||
Goodwill
and other intangible assets, net
|
15,455 | 16,322 | ||||||
Bank
owned life insurance
|
30,144 | 29,743 | ||||||
Deferred
tax assets
|
25,379 | 31,407 | ||||||
Accrued
interest receivable and other assets
|
25,369 | 22,476 | ||||||
Total
Assets
|
$ | 1,681,749 | $ | 1,639,104 | ||||
Liabilities
and Shareholders' Equity
|
||||||||
Liabilities:
|
||||||||
Non-interest
bearing deposits
|
$ | 107,608 | $ | 107,749 | ||||
Interest
bearing deposits
|
1,129,526 | 1,115,140 | ||||||
Total
deposits
|
1,237,134 | 1,222,889 | ||||||
Short-term
borrowings
|
46,229 | 50,495 | ||||||
Long-term
borrowings
|
276,615 | 277,403 | ||||||
Accrued
interest payable and other liabilities
|
14,784 | 14,529 | ||||||
Dividends
payable
|
1,229 | 1,098 | ||||||
Total
Liabilities
|
1,575,991 | 1,566,414 | ||||||
Shareholders'
Equity:
|
||||||||
Preferred
stock —no par value;
|
||||||||
Authorized
2,000 shares of which 30 shares of Series A,
$1,000 per share liquidation preference, 5% cumulative increasing
to 9% cumulative on February 15, 2014, were
issued
and outstanding on September 30, 2009 (discount
of $290 and $0, respectively) |
29,724 | - | ||||||
Common
Stock – par value $.01 per share;
|
||||||||
Authorized
25,000 shares; issued and outstanding 6,132 shares at
September
30, 2009 and 6,113 shares at December 31, 2008
|
61 | 61 | ||||||
Surplus
|
21,183 | 20,520 | ||||||
Retained
earnings
|
86,388 | 93,092 | ||||||
Accumulated
other comprehensive loss
|
(31,598 | ) | (40,983 | ) | ||||
Total
Shareholders' Equity
|
105,758 | 72,690 | ||||||
Total
Liabilities and Shareholders' Equity
|
$ | 1,681,749 | $ | 1,639,104 |
See
accompanying notes to the consolidated financial statements.
3
FIRST
UNITED CORPORATION
Consolidated
Statements of Operations
(In
thousands, except per share data)
Nine
Months Ended
September
30,
|
||||||||
2009
|
2008
|
|||||||
(Unaudited)
|
||||||||
Interest
income
|
||||||||
Interest
and fees on loans
|
$ | 51,571 | $ | 55,921 | ||||
Interest
on investment securities:
|
||||||||
Taxable
|
10,316 | 12,491 | ||||||
Exempt
from federal income tax
|
2,932 | 2,536 | ||||||
Total
investment income
|
13,248 | 15,027 | ||||||
Other
|
65 | 538 | ||||||
Total
interest income
|
64,884 | 71,486 | ||||||
Interest
expense
|
||||||||
Interest
on deposits
|
15,385 | 23,972 | ||||||
Interest
on short-term borrowings
|
237 | 852 | ||||||
Interest
on long-term borrowings
|
8,768 | 8,208 | ||||||
Total
interest expense
|
24,390 | 33,032 | ||||||
Net
interest income
|
40,494 | 38,454 | ||||||
Provision
for loan losses
|
10,837 | 6,570 | ||||||
Net
interest income after provision for loan losses
|
29,657 | 31,884 | ||||||
Other
operating income
|
||||||||
Service
charges
|
4,163 | 4,741 | ||||||
Trust
department
|
2,631 | 2,989 | ||||||
Total
other-than-temporary security impairment losses
|
(18,334 | ) | — | |||||
Less:
Portion of loss recognized in other comprehensive income (before
taxes)
|
7,492 | — | ||||||
Net
securities impairment losses recognized in earnings
|
(10,842 | ) | — | |||||
Securities
losses – trading
|
(226 | ) | — | |||||
Securities
gains – available-for-sale
|
131 | 476 | ||||||
Insurance
commissions Bank
owned life insurance
|
2,123 401 | 1,602 585 | ||||||
Other
income
|
2,244 | 2,295 | ||||||
Total
other operating income
|
625 | 12,688 | ||||||
Other
operating expenses
|
||||||||
Salaries
and employee benefits
|
17,398 | 16,586 | ||||||
Occupancy,
equipment and data processing
|
6,494 | 6,027 | ||||||
Other
expense
|
11,144 | 8,368 | ||||||
Total
other operating expenses
|
35,036 | 30,981 | ||||||
(Loss)/Income
before income taxes
|
(4,754 | ) | 13,591 | |||||
Applicable
income tax (benefit) expense
|
(2,696 | ) | 4,477 | |||||
Net
(Loss)/Income
|
(2,058 | ) | 9,114 | |||||
Accumulated
preferred stock dividends and discount accretion
|
(1,041 | ) | —- | |||||
Net
(Loss)/Income Available to Common Shareholders
|
$ | (3,099 | ) | $ | 9,114 | |||
Basic
net (loss)/income per common share
|
$ | (.51 | ) | $ | 1.49 | |||
Diluted
net (loss)/income per common share
|
$ | (.51 | ) | $ | 1.49 | |||
Dividends
declared per common share
|
$ | .60 | $ | .60 | ||||
Weighted
average number of common shares outstanding
|
6,116 | 6,113 | ||||||
Weighted
average number of diluted shares outstanding
|
6,116 | 6,131 |
See
accompanying notes to the consolidated financial statements.
4
FIRST
UNITED CORPORATION
Consolidated
Statements of Operations
(In
thousands, except per share data)
Three
Months Ended
September
30,
|
||||||||
2009
|
2008
|
|||||||
(Unaudited)
|
||||||||
Interest
income
|
||||||||
Interest
and fees on loans
|
$ | 17,061 | $ | 18,483 | ||||
Interest
on investment securities:
|
||||||||
Taxable
|
3,041 | 4,321 | ||||||
Exempt
from federal income tax
|
975 | 845 | ||||||
Total
investment income
|
4,016 | 5,166 | ||||||
Other
|
61 | 128 | ||||||
Total
interest income
|
21,138 | 23,777 | ||||||
Interest
expense
|
||||||||
Interest
on deposits
|
4,835 | 7,330 | ||||||
Interest
on short-term borrowings
|
82 | 230 | ||||||
Interest
on long-term borrowings
|
2,916 | 3,016 | ||||||
Total
interest expense
|
7,833 | 10,576 | ||||||
Net
interest income
|
13,305 | 13,201 | ||||||
Provision
for loan losses
|
6,917 | 4,217 | ||||||
Net
interest income after provision for loan
losses
|
6,388 | 8,984 | ||||||
Other
operating income
|
||||||||
Service
charges
|
1,460 | 1,595 | ||||||
Trust
department
|
944 | 971 | ||||||
Total
other-than-temporary security impairment losses
|
(12,538 | ) | — | |||||
Less:
Portion of loss recognized in other comprehensive income (before
taxes)
|
3,877 | — | ||||||
Net
security impairment losses recognized in earnings
|
(8,661 | ) | — | |||||
Securities
gains – trading
|
147 | — | ||||||
Securities
gains – available-for-sale
|
35 | —- | ||||||
Insurance
commissions
|
682 | 521 | ||||||
Bank
owned life insurance
|
133 | 138 | ||||||
Other
income
|
730 | 553 | ||||||
Total
other operating (loss)/income
|
(4,530 | ) | 3,778 | |||||
Other
operating expenses
|
||||||||
Salaries
and employee benefits
|
5,551 | 5,364 | ||||||
Occupancy,
equipment and data processing
|
2,236 | 2,182 | ||||||
Other
expense
|
3,713 | 2,430 | ||||||
Total
other operating expenses
|
11,500 | 9,976 | ||||||
(Loss)/Income
before income taxes
|
(9,642 | ) | 2,786 | |||||
Applicable
income tax (benefit) expense
|
(4,056 | ) | 921 | |||||
Net
(Loss)/Income
|
(5,586 | ) | 1,865 | |||||
Accumulated
preferred stock dividends and
discount accretion
|
(389 | ) | —- | |||||
Net
(Loss)/Income Available to Common Shareholders
|
$ | (5,975 | ) | $ | 1,865 | |||
Basic
net (loss)/income per common share
|
$ | (.97 | ) | $ | .30 | |||
Diluted
net (loss)/income per common share
|
$ | (.97 | ) | $ | .30 | |||
Dividends
per common share
|
$ | .20 | $ | .20 | ||||
Weighted average number of common shares outstanding | 6,132 | 6,103 | ||||||
Weighted
average number of diluted shares outstanding
|
6,132 | 6,121 |
See
accompanying notes to the consolidated financial statements.
5
FIRST
UNITED CORPORATION
Consolidated
Statements of Changes in Shareholders’ Equity
(Dollars
in thousands, except per share data)
Preferred
Stock
|
Common
Stock
|
Surplus
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
Loss
|
Total
Shareholders’
Equity
|
|||||||||||||||||||
Balance
at January 1, 2008
|
$ | - | $ | 61 | $ | 21,400 | $ | 88,859 | $ | (5,655 | ) | $ | 104,665 | |||||||||||
Comprehensive
income:
|
||||||||||||||||||||||||
Net
income
|
8,871 | 8,871 | ||||||||||||||||||||||
Unrealized
loss on securities
available-for-
sale, net of
income
taxes of $20,748
|
(30,660 | ) | (30,660 | ) | ||||||||||||||||||||
Change
in accumulated unrealized
losses
for pension and SERP
obligations,
net of income
taxes
of $2,784
|
(4,668 | ) | (4,668 | ) | ||||||||||||||||||||
Comprehensive
loss
|
(26,457 | ) | ||||||||||||||||||||||
Issuance
of 25,814 shares of
common
stock under dividend
reinvestment
plan
|
362 | 362 | ||||||||||||||||||||||
Repurchase
of common stock
|
(1,391 | ) | (1,391 | ) | ||||||||||||||||||||
Stock
based compensation
|
149 | 149 | ||||||||||||||||||||||
Cash
dividends declared - $.80 per share
|
(4,638 | ) | (4,638 | ) | ||||||||||||||||||||
Balance
at December 31, 2008
|
- | 61 | 20,520 | 93,092 | (40,983 | ) | 72,690 | |||||||||||||||||
Comprehensive
income:
|
||||||||||||||||||||||||
Net
loss
|
(2,058 | ) | (2,058 | ) | ||||||||||||||||||||
Unrealized
gain on securities
available-for-sale,
net of
reclassifications
and income taxes of
$6,466
|
9,554 | 9,554 | ||||||||||||||||||||||
Unrealized
loss on derivatives, net of income taxes
of $115
|
(169 | ) | (169 | ) | ||||||||||||||||||||
Comprehensive
income
|
7,327 | |||||||||||||||||||||||
Issuance
of 32,373 shares of
common
stock under dividend
reinvestment
plan
|
366 | 366 | ||||||||||||||||||||||
Stock
based compensation
|
(16 | ) | (16 | ) | ||||||||||||||||||||
Preferred
stock issued pursuant to
TARP
– 30,000 shares
|
29,687 | 29,687 | ||||||||||||||||||||||
Preferred
stock discount accretion
|
37 | (37 | ) | - | ||||||||||||||||||||
Warrant
issued pursuant to TARP
|
313 | 313 | ||||||||||||||||||||||
Preferred
stock dividends
|
(813 | ) | (813 | ) | ||||||||||||||||||||
Cash
dividends declared on common stock-
$.60
per share
|
(3,796 | ) | (3,796 | ) | ||||||||||||||||||||
Balance
at September 30, 2009
|
$ | 29,724 | $ | 61 | $ | 21,183 | $ | 86,388 | $ | (31,598 | ) | $ | 105,758 |
See
accompanying notes to the consolidated financial statements.
6
FIRST
UNITED CORPORATION
Consolidated
Statements of Cash Flows
(In
thousands)
Nine Months Ended
September 30,
|
||||||||
|
2009
|
2008
|
||||||
Operating
activities
|
(Unaudited)
|
|||||||
Net
(loss)/income
|
$ | (2,058 | ) | $ | 9,114 | |||
Adjustments
to reconcile net (loss) income to net
|
||||||||
cash
provided by operating activities:
|
||||||||
Provision
for loan losses
|
10,837 | 6,570 | ||||||
Depreciation
|
2,046 | 2,130 | ||||||
Stock
compensation
|
(16 | ) | 140 | |||||
Amortization
of intangible assets
|
867 | 513 | ||||||
Loss
on foreclosed real estate
|
114 | — | ||||||
Net
amortization /(accretion) of investment securities
discounts and premiums
|
161 | (433 | ) | |||||
Other-than-temporary-impairment
loss on securities
|
10,842 | — | ||||||
Loss
on investment securities- trading
|
226 | — | ||||||
Gain
on investment securities-available
for sale
|
(131 | ) | (476 | ) | ||||
Increase
in accrued interest receivable and other assets
|
(1,425 | ) | (3,647 | ) | ||||
Increase
in deferred tax assets
|
(437 | ) | (92 | ) | ||||
Increase
in accrued interest payable and other
liabilities
|
255 | 114 | ||||||
Earnings
on bank owned life insurance
|
(401 | ) | (585 | ) | ||||
Net
cash provided by operating activities
|
20,880 | 13,348 | ||||||
Investing
activities
|
||||||||
Proceeds from maturities of investment securities available-for-sale | 73,738 | 61,742 | ||||||
Proceeds
from sales/calls of investment securities
available-for-sale
|
37,878 | 15,270 | ||||||
Purchases
of investment securities available-for-sale
|
(70,170 | ) | (179,169 | ) | ||||
Purchases
of investment securities held to maturity
|
— | (8,700 | ) | |||||
Proceeds
from sales of foreclosed real estate
|
1,148 | — | ||||||
Net
increase in loans
|
(14,974 | ) | (60,582 | ) | ||||
Net
decrease (increase) in FHLB stock
|
72 | (4,599 | ) | |||||
Purchases
of premises and equipment
|
(3,285 | ) | (1,911 | ) | ||||
Net
cash provided by (used in) investing activities
|
24,407 | (177,949 | ) | |||||
Financing
activities
|
||||||||
Net (decrease) increase in short-term borrowings | (4,266 | ) | 15,742 | |||||
Payments on long-term borrowings | (788 | ) | (15,786 | ) | ||||
Proceeds
from long-term borrowings
|
— | 115,000 | ||||||
Net
increase in deposits
|
14,245 | 50,362 | ||||||
Proceeds
from issuance of preferred stock and warrant
|
30,000 | — | ||||||
Cash
dividends paid
|
(3,665 | ) | (3,670 | ) | ||||
Preferred
stock dividends paid
|
(813 | ) | — | |||||
Proceeds
from issuance of common stock
|
366 | 360 | ||||||
Stock
repurchase
|
— | (1,248 | ) | |||||
Net
cash provided by financing activities
|
35,079 | 160,760 | ||||||
Increase
(decrease) in cash and cash equivalents
|
80,366 | (3,841 | ) | |||||
Cash
and cash equivalents at beginning of the year
|
19,305 | 25,802 | ||||||
Cash
and cash equivalents at end of period
|
$ | 99,671 | $ | 21,961 | ||||
Supplemental
information
|
||||||||
Interest
paid
|
$ | 25,679 | $ | 33,947 | ||||
Taxes
paid
|
$ | 1,750 | $ | 5,120 | ||||
Non-cash
investing activities:
|
||||||||
Transfers from loans to foreclosed real estate | $ | 2,899 | $ | 313 | ||||
Transfers
from available-for-sale securities to trading
|
$ | 409 | $ | — |
See
accompanying notes to the consolidated financial statements.
7
FIRST
UNITED CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September
30, 2009
Note
A – Basis of Presentation
The accompanying unaudited consolidated
financial statements of First United Corporation (the “Corporation”) and its
consolidated subsidiaries have been prepared in accordance with U.S. generally
accepted accounting principles (“GAAP”) for interim financial information, as
required by the Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) Topic 270, Interim Reporting, and with
the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all the information and
footnotes required for annual financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation,
consisting of normal recurring items, have been included. Operating
results for the three- and nine-month periods ended September 30, 2009 are not
necessarily indicative of the results that may be expected for the full year or
for any future interim period. These consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Corporation’s Annual Report on Form
10-K for the year ended December 31, 2008. For purposes of
comparability, certain prior period amounts have been reclassified to conform to
the 2009 presentation. Such reclassifications had no impact on net
income.
The Corporation has evaluated events
and transactions occurring subsequent to the balance sheet date of September 30,
2009 for items that should potentially be recognized or disclosed in these
financial statements as prescribed by ASC Topic 855, Subsequent Events. The
evaluation was conducted through November 9, 2009, the date these financial
statements were issued.
Note
B – Earnings per Common Share
Basic earnings per common share is
derived by dividing net income available to common shareholders by the
weighted-average number of common shares outstanding during the period. There is
no dilutive effect on the earnings per share during loss
periods. The outstanding warrant did not have a dilutive effect under
the treasury stock method because the average market prices of the common stock
for the three- and nine-month periods ended September 30, 2009 of $10.88 per
share and $10.87 per share, respectively, did not exceed the exercise price of
the warrant ($13.79 per share).
The following table sets forth the
calculation of basic and diluted earnings per common share for the nine- and
three-month periods ended September 30, 2009 and 2008 (in thousands, except for
per share amounts):
For
the nine months ended
|
||||||||||||||||||||||||
September 30, 2009
|
September 30, 2008
|
|||||||||||||||||||||||
Income
|
Average
Shares
|
Per
Share
Amount
|
Income
|
Average
Shares
|
Per
Share
Amount
|
|||||||||||||||||||
Basic Earnings Per
Share:
|
||||||||||||||||||||||||
Net
(loss)/income
|
$ | (2,058 | ) | $ | 9,114 | |||||||||||||||||||
Accumulated
preferred stock dividends
|
(1,004 | ) | — | |||||||||||||||||||||
Discount
accretion on preferred stock
|
(37 | ) | — | |||||||||||||||||||||
Net
(loss)/income available to common shareholders
|
$ | (3,099 | ) | 6,116 | $ | (.51 | ) | $ | 9,114 | 6,113 | $ | 1.49 | ||||||||||||
Diluted
Earnings Per Share:
|
||||||||||||||||||||||||
Net
(loss)/income available to common shareholders
|
$ | (3,099 | ) | 6,116 | $ | (.51 | ) | $ | 9,114 | 6,113 | $ | 1.49 | ||||||||||||
Non-vested
employee stock award
|
18 | |||||||||||||||||||||||
Diluted
net (loss)/income available to common shareholders
|
$ | (3,099 | ) | 6,116 | $ | (.51 | ) | $ | 9,114 | 6,131 | $ | 1.49 |
8
For the three months ended
|
|||||||||||||||||||||||||
September 30, 2009
|
September 30, 2008
|
||||||||||||||||||||||||
Income
|
Average
Shares
|
Per
Share
Amount
|
Income
|
Average
Shares
|
Per
Share
Amount
|
||||||||||||||||||||
Basic Earnings Per
Share:
|
|||||||||||||||||||||||||
Net
(loss)/income
|
$ | (5,586 | ) | $ | 1,865 | ||||||||||||||||||||
Accumulated
preferred stock dividends
|
(375 | ) | — | ||||||||||||||||||||||
Discount
accretion on preferred stock
|
(14 | ) | — | ||||||||||||||||||||||
Net
(loss)/income available to common shareholders
|
$ | (5,975 | ) | 6,132 | $ | (.97 | ) | $ | 1,865 | 6,103 | $ | .30 | |||||||||||||
Diluted
Earnings Per Share:
|
|||||||||||||||||||||||||
Net
(loss)/income available to common shareholders
|
$ | (5,975 | ) | 6,132 | $ | (.97 | ) | $ | 1,865 | 6,103 | $ | .30 | |||||||||||||
Non-vested
employee stock award
|
18 | ||||||||||||||||||||||||
Diluted
net (loss)/income available to common shareholders
|
$ | (5,975 | ) | 6,132 | $ | (.97 | ) | $ | 1,865 | 6,121 | $ | .30 |
Note
C – Investments
The
investment portfolio is classified and accounted for based on the guidance of
ASC Topic 320, Investments –
Debt and Equity Securities.
Securities held for trading:
Securities that are held principally for resale in the near future are reported
at their fair values (See Note F) as investment securities – trading, with
changes in fair value reported in earnings. Interest and dividends on
trading securities are included in interest income from
investments.
Securities
available-for-sale: Securities classified as available-for-sale are
stated at their fair values (See Note F), with the unrealized gains and losses,
net of tax, reported as a separate component of accumulated other comprehensive
income (loss) in shareholders’ equity. The fair values of
investments are based upon information that is currently available and may not
necessarily represent amounts that will ultimately be realized, which depend on
future events and circumstances that are beyond the control of the
Corporation.
The
amortized cost of debt securities classified as available-for-sale is adjusted
for the amortization of premiums to the first call date, if applicable, or to
maturity, and for the accretion of discounts to maturity, or, in the case of
mortgage-backed securities, over the estimated life of the
security. Such amortization and accretion is included in interest
income from investments. Interest and dividends are included in
interest income from investments. Gains and losses on the sale of
securities are recorded using the specific identification method.
Management systematically evaluates
securities for impairment on a quarterly basis. Based upon
application of new accounting guidance for subsequent measurement in Topic 320
(ASC Section 320-10-35), which the Corporation early adopted effective March 31,
2009 according to the effective date provisions of ASC Paragraph 320-10-65-1,
management assesses whether (a) it has the intent to sell a security being
evaluated and (b) it is more likely than not that the Corporation will be
required to sell the security prior to its anticipated recovery. If
neither applies, then declines in the fair values of securities below their cost
that are considered other-than-temporary declines are split into two
components. The first is the loss attributable to declining credit
quality. Credit losses are recognized in earnings as realized losses
in the period in which the impairment determination is made. The
second component consists of all other losses, which are recognized in other
comprehensive loss. In estimating other-than-temporary impairment
losses, management considers (1) the length of time and the extent to which the
fair value has been less than cost, (2) adverse conditions specifically related
to the security, an industry, or a geographic area, (3) the historic and implied
volatility of the fair value of the security, (4) changes in the rating of the
security by a rating agency, (5) recoveries or additional declines in fair value
subsequent to the balance sheet date, (6) failure of the issuer of the security
to make scheduled interest or principal payments, and (7) the payment structure
of the debt security and the likelihood of the issuer being able to make
payments that increase in the future. Management also monitors cash
flow projections for securities that are considered beneficial interests under
the guidance of ASC Subtopic 325-40, Investments – Other – Beneficial
Interests in Securitized Financial Assets, (ASC Section 325-40-35).
Further discussion about the evaluation of securities for impairment can be
found in Item 2 of Part I of this report under the heading “Investment
Securities”.
9
The following table shows a comparison
of amortized cost and fair values of investment securities available-for-sale,
at September 30, 2009 and December 31, 2008 (in thousands):
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
|||||||||||||
September
30, 2009
|
||||||||||||||||
U.S.
government agencies
|
$ | 93,769 | $ | 1,067 | $ | 153 | $ | 94,683 | ||||||||
Residential
mortgage-backed agencies
|
63,822 | 3,410 | — | 67,232 | ||||||||||||
Collateralized
mortgage obligations
|
42,918 | — | 8,183 | 34,735 | ||||||||||||
Obligations
of states and political subdivisions
|
97,080 | 3,542 | 144 | 100,478 | ||||||||||||
Collateralized
debt obligations
|
59,928 | — | 39,169 | 20,759 | ||||||||||||
Totals
|
$ | 357,517 | $ | 8,019 | $ | 47,649 | $ | 317,887 | ||||||||
December
31, 2008
|
||||||||||||||||
U.S.
government agencies
|
$ | 111,938 | $ | 1,885 | $ | 178 | $ | 113,645 | ||||||||
Residential
mortgage-backed agencies
|
80,354 | 2,222 | 15 | 82,561 | ||||||||||||
Collateralized
mortgage obligations
|
51,753 | — | 11,115 | 40,638 | ||||||||||||
Obligations
of states and political subdivisions
|
95,876 | 705 | 3,096 | 93,485 | ||||||||||||
Collateralized
debt obligations
|
70,324 | — | 46,058 | 24,266 | ||||||||||||
Totals
|
$ | 410,245 | $ | 4,812 | $ | 60,462 | $ | 354,595 |
The
following table shows the Corporation’s securities available-for-sale with gross
unrealized losses and fair values, aggregated by investment category and length
of time that individual securities have been in a continuous unrealized loss
position, at September 30, 2009 and December 31, 2008 (in
thousands):
September
30, 2009
|
||||||||||||||||
Less than 12 months
|
12 months or more
|
|||||||||||||||
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
|||||||||||||
U.S.
government agencies
|
$ | 9,997 | $ | 3 | $ | 14,850 | $ | 150 | ||||||||
Residential
mortgage-backed agencies
|
— | — | — | — | ||||||||||||
Collateralized
mortgage obligations
|
— | — | 34,735 | 8,183 | ||||||||||||
Obligations
of states and political
Subdivisions
|
905 | 13 | 8,208 | 131 | ||||||||||||
Collateralized
debt obligations
|
— | — | 20,759 | 39,169 | ||||||||||||
$ | 10,902 | $ | 16 | $ | 78,552 | $ | 47,633 | |||||||||
December
31, 2008
|
||||||||||||||||
Less than 12 months
|
12 months or more
|
|||||||||||||||
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
|||||||||||||
U.S.
government agencies
|
$ | 19,822 | $ | 178 | $ | — | $ | — | ||||||||
Residential mortgage-backed agencies | 806 | 15 | — | — | ||||||||||||
Collateralized
mortgage obligations
|
37,423 | 9,927 | 3,216 | 1,188 | ||||||||||||
Obligations
of states and political Subdivisions
|
66,735 | 2,781 | 3,632 | 315 | ||||||||||||
Collateralized
debt obligations
|
2,159 | 5,393 | 21,724 | 40,665 | ||||||||||||
$ | 126,945 | $ | 18,294 | $ | 28,572 | $ | 42,168 |
10
The
amortized cost and estimated fair value of available-for-sale securities by
contractual maturity at September 30, 2009 are shown in the following
table. Actual maturities will differ from contractual maturities
because the issuers of the securities may have the right to call or prepay
obligations with or without call or prepayment penalties.
(in thousands)
|
||||||||
Contractual Maturity
|
Amortized
Cost
|
Fair
Value
|
||||||
Due in one year or less
|
$ | 2,460 | $ | 2,478 | ||||
Due
after one year through five years
|
25,817 | 26,254 | ||||||
Due
after five years through ten years
|
16,718 | 17,407 | ||||||
Due
after ten years
|
205,782 | 169,781 | ||||||
250,777 | 215,920 | |||||||
Residential
mortgage-backed agencies
|
63,822 | 67,232 | ||||||
Collateralized
mortgage obligations
|
42,918 | 34,735 | ||||||
$ | 357,517 | $ | 317,887 |
U.S. Government Agencies
– The unrealized losses on the Corporation’s investments in U.S.
government agencies of $153,000 are attributable to the lower interest rate
environment and call features associated with the securities with premiums paid
at the time of purchase. All of these securities are of the highest
investment grade. The fair value of one security has been impaired
for over 12 months and the fair value of one security has been impaired for less
than 12 months. Contractually, the issuers are not permitted to
settle the securities at a price less than the amortized cost basis of the
individual investments. The Corporation does not intend to sell these
investments and it is not more likely than not that the Corporation will be
required to sell the investments before recovery of their amortized cost bases,
which may be at maturity. Accordingly, management does not consider
these investments to be other-than-temporarily impaired at September 30,
2009.
Residential Mortgage-Backed
Agencies - The residential mortgage-backed agencies are in an unrealized
gain position of $3.4 million at September 30, 2009. All of these
securities are of the highest investment grade. Therefore, no
impairment exists at September 30, 2009.
Collateralized Mortgage
Obligations – The collateralized mortgage obligations are in an
unrealized loss position of $8.2 million at September 30, 2009. All
nine of these securities are private label residential mortgage-backed
securities and have been in an unrealized loss position for 12 months or
more. These securities are reviewed for factors such as loan to value
ratio, credit support levels, borrower FICO scores, geographic concentration,
prepayment speeds, delinquencies, coverage ratios and credit
ratings. Management believes that all of the securities continue to
demonstrate collateral coverage ratios that are adequate to support the
Corporation’s investment. The Corporation purchased all of these
securities at a discount relative to their face amounts. All of these
securities were of the highest investment grade at the time of
purchase. As of September 30, 2009, two have been downgraded to one
level below investment grade and five have been downgraded more than one level
below investment grade. All of these securities continue to perform
as expected at the time of purchase. This class of securities has
been reduced by $8.8 million since December 31, 2008 due to principal
paydown. The Corporation does not intend to sell these investments
and it is not more likely than not that the Corporation will be required to sell
the investments before recovery of their amortized cost bases, which may be at
maturity. Accordingly, management does not consider these investments
to be other-than-temporarily impaired at September 30, 2009.
Obligations of State and
Political Subdivisions – The unrealized losses on the Corporation’s
investments in state and political subdivisions were in an unrealized loss
position of $144,000 at September 30, 2009. Ten securities carried a
fair value less than amortized cost basis for over 12 months and two securities
have been in an unrealized loss position for less than 12 months. All
of the Corporation’s investments in states and other political subdivisions are
of investment grade as determined by the major rating
agencies. Management believes that this portfolio is well-diversified
throughout the United States, and all bonds continue to perform according to
their contractual terms. The Corporation does not intend to sell
these investments and it is not more likely than not that the Corporation will
be required to sell the investments before recovery of their amortized cost
bases, which may be at maturity. Accordingly, management does not
consider these investments to be other-than-temporarily impaired at September
30, 2009.
Collateralized Debt
Obligations - The $39.2 million in unrealized losses reported for
collateralized debt obligations at September 30, 2009 relates to 22 pooled trust
preferred securities. See Note F for a discussion of the methodology
used by management to determine the fair values of these
securities. Based upon a review of credit quality and the cash flow
tests performed, management determined that six of the collateralized debt
obligations in the Corporation’s portfolio were other-than-temporarily
impaired. As a result of this assessment, the Corporation recorded an
$18.3 million other-than-temporary impairment loss on these securities as of
September 30, 2009. Year to date, $10.8 million of
other-than-temporary losses have been recognized in earnings on the six trust
preferred securities and $226,000 of losses have been recognized as a result of
moving four securities to trading. The unrealized losses on the
remaining investment securities are primarily attributable to factors such as
changes in market interest rates, marketability, liquidity and the current
economic environment.
11
The
following tables present a roll-forward of the amount of other-than-temporary
impairment (“OTTI”) related to credit losses which have been recognized in
earnings.
Other-Than-
Temporary
Impairment
Credit Losses
recorded in
Earnings
(in thousands)
|
Other-Than-
Temporary
Impairment
Losses
recorded in
Other
Comprehensive
Income
(in thousands)
|
|||||||
Beginning
balance January 1, 2009
|
$ | 2,724 | $ | 0 | ||||
Other-than-temporary
losses recognized during the period:
|
||||||||
Additions
for OTTI not
previously recognized |
7,925 | 5,881 | ||||||
Additional
increases for OTTI previously
recognized when there is no intent to sell and no requirements to sell before recovery
of amortized cost basis
|
2,917 | 1,611 | ||||||
Total
other-than-temporary losses recognized during the period
|
10,842 | 7,492 | ||||||
Ending
balance September 30, 2009
|
$ | 13,566 | $ | 7,492 |
Other-Than-
Temporary
Impairment
Credit Losses
recorded in
Earnings
(in thousands)
|
Other-Than-
Temporary
Impairment
Losses recorded
in Other
Comprehensive
Income
(in thousands)
|
|||||||
Beginning
balance July 1, 2009
|
$ | 4,905 | $ | 3,615 | ||||
Other-than-temporary
losses recognized during the period:
|
||||||||
Additions
for OTTI not previously
recognized |
5,744 | 5,881 | ||||||
Additional
increases(decreases) for OTTI
previously recognized when there is no intent to sell and no requirements to sell before recovery of amortized cost basis |
2,917 | (2,004 | ) | |||||
Total
other-than-temporary losses recognized during the period
|
8,661 | 3,877 | ||||||
Ending
balance September 30, 2009
|
$ | 13,566 | $ | 7,492 | ||||
12
Note
D – Cash and Cash Equivalents
Cash and due from banks, which
represents vault cash in the retail offices and invested cash balances at the
Federal Reserve, is carried at fair value.
September 30,
2009
|
December 31,
2008
|
|||||||
Cash
and due from banks, weighted average interest rate of .22% (atSeptember
30, 2009)
|
$ | 63,096 | $ | 18,423 |
Interest bearing deposits in banks,
which represent funds invested at a correspondent bank, are carried at fair
value and, as of September 30, 2009 and December 31, 2008, consisted of daily
funds invested at the Federal Home Loan Bank (“FHLB”) of Atlanta and First
Tennessee Bank (“FTN”).
September 30,
2009
|
December 31,
2008
|
|||||||
FHLB
daily investments, interest rate of 0.01% (at September 30,
2009)
|
$ | 36,003 | $ | 882 | ||||
550 | — | |||||||
FTN
Fed Funds sold, interest rate of 0.25% (at September 30,
2009)
|
22 | — |
Note
E - Restricted Investment in Bank Stock
Restricted
stock, which represents required investments in the common stock of the FHLB of
Atlanta and Atlantic Central Bankers Bank, is carried at cost and is considered a
long-term investment.
Management evaluates the
restricted stock for impairment in accordance with ASC Industry Topic 942,
Financial
Services – Depository and Lending, (ASC Section
942-325-35). Management’s evaluation of potential impairment is based
on management’s assessment of the ultimate
recoverability of the cost of the restricted stock rather than by recognizing
temporary declines in value. The determination of whether a
decline affects the ultimate recoverability is influenced by criteria such as
(1) the significance of the decline in net assets of the issuing bank as
compared to the capital stock amount for that bank and the length of time this
situation has persisted, (2) commitments by the issuing bank to make payments
required by law or regulation and the level of such payments in relation to the
operating performance of that bank, and (3) the impact of legislative and
regulatory changes on institutions and, accordingly, on the customer base of the
issuing bank.
On March 25, 2009, the FHLB of Atlanta
announced that it would not pay a dividend for the fourth quarter of
2008. On June 3, 2009, the FHLB of Atlanta announced that it would
not pay a dividend for first quarter of 2009. During the first
quarter of 2009, the Corporation reversed approximately $28,000 in dividends
that were accrued for the fourth quarter of 2008. On August 12, 2009,
FHLB of Atlanta announced that a dividend for the second quarter of 2009 would
be paid. A dividend of $29,000 was posted during the third quarter of
2009. The Corporation has not accrued any dividends for the third
quarter of 2009.
Management
believes that no impairment charge in respect of the restricted stock is
necessary as of September 30, 2009.
Note
F – Fair Value of Financial Instruments
The
Corporation complies with the guidance of ASC Topic 820, Fair Value Measurements and
Disclosures, which defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements
required under other accounting pronouncements. This guidance applies only to
fair value measurements required or permitted under current accounting
guidelines, but does not require any new fair value measurements. The
Corporation also follows the guidance on matters relating to all financial
instruments found in ASC Subtopic 825-10, Financial Instruments –
Overall.
Fair
value is defined as the price to sell an asset or to transfer a liability in an
orderly transaction between willing market participants as of the measurement
date. Fair value is best determined by values quoted through active
trading markets. Active trading markets are characterized by numerous
transactions of similar financial instruments between willing buyers and willing
sellers. Because no active trading market exists for various types of financial
instruments, many of the fair values disclosed were derived using present value
discounted cash flows or other valuation techniques described
below. As a result, the Corporation’s ability to actually realize
these derived values cannot be assumed.
13
The
Corporation measures fair values based on the fair value hierarchy established
in ASC Paragraph 820-10-35-37. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority to unobservable
inputs (Level 3 measurements). The three levels of inputs that may be
used to measure fair value under the hierarchy are as follows:
Level 1: Unadjusted quoted
prices in active markets that are accessible at the measurement date for
identical, unrestricted assets and liabilities. This level is the
most reliable source of valuation.
Level 2: Quoted prices that
are not active, or inputs that are observable either directly or indirectly, for
substantially the full term of the asset or liability. Level 2 inputs
include inputs other than quoted prices that are observable for the asset or
liability (for example, interest rates and yield curves at commonly quoted
intervals, volatilities, prepayment speeds, loss severities, credit risks, and
default rates). It also includes inputs that are derived principally
from or corroborated by observable market data by correlation or other means
(market-corroborated inputs). Several sources are utilized for
valuing these assets, including a contracted valuation service, Standard &
Poor’s (S&P) evaluations and pricing services, and other valuation
matrices.
Level 3: Prices or valuation
techniques that require inputs that are both significant to the valuation
assumptions and not readily observable in the market (i.e. supported with little
or no market activity). Level 3 instruments are valued based on the
best available data, some of which is internally developed, and consider risk
premiums that a market participant would require.
The level
established within the fair value hierarchy is based on the lowest level of
input that is significant to the fair value measurement.
In April
2009, FASB issued additional guidance in ASC Subparagraphs 820-10-35-51A
and 820-10-35-51B on determining when the volume and level of activity for the
asset or liability has significantly decreased and provides a list of factors
that a reporting entity should evaluate to determine whether there has been a
significant decrease in the volume and level of activity for the asset or
liability in relation to normal market activity for the asset or liability. When
the reporting entity concludes there has been a significant decrease in the
volume and level of activity for the asset or liability, further analysis of the
information from that market is needed and significant adjustments to the
related prices may be necessary to estimate fair value. The new
guidance also clarifies in ASC Subparagraphs 820-10-35-51E and 820-10-35-51F
that when there has been a significant decrease in the volume and level of
activity for the asset or liability, some transactions may not be orderly. In
those situations, the entity must evaluate the weight of the evidence to
determine whether the transaction is orderly. The guidance provides a list of
circumstances that may indicate that a transaction is not orderly. A transaction
price that is not associated with an orderly transaction is given little, if
any, weight when estimating fair value. The Corporation elected to early adopt
this guidance for its March 31, 2009 financial statements as provided in the
effective date provisions of ASC Paragraph 820-10-65-4.
The
Corporation believes that its valuation techniques are appropriate and
consistent with other market participants. However, the use of
different methodologies and assumptions could result in a different estimate of
fair values at the reporting date. The following valuation techniques
were used to measure the fair value of assets in the table below which are
measured on a recurring and non-recurring basis as of September 30,
2009.
Investments held
for trading – The
fair value of investments held for trading is determined using a market
approach. The Level 3 investments consist of four pooled trust preferred
securities, which are preferred term securities issued by trust subsidiaries of
financial institutions and insurance companies and collateralized by junior
subordinated debentures issued to those trusts by the parent institution. Two
securities were deemed to be other-than-temporarily impaired at December 31,
2008 and were moved to trading during the first quarter of 2009. The
remaining two securities were moved to trading during the third quarter of
2009. The Corporation obtained fair values for these securities from
Moody’s Analytics, an experienced independent third-party pricing
provider. Information such as performance of the underlying
collateral, deferral/default rates, cash flow projections, related relevant
trades, models and other analytical tools are utilized by the third-party in
determining individual security valuations in accordance with proper accounting
guidance. A full explanation of the pricing methodology used by
Moody’s Analytics is presented in the next section, under Investments available for
sale.
14
Investments
available for sale – The fair value of investments available-for-sale is
determined using a market approach. As of September 30, 2009, Level 2
investment securities available-for-sale include U.S. Government Agencies
and residential mortgage-backed securities, private label residential
mortgage-backed securities and municipal bonds which are not as actively
traded. Their fair values were determined based upon
market-corroborated inputs and valuation matrices which were obtained through
third party data service providers or securities brokers through which the
Corporation has historically transacted both purchases and sales of investment
securities. The Level 3 investments consist of pooled trust preferred
securities. The Corporation obtained fair values for these securities
from Moody’s Analytics. Information such as performance of the
underlying collateral, deferral/default rates, cash flow projections, related
relevant trades, models and other analytical tools were utilized by the
third-party in determining individual security valuations in accordance with
proper accounting guidance.
At
September 30, 2009, the Bank owned 22 pooled trust preferred securities with a
par value of $59.9 million and a fair value of $20.8 million. Based upon
application of the guidance in ASC Subparagraph 820-10-35-51A, management has
determined that there has been a significant decrease in the volume and level of
activity in these securities. The market for pooled trust preferred
securities continues to be non-existent. There were no new pooled
trust preferred issuances during 2008 and there have been none to date in
2009. Trading activity for pooled trust preferred securities
indicates only three total trades during the first quarter of 2009 and zero
trades during the third quarter of 2009, compared to a high of 116 trades in the
first quarter of 2008. The volume has declined from a high of $376
million in the first quarter of 2007 to $0 during the third quarter of
2009. The trading and issuance data presented, along with information
from traders, indicates that there is currently an inactive and inefficient
market in pooled trust preferred securities which is contributing to the
depressed pricing on these securities.
Observable
prices for these securities are available based upon broker models and these
inputs have been considered in the pricing models used by Moody’s
Analytics. However, the few observable transactions and market
quotations that are available are not reliable for purposes of determining fair
value at September 30, 2009. Accordingly, the pooled trust preferred
securities portion of the Corporation’s investment portfolio will be classified
within Level 3 of the fair value hierarchy because management determined that
significant adjustments are required to determine fair value at the measurement
date.
In
determining the fair values of the securities, Moody’s Analytics utilized an
income valuation approach (present value technique) which maximizes the use of
observable inputs and minimizes the use of unobservable inputs. This
approach is more indicative of fair value than the market approach that has been
used historically, and involves several steps. The credit quality of
the collateral was estimated using the average probability of default values for
each underlying issuer, adjusted for credit ratings. The default
probabilities also considered the potential for correlation among issuers within
the same industry, such as banks with other banks. The loss given
default was assumed to be 95%, allowing for a 5% recovery of
collateral. Management elected to utilize the option assuming that
there were no defaults or deferrals for a two-year time period for those banks
who have publicly announced participation in the Treasury’s Capital Purchase
Program. The cash flows for the securities were forecast for the underlying
collateral and applied to each tranche in the structure to determine the
resulting distribution among the securities. These expected cash
flows were then discounted to calculate the present value of the
security. The effective discount rate utilized by Moody’s Analytics
for the various securities in the present value calculation was the three-month
LIBOR plus 200 basis points (a risk free rate plus a premium for
illiquidity). The resulting prices are highly dependent upon the
credit quality of the collateral, the relative position of the tranche in the
capital structure of the security and the prepayment
assumptions. Moody’s Analytics modeled the calculations in
several thousand scenarios using a Monte Carlo engine and the average price was
used for valuation purposes. Due to the current market conditions as
well as the limited trading activity of these securities, the market value of
the securities is highly sensitive to assumption changes and market
volatility.
Impaired
loans – Loans included in the table below are those that are considered
impaired under the guidance of the loan impairment subsection of the Receivables Topic, ASC
Section 310-10-35, under which the Corporation has measured impairment generally
based on the fair value of the loan’s collateral. Fair value consists
of the loan balance less its valuation allowance and is generally determined
based on independent third-party appraisals of the collateral or discounted cash
flows based upon the expected proceeds. These assets are included as
Level 3 fair values based upon the lowest level of input that is significant to
the fair value measurements.
Foreclosed real
estate – Fair value of foreclosed assets was based on independent
third-party appraisals of the properties. These values were
determined based on the sales prices of similar properties in the approximate
geographic area. These assets are included as Level 3 fair values
based upon the lowest level of input that is significant to the fair value
measurements.
15
For
assets measured at fair value on a recurring and non-recurring basis, the fair
value measurements by level within the fair value hierarchy used at September
30, 2009 and December 31, 2008 are as follows:
Fair Value Measurements at
September 30, 2009 Using
(Dollars in Thousands)
|
|||||||||||||
Description
|
Assets
Measured
at Fair
Value
09/30/09
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
|
Significant
Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
|||||||||
Recurring:
|
|||||||||||||
Investment
securities - trading
|
$ | 183 | $ | 183 | |||||||||
Investment
securities available-for-sale:
|
|||||||||||||
U.S.
government agencies
|
$ | 94,683 | $ | 94,683 | |||||||||
Residential
mortgage-backed agencies
|
$ | 67,232 | $ | 67,232 | |||||||||
Collateralized
mortgage obligations
|
$ | 34,735 | $ | 34,735 | |||||||||
Obligations
of states and political
Subdivisions
|
$ | 100,478 | $ | 100,478 | |||||||||
Collateralized
debt obligations
|
$ | 20,759 | $ | 20,759 | |||||||||
Financial
Derivative
|
$ | (284 | ) | $ | (284 | ) | |||||||
Non-recurring: | |||||||||||||
Impaired
loans¹
|
$ | 9,931 | $ | 9,931 | |||||||||
Foreclosed
real estate
|
$ | 4,061 | $ | 4,061 | |||||||||
¹ The impaired loans fair value
consists of impaired loans net of the $4,458 valuation
allowance.
|
Fair Value Measurements at
December 31, 2008 Using
(Dollars in Thousands)
|
|||||||||||||
Description
|
Assets
Measured
at Fair
Value
12/31/08
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
|
Significant
Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
|||||||||
Recurring: | |||||||||||||
Investment
securities available-for-sale:
|
|||||||||||||
U.S.
government agencies
|
$ | 113,645 | $ | 113,645 | |||||||||
Residential
mortgage-backed agencies
|
$ | 82,561 | $ | 82,561 | |||||||||
Collateralized
mortgage obligations
|
$ | 40,638 | $ | 40,638 | |||||||||
Obligations
of states and political
Subdivisions |
$ | 93,485 | $ | 93,485 | |||||||||
Collateralized
debt obligations
|
$ | 24,266 | $ | 24,266 | |||||||||
Financial
Derivative
|
— | — | |||||||||||
Non-recurring: | |||||||||||||
Impaired
loans¹
|
$ | 11,760 | $ | 11,760 | |||||||||
Foreclosed
real estate
|
$ | 2,424 | $ | 2,424 | |||||||||
¹
The impaired loans fair value consists of impaired loans net of the $4,759
valuation allowance.
|
16
The
following tables show a reconciliation of the beginning and ending balances for
fair valued assets measured using Level 3 significant unobservable inputs for
the nine and three months ended September 30, 2009:
Fair Value Measurements Using
Significant
Unobservable inputs
(Level 3)
(Dollars in Thousands)
|
||||||||||||||||||||
Investment
Securities
Available for Sale
|
Investment
Securities -
Trading
|
Cash Flow Hedge
|
Impaired
Loans
|
Foreclosed Real
Estate
|
||||||||||||||||
Beginning
balance January 1, 2009
|
$ | 24,266 | $ | — | $ | — | $ | 11,760 | $ | 2,424 | ||||||||||
Total
gains/(losses) realized/unrealized:
|
||||||||||||||||||||
Included
in earnings (or changes in net assets)
|
(10,842 | ) | (226 | ) | — | — | (114 | ) | ||||||||||||
Included
in other comprehensive loss
|
7,744 | — | — | — | ||||||||||||||||
Purchases,
issuances, and settlements
|
— | — | (284 | ) | — | — | ||||||||||||||
Transfers
from Available for Sale to Trading
|
(409 | ) | 409 | — | — | |||||||||||||||
Transfers
in and/or out of Level 3
|
— | — | — | — | ||||||||||||||||
Sales
|
— | — | — | (1,148 | ) | |||||||||||||||
Payments/credits/charge-offs
|
— | — | (10,881 | ) | — | |||||||||||||||
Properties/loans
added
|
— | — | (284 | ) | 9,052 | 2,899 | ||||||||||||||
Ending
balance September 30, 2009
|
$ | 20,759 | $ | 183 | $ | (284 | ) | $ | 9,931 | $ | 4,061 | |||||||||
The
amount of total gains or losses for the period
included in earnings attributable to the change in realized/ unrealized gains or losses related to assets still held at the reporting date |
$ | (10,842 | ) | $ | (226 | ) | $ | — | $ | — | $ | (49 | ) |
Fair Value Measurements Using
Significant
Unobservable inputs
(Level 3)
(Dollars in
Thousands)
|
||||||||||||||||||||
Investment
Securities
Available for Sale
|
Investment
Securities -
Trading
|
Cash Flow Hedge
|
Impaired
Loans
|
Foreclosed Real
Estate
|
||||||||||||||||
Beginning
balance July 1, 2009
|
$ | 16,674 | $ | 13 | $ | — | $ | 11,118 | $ | 2,357 | ||||||||||
Total
gains/(losses) realized/unrealized:
|
||||||||||||||||||||
Included
in earnings (or changes in net assets)
|
(8,661 | ) | 147 | — | — | (26 | ) | |||||||||||||
Included
in other comprehensive loss
|
12,769 | — | — | — | — | |||||||||||||||
Purchases,
issuances, and settlements
|
— | — | (284 | ) | — | — | ||||||||||||||
Transfers
from Available for Sale to Trading
|
(23 | ) | 23 | — | — | — | ||||||||||||||
Transfers
in and/or out of Level 3
|
— | — | — | — | — | |||||||||||||||
Sales
|
— | — | — | — | (365 | ) | ||||||||||||||
Payments/credits/charge-offs
|
— | — | — | (7,117 | ) | — | ||||||||||||||
Properties/loans
added
|
— | — | — | 5,930 | 2,095 | |||||||||||||||
Ending
balance September 30, 2009
|
$ | 20,759 | $ | 183 | $ | (284 | ) | $ | 9,931 | $ | 4,061 | |||||||||
The
amount of total gains or losses for the period
included in earnings attributable to the change in unrealized gains or losses related to assets still held at the reporting date |
$ | (8,661 | ) | $ | 147 | $ | (284 | ) | $ | — | $ | (26 | ) |
Gains and
losses (realized and unrealized) included in earnings for the periods
(above) are reported in the statement of operations in other operating
income.
Beginning
with its March 31, 2009 financial statements, the Corporation elected to early
adopt guidance in ASC Subparagraph 825-10-50-2A that requires disclosures about
fair value of financial instruments in summarized financial information for
interim reporting periods of publicly traded companies, as provided in the
effective date provisions of ASC Paragraph 825-10-65-1.
17
The fair
values disclosed under ASC Subtopic 825-10 may vary significantly between
institutions based on the estimates and assumptions used in the various
valuation methodologies. The derived fair values are subjective in
nature and involve uncertainties and significant judgment. Therefore, they
cannot be determined with precision. Changes in the assumptions could
significantly impact the derived estimates of fair value. Disclosure
of non financial assets such as buildings as well as certain financial
instruments such as leases is not required. Accordingly, the
aggregate fair values presented do not represent the underlying value of the
Corporation.
The
following methods and assumptions were used by the Corporation in estimating its
fair value disclosures for financial instruments:
Cash and due from
banks: The
carrying amounts as reported in the statement of financial condition for cash
and due from banks approximate their fair values.
Interest bearing deposits
in banks: The carrying amount of interest bearing deposits
approximates their fair values.
Federal Home Loan Bank
stock: The
carrying value of stock issued by the FHLB of Atlanta approximates fair value
based on the redemption provisions of that stock.
Loans: For
variable rate loans and leases 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 leases and loans and
leases that do not reprice frequently are estimated using a discounted cash flow
calculation that applies current market interest rates being offered on the
various loan products.
Deposits: The
fair values disclosed for demand deposits (e.g., interest and non-interest
checking, savings, and certain types of money market accounts, etc.) are, by
definition, equal to the amount payable on demand at the reporting date (i.e.,
their carrying amounts). Fair values for fixed rate certificates of
deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on the various certificates of deposit to
the cash flow stream.
Borrowed
funds: The fair value of the Corporation’s FHLB borrowings and junior
subordinated debt is calculated based on the discounted value of contractual
cash flows, using rates currently existing for borrowings with similar remaining
maturities. The carrying amounts of federal funds purchased and
securities sold under agreements to repurchase approximate their fair
values.
Accrued
Interest: The carrying amount of accrued interest receivable
and payable approximates their fair values.
Derivative
Financial Instruments - The
Corporation’s open derivative positions are interest rate swaps that are
classified as Level 3 within the valuation hierarchy. Open derivative positions
are valued using externally developed pricing models based on observable market
inputs provided by a third party and validated by
management. The Corporation has considered counterparty credit
risk in the valuation of its interest rate swap assets. The
Corporation did not have any derivative financial instruments at December 31,
2008.
Off-Balance-Sheet
Financial Instruments: In the normal course of business, the
Corporation’s trust company subsidiary, First United Bank & Trust (the
“Bank”), makes commitments to extend credit and issues standby letters of
credit. The Bank expects most of these commitments to expire without
being drawn upon; therefore, the commitment amounts do not necessarily represent
future cash requirements. Due to the uncertainty of cash flows and
difficulty in the predicting the timing of such cash flows, fair values were not
estimated for these instruments.
18
The
following table presents fair value information about financial instruments,
whether or not recognized in the statement of financial condition, for which it
is practicable to estimate that value. The actual carrying amounts and
estimated fair values of the Corporation’s financial instruments that are
included in the statement of financial condition are as follows (in
thousands):
September
30, 2009
|
December
31, 2008
|
|||||||||||||||
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
|||||||||||||
Financial
Assets:
|
||||||||||||||||
Cash
and due from banks
|
$ | 63,096 | $ | 63,096 | $ | 18,423 | $ | 18,423 | ||||||||
Interest
bearing deposits in banks
|
36,575 | 36,575 | 882 | 882 | ||||||||||||
Investment
securities (AFS and trading)
|
318,070 | 318,070 | 354,595 | 354,595 | ||||||||||||
Federal
Home Loan Bank stock
|
13,861 | 13,861 | 13,933 | 13,933 | ||||||||||||
Loans,
net
|
1,121,437 | 1,114,647 | 1,120,199 | 1,125,029 | ||||||||||||
Accrued
interest receivable
|
7,292 | 7,292 | 7,713 | 7,713 | ||||||||||||
Financial
derivative
|
(284 | ) | (284 | ) | — | — | ||||||||||
Financial
Liabilities:
|
||||||||||||||||
Deposits
|
1,237,134 | 1,185,239 | 1,222,889 | 1,229,834 | ||||||||||||
Borrowed
funds
|
322,844 | 337,920 | 327,898 | 346,110 | ||||||||||||
Accrued
interest payable
|
3,006 | 3,006 | 4,295 | 4,295 | ||||||||||||
Off
balance sheet financial instruments
|
— | — | — | — |
Note
G – Comprehensive Income/(Loss)
Unrealized gains and losses on
investment securities available-for-sale and on pension obligations are included
in accumulated other comprehensive loss. Other comprehensive
income/(loss) (“OCI”) consists of the changes in unrealized gains (losses) on
investment securities available-for-sale and pension obligations. Total
comprehensive income/(loss), which consists of net income/(loss) plus the
changes in other comprehensive income/(loss), was $7.3 million and ($10.4)
million for the nine months ended September 30, 2009 and 2008, respectively, and
$6.1 million and ($3.5) million for the three months ended September 30, 2009
and 2008, respectively.
The
following tables present the accumulated other comprehensive loss for the nine
months ended September 30, 2009 and the components included:
Investment
securities
with OTTI
|
Investment
securities –
all other
|
Cash Flow
hedges
|
Pension
Plan
|
SERP
|
Total
|
|||||||||||||||||||
Accumulated
OCI, net:
|
||||||||||||||||||||||||
Balance
– January 1, 2009
|
$ | — | $ | (33,190 | ) | $ | — | $ | (7,386 | ) | $ | (407 | ) | $ | (40,983 | ) | ||||||||
Net
gain/(loss) during period
|
(4,468 | ) | 14,022 | (169 | ) | — | — | 9,385 | ||||||||||||||||
Balance
– September 30, 2009
|
$ | (4,468 | ) | $ | (19,168 | ) | $ | (169 | ) | $ | (7,386 | ) | $ | (407 | ) | $ | (31,598 | ) |
19
For the nine months ended
September 30, 2009
|
||||||||||||
Pre-tax
|
Taxes
|
Net
|
||||||||||
Components
of OCI, net:
|
||||||||||||
AFS
Securities with OTTI:
|
||||||||||||
Securities
with OTTI charges during the period
|
$ | (18,334 | ) | $ | 7,400 | $ | (10,934 | ) | ||||
Less:
OTTI charges recognized in net income
|
(10,842 | ) | 4,376 | (6,466 | ) | |||||||
Net
unrealized losses on investments with OTTI
|
(7,492 | ) | 3,024 | (4,468 | ) | |||||||
AFS
Securities – All other:
|
||||||||||||
Unrealized
holding gains during period
|
5,178 | (2,090 | ) | 3,088 | ||||||||
Less:
Securities with OTTI charges during the period
|
(18,334 | ) | 7,400 | (10,934 | ) | |||||||
Net
unrealized gains on investment securities
|
23,512 | (9,490 | ) | 14,022 | ||||||||
Net
unrealized gains on investment securities
|
16,020 | (6,466 | ) | 9,554 | ||||||||
Cash
flow hedges:
|
||||||||||||
Unrealized
losses
|
(284 | ) | 115 | (169 | ) | |||||||
Defined
benefit plans liability adjustment
|
— | — | — | |||||||||
$ | 15,736 | $ | (6,351 | ) | $ | 9,385 |
Note
H – Junior Subordinated Debentures
In March
2004, the Corporation formed two Connecticut statutory business trusts, First
United Statutory Trust I and First United Statutory Trust II (collectively, the
“Trusts”), for the purpose of selling $30.9 million of mandatorily redeemable
preferred securities to third party investors. The Trusts used the
proceeds of their sales of preferred securities to purchase an equal amount of
junior subordinated debentures from the Corporation, as follows:
$20.6 million—
floating rate, effective June 2009, payable quarterly based on three-month LIBOR
plus 275 basis points (3.04% at September 30, 2009) maturing in 2034, redeemable
five years after issuance at the Corporation’s option.
$10.3
million—floating rate payable quarterly based on three-month LIBOR plus
275 basis points (3.04% at September 30, 2009) maturing in 2034, redeemable five
years after issuance at the Corporation’s option.
The
debentures represent the sole assets of the Trusts, and payments of the
debentures by the Corporation are the only sources of cash flow for the
Trusts.
In
December 2004, the Corporation issued an additional $5.0 million of
debentures. The debentures have a fixed rate of 5.88% for the first
five years, payable quarterly, and then convert to a floating rate based on the
three month LIBOR plus 185 basis points in December 2009. The
debentures mature in 2014, but are redeemable five years after issuance at the
Corporation’s option.
The
Corporation has the right to defer interest on all of the foregoing debentures
for up to 20 quarterly periods, in which case distributions on the preferred
securities will also be deferred. Should this occur, the Corporation
may not pay dividends or distributions on, or repurchase, redeem or acquire, any
shares of its capital stock.
20
Note
I – Borrowed Funds
The following is a summary of
short-term borrowings with original maturities of less than one year (dollars in
thousands):
September 30, 2009
|
December 31, 2008
|
|||||||
Short-term advances,
Daily
borrowings, interest rate of 0.46% at
December 31, 2008 |
$ | 0 | $ | 8,500 | ||||
Securities
sold under agreements to repurchase, with
weighted average interest rate at end of period of 0.72% and 1.33%, respectively |
46,229 | 41,995 | ||||||
$ | 46,229 | $ | 50,495 |
The
following is a summary of long-term borrowings with original maturities
exceeding one year (dollars in thousands):
FHLB
advances, bearing interest at rates ranging
from 2.46% to 4.98% at September 30, 2009 |
$ | 240,686 | $ | 241,474 | ||||
Junior
subordinated debentures, bearing interest at rates
ranging from 3.04% to 5.88% at September 30, 2009 |
35,929 | 35,929 | ||||||
$ | 276,615 | $ | 277,403 |
The
long-term FHLB advances are secured by loans collateralized by 1-4 family
mortgages and securities.
The contractual maturities of all
long-term borrowings are as follows (in thousands):
September 30, December 31,
|
||||||||
2009
|
2008
|
|||||||
Due
in 2009
|
$ | 13,250 | $ | 14,000 | ||||
Due
in 2010
|
31,000 | 31,000 | ||||||
Due
in 2011
|
51,000 | 51,000 | ||||||
Due
in 2012
|
44,250
|
44,250
|
||||||
Due
in 2013
|
—
|
—
|
||||||
Thereafter
|
137,115 | 137,153 | ||||||
Total
long-term debt
|
$ | 276,615 | $ | 277,403 |
Note
J – Preferred Stock
On
January 30, 2009, pursuant to the Troubled Asset Relief Program Capital Purchase
Program adopted by the United States Department of the Treasury (the
“Treasury”), the Corporation issued the following securities to the Treasury for
an aggregate consideration of $30.0 million: (i) 30,000 shares of
Fixed Rate Cumulative Perpetual Preferred Stock, Series A, having no par per
share (the “Series A Preferred Stock”); and (ii) a warrant to purchase 326,323
shares of common stock, par value $.01 per share, at an exercise price of $13.79
per share (the “Warrant”). The proceeds from this transaction qualify
as Tier 1 capital and the warrant qualifies as tangible common
equity. The operative documents relating to this transaction are on
file with the SEC and available to the public free of charge.
Holders of the Series A Preferred Stock
are entitled to receive, if and when declared by the Board of Directors, out of
assets legally available for payment, cumulative cash dividends at a rate per
annum of 5% per share on a liquidation amount of $1,000 per share of Series A
Preferred Stock with respect to each dividend period from January 30, 2009 to,
but excluding, February 15, 2014. From and after February 15, 2014,
holders of Series A Preferred Stock are entitled to receive cumulative cash
dividends at a rate per annum of 9% per share on a liquidation amount of $1,000
per share with respect to each dividend period thereafter. Under the terms of
the Series A Preferred Stock, on and after February 15, 2012, the Corporation
may, at its option, redeem shares of Series A Preferred Stock, in whole or in
part, at any time and from time to time, for cash at a per share amount equal to
the sum of the liquidation preference per share plus any accrued and unpaid
dividends to but excluding the redemption date. The terms of the
Series A Preferred Stock further provide that, prior to February 15, 2012, the
Corporation may redeem shares of Series A Preferred Stock only if it has
received aggregate gross proceeds of not less than $7.5 million from one or more
qualified equity offerings, and the aggregate redemption price may not exceed
the net proceeds received by the Corporation from such
offerings. Notwithstanding the foregoing restriction on redemption,
the recently-enacted American Recovery and Reinvestment Act of 2009 (the
“Recovery Act”) permits the Corporation to redeem shares of Series A Preferred
Stock held by Treasury at any time (subject to a minimum 25% redemption
requirement). If the Corporation redeems shares of Series A Preferred
Stock pursuant to the Recovery Act, it may also repurchase a pro rata portion of
the Warrant; otherwise, Treasury must liquidate any portion of the Warrant that
is not repurchased, at the current market price. Any redemption of
the Series A Preferred Stock requires prior regulatory
approval.
21
Until the earlier of (i) January 30,
2012 or (ii) the date on which the Series A Preferred Stock has been redeemed in
full or otherwise disposed of by Treasury, the terms of the Series A Preferred
Stock prohibit the Corporation from increasing its quarterly cash dividend paid
on common stock above $0.20 per share or repurchasing any shares of common stock
or other capital stock or equity securities or trust preferred securities
without the consent of the Treasury.
Note
K - Pension and SERP Plans
The following table presents the net
periodic pension plan cost for the Corporation’s Defined Benefit Pension Plan,
the Bank’s Supplemental Executive Retirement Plan, and their related
components:
Pension
|
For the nine months ended
September 30,
|
For the three months ended
September 30,
|
||||||||||||||
(In thousands)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Service
cost
|
$ | 606 | $ | 693 | $ | 202 | $ | 231 | ||||||||
Interest
cost
|
912 | 948 | 304 | 316 | ||||||||||||
Expected
return on assets
|
(1,275 | ) | (1,755 | ) | (425 | ) | (585 | ) | ||||||||
Amortization
of transition asset
|
(30 | ) | (30 | ) | (10 | ) | (10 | ) | ||||||||
Recognized
loss
|
465 | 105 | 155 | 35 | ||||||||||||
Prior
service cost
|
9 | 9 | 3 | 3 | ||||||||||||
Net
pension expense
included in employee benefits |
$ | 687 | $ | (30 | ) | $ | 229 | $ | (10 | ) |
SERP
|
For
the nine months ended
September
30,
|
For
the three months ended
September
30,
|
||||||||||||||
(In
thousands)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Service
cost
|
$ | 100 | $ | 90 | $ | 33 | $ | 30 | ||||||||
Interest
cost
|
172 | 138 | 58 | 46 | ||||||||||||
Recognized
loss
|
— | 6 | — | 2 | ||||||||||||
Prior
service cost
|
95 | 84 | 32 | 28 | ||||||||||||
Net
pension expense
included in employee benefits |
$ | 367 | $ | 318 | $ | 123 | $ | 106 |
The Corporation does not intend to
contribute to the pension plan in 2009 based upon its fully funded status and a
full evaluation of the pension plan. The Corporation expects to fund
the annual projected benefit payments for the SERP from operations.
Note
L - Equity Compensation Plan Information
At the
2007 Annual Meeting of Shareholders, the Corporation’s shareholders approved the
First United Corporation Omnibus Equity Compensation Plan (the “Omnibus Plan”),
which authorizes the grant of stock options, stock appreciation rights, stock
awards, stock units, performance units, dividend equivalents, and other
stock-based awards to employees or directors totaling up to 185,000
shares.
On June
18, 2008, the Board of Directors of the Corporation adopted a Long-Term
Incentive Program (the “LTIP”). This program was adopted as a
sub-plan of the Omnibus Plan to reward participants for increasing shareholder
value, align executive interests with those of shareholders, and serve as a
retention tool for key executives. Under the LTIP, participants are
granted shares of restricted common stock of the Corporation. The
amount of an award is based on a specified percentage of the participant’s
salary as of the date of grant. These shares will vest if the
Corporation meets or exceeds certain performance thresholds.
22
The
Corporation complies with the provisions of ASC Topic 718, Compensation-Stock Compensation, in
measuring and disclosing stock compensation cost. The
measurement objective in ASC Compensation Paragraph 718-10-30-6 requires public
companies to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant date fair value of the
award. The cost is recognized in expense over the period in which an
employee is required to provide service in exchange for the award (the vesting
period). The performance-related shares granted in connection with
the LTIP are expensed ratably from the date that the likelihood of meeting the
performance measures is probable through the end of a three year vesting
period.
During
the second quarter 2009, management determined that the likelihood of meeting
the performance measures set forth with the 2008 LTIP stock grant would not be
probable. Therefore, under the guidance of ASC Paragraph
718-10-25-20, the shares are considered unissued and the share-based
compensation expense of approximately $148,000 recognized in 2008 and 2009
earnings was reversed effective June 30, 2009.
The
Recovery Act imposes restrictions on the type and timing of bonuses and
incentive compensation that may be accrued for or paid to certain employees of
institutions that participated in Treasury’s Capital Purchase
Program. The Recovery Act generally limits bonuses and incentive
compensation to grants of long-term restricted stock that, among other
requirements, cannot fully vest until the Capital Purchase Program assistance is
repaid, but certain types of compensation, including the Corporation’s 2008
restricted stock grants, are grandfathered.
Stock-based
awards were made to directors in May 2009. This award totaled 5,655
shares at a fair market price of $11.48 per share and is part of their annual
compensation package.
Note
M – Letters of Credit and Off Balance Sheet Liabilities
The Bank does not issue any guarantees
that would require liability recognition or disclosure other than its standby
letters of credit. Standby letters of credit are conditional commitments
issued by the Bank to guarantee the performance of a customer to a third
party. Generally, the Bank’s letters of credit are issued with expiration
dates within one year. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to
customers. The Bank generally holds collateral and/or personal
guarantees supporting these commitments. The Bank had $4.5 million of
outstanding standby letters of credit at September 30, 2009 and $5.9 million at
December 31, 2008. Management believes that the proceeds obtained
through a liquidation of collateral and the enforcement of guarantees would be
sufficient to cover the potential amount of future payment required by the
letters of credit. Management does not believe that the amount of the
liability associated with guarantees under standby letters of credit outstanding
at September 30, 2009 and December 31, 2008 is material.
Note
N – Derivative Financial Instruments
As a part
of managing interest rate risk, the Corporation entered into interest rate swap
agreements to modify the re-pricing characteristics of certain interest-bearing
liabilities. The Corporation has designated its interest rate swap agreements as
cash flow hedges under the guidance of ASC Subtopic 815-30, Derivatives and Hedging – Cash Flow
Hedges. Cash flow hedges have the effective portion of changes in the
fair value of the derivative, net of taxes, recorded in net accumulated other
comprehensive income.
In July
2009, the Corporation entered into three interest rate swap contracts totaling
$20.0 million notional amount, hedging future cash flows associated with
floating rate trust preferred debt. At September 30, 2009, the fair
value of the interest rate swap contracts was ($284) thousand and was reported
in Other Assets on the Consolidated Statements of Financial Condition. Cash
in the amount of $550,000 is posted as collateral as of September 30,
2009. The Corporation had no open derivative positions at December 31,
2008.
For the
three months ended September 30, 2009, the Corporation recorded a decrease in
the value of the derivatives of $169 thousand in net accumulated other
comprehensive loss to reflect the effective portion of cash flow
hedges. ASC Subtopic 815-30 requires this amount to be reclassified
to earnings if the hedge becomes ineffective or is terminated. There was no
hedge ineffectiveness recorded for the three months ending September 30,
2009.
Interest
rate swap agreements are entered into with counterparties that meet established
credit standards and the Corporation believes that the credit risk inherent in
these contracts is not significant as of September 30, 2009.
23
The table
below discloses the impact of derivative financial instruments on the
Corporation’s Consolidated Financial Statements for the three and nine months
ended September 30, 2009.
Derivatives in Cash
Flow Hedging
Relationships
(In thousands)
|
Amount of gain or (loss)
recognized in OCI on
derivative
(effective portion)
|
Amount of gain or (loss)
reclassified from accumulated
OCI into income
(effective portion) (a)
|
Amount of gain or (loss)
recognized in income on
derivative (ineffective
portion and amount
excluded from
effectiveness testing) (b)
|
|||||||||
Interest
rate contracts
|
$ | (169 | ) | $ | — | $ | — |
|
(a)
|
Reported
as interest expense
|
|
(b)
|
Reported
as other income
|
Note
O – Adoption of New Accounting Standards and Effects of New Accounting
Pronouncements
In June
2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards
Codification TM and the Hierarchy of Generally Accepted Accounting Principles –
a replacement of FASB Statement No. 162,” (“SFAS 168”). SFAS 168 establishes the
FASB Accounting Standards Codification TM (“Codification”) as the source of
authoritative generally accepted accounting principles (“GAAP”) for
nongovernmental entities. The Codification does not change
GAAP. Instead, it takes the thousands of individual pronouncements
the currently comprise GAAP and reorganizes them approximately 90 accounting
Topics, and displays all Topics using a consistent
structure. Contents in each Topic are further organized first by
Subtopic, then Section and finally Paragraph. The Paragraph level is
the only level that contains substantive content. Citing particular
content in the Codification involves specifying the unique numeric path to the
content through the Topic, Subtopic, Section and Paragraph
structure. FASB suggests that all citations begin with “FASB ASC,”
where ASC stands for Accounting Standards Codification. Changes to
the ASC subsequent to June 30, 2009 are referring to as Accounting Standards
Updates (“ASU”).
In
conjunction with the issuance of SFAS 168, the FASB also issued its first
Accounting Standards Update No. 2009-1, “Topic 105 – Generally Accepted
Accounting Principles” (“ASU 2009-1”) which includes SFAS 168 in its entirety as
a transition to the ASC. ASU 2009-1 is effective for interim and
annual periods ending after September 15, 2009 and will not have an impact on
the Corporation’s financial position or results of operations but will change
the referencing system for accounting standards.
In June
2009, the FASB issued ASC Topic 855, Subsequent Events, to
establish general standards of accounting and disclosure for subsequent
events. The guidance, which only applies to the accounting and
disclosure of subsequent events that are not addressed in other applicable GAAP,
establishes the period through which an entity should evaluate events for
possible recognition or disclosure in the financial statements; requires
disclosure of the date through which the subsequent events evaluation ended, and
whether it is the issued date or available to be issued date; and provides
examples of subsequent events that a company is required to recognize, as well
as those that a company is required to disclose, but not
recognize. For calendar year entities, the guidance became effective
for the quarter ending on June 30, 2009 (See note A).
In June
2009, the FASB issued SFAS No. 166, Accounting for Transfers of
Financial Assets, an amendment of FASB Statement No. 140 (not yet included in the
codification). This statement
prescribes the information that a reporting entity must provide in its financial
reports about a transfer of financial assets; the effects of a transfer on its
financial position, financial performance and cash flows; and a transferor’s
continuing involvement in transferred financial assets. Specifically,
among other aspects, SFAS 166 amends the guidance found in ASC Topic 860,
Transfers and
Servicing, formerly SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, by
removing the concept of a qualifying special-purpose entity and by modifying the
financial-components approach used in Topic 860. The amended guidance is
effective for fiscal years beginning after November 15, 2009. The
Corporation is currently evaluating the effect that the adoption of
SFAS 166 may have on its financial position and results of
operations.
24
In June
2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation
No. 46(R) (not yet included in the codification). This statement amends
guidance found in the ASC Topic 810, Consolidation, that required
an enterprise to determine whether it’s variable interest or interests give it a
controlling financial interest in a variable interest entity. The
primary beneficiary of a variable interest entity is the enterprise that has
both (1) the power to direct the activities of a variable interest entity
that most significantly impact the entity’s economic performance and
(2) the obligation to absorb losses of the entity that could potentially be
significant to the variable interest entity or the right to receive benefits
from the entity that could potentially be significant to the variable interest
entity. SFAS 167 also amends Topic 810 to require ongoing
reassessments of whether an enterprise is the primary beneficiary of a variable
interest entity. The amended guidance is effective for fiscal years
beginning after November 15, 2009 and is not anticipated to have any material
effect on the Corporation’s consolidated financial statements.
Item
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
INTRODUCTION
The following discussion and analysis
is intended as a review of material changes in and significant factors affecting
the financial condition and results of operations of the Corporation and its
consolidated subsidiaries for the periods indicated. This discussion
and analysis should be read in conjunction with the unaudited consolidated
financial statements and the notes thereto contained in Item 1 of Part I of this
report. Unless the context clearly suggests otherwise, references in
this report to “us”, “we”, “our”, and “the Corporation” are to First United
Corporation and its consolidated subsidiaries.
FORWARD-LOOKING
STATEMENTS
This report may contain forward-looking
statements within the meaning of The Private Securities Litigation Reform Act of
1995. Readers of this report should be aware of the speculative
nature of “forward-looking statements.” Statements that are not
historical in nature, including those that include the words “anticipate”,
“estimate”, “should”, “expect”, “believe”, “intend”, and similar expressions,
are based on current expectations, estimates and projections about, among other
things, the industry and the markets in which we operate, and they are not
guarantees of future performance. Whether actual results will conform
to expectations and predictions is subject to known and unknown risks and
uncertainties, including risks and uncertainties discussed in this report;
general economic, market, or business conditions; changes in interest rates,
deposit flow, the cost of funds, and demand for loan products and financial
services; changes in our competitive position or competitive actions by other
companies; changes in the quality or composition of our loan and investment
portfolios; our ability to manage growth; changes in laws or regulations or
policies of federal and state regulators and agencies; and other circumstances
beyond our control. Consequently, all of the forward-looking
statements made in this report are qualified by these cautionary statements, and
there can be no assurance that the actual results anticipated will be realized,
or if substantially realized, will have the expected consequences on our
business or operations. These and other risks are discussed in detail
in the periodic reports that First United Corporation files with the Securities
and Exchange Commission (the “SEC”) (see Item 1A of Part II of this report for
further information). Except as required by applicable laws, we do
not intend to publish updates or revisions of any forward-looking statements we
make to reflect new information, future events or otherwise.
THE
CORPORATION
First United Corporation is a Maryland
corporation that was incorporated in 1985 and is a registered financial holding
company under the federal Bank Holding Company Act of 1956, as
amended. The Corporation’s primary business activity is acting as the
parent company of First United Bank & Trust, a Maryland trust company (the
“Bank”), First United Insurance Group, LLC, a full service insurance provider
organized under Maryland law (the “Insurance Group”), and First United Statutory
Trust I and First United Statutory Trust II, Connecticut statutory business
trusts that we formed for the purpose of selling trust preferred
securities. The Bank has two subsidiaries: OakFirst Loan
Center, Inc., a West Virginia finance company; and OakFirst Loan Center, LLC, a
Maryland finance company. First United Insurance Agency, Inc, a
subsidiary of OakFirst Loan Center, Inc., was merged into the Insurance Group
effective June 30, 2009. The Bank provides a complete range of retail
and commercial banking services to a customer base serviced by a network of 27
offices and 33 automated teller machines.
We maintain an Internet site at www.mybank4.com on
which we make available, free of charge, First United Corporation’s Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form
8-K, and all amendments to the foregoing as soon as reasonably practicable after
these reports are electronically filed with, or furnished to, the
SEC.
25
ESTIMATES
AND CRITICAL ACCOUNTING POLICIES
This
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent liabilities. (See
Note 1 to the Consolidated Financial Statements included in Item 8 of Part II of
First United Corporation’s Annual Report on Form 10-K for the year ended
December 31, 2008). On an on-going basis, management evaluates its estimates,
including those related to loan losses, intangible assets, other-than-temporary
impairment of investment securities and pension plan assumptions. Management
bases its estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
Management described its critical accounting policies in First United
Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008.
The following discussion updates a critical accounting policy that was contained
in the Annual Report on Form 10-K to reflect recent changes in economic
conditions.
Other-Than-Temporary
Impairment of Investment Securities
Investments
available-for-sale: Securities available-for-sale are stated at
fair value, with the unrealized gains and losses, net of tax, reported as a
separate component of accumulated other comprehensive loss in shareholders’
equity.
The amortized cost of debt securities
classified as available-for-sale is adjusted for amortization of premiums to the
first call date, if applicable, or to maturity, and for accretion of discounts
to maturity, or in the case of mortgage-backed securities, over the estimated
life of the security. Such amortization and accretion, plus interest
and dividends, are included in interest income from investments.
Management systematically evaluates
securities for impairment on a quarterly basis. Based upon
application of new accounting guidance for subsequent measurement in Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
Topic 320, Investments – Debt
and Equity Securities, (ASC Section 320-10-35), which the Corporation
early adopted effective March 31, 2009 according to the effective date
provisions of ASC Paragraph 320-10-65-1 management must assess whether
(a) it has the intent to sell the security and (b) it is more likely than
not that the Corporation will be required to sell the security prior to its
anticipated recovery. If neither applies, then declines in the fair
values of securities below their cost that are considered other-than-temporary
declines are split into two components. The first is the loss
attributable to declining credit quality. Credit losses are
recognized in earnings as realized losses in the period in which the impairment
determination is made. The second component consists of all other
losses. The other losses are recognized in other comprehensive
income. Further discussion can be found below under the heading
“Investments Securities”. In
estimating other-than-temporary impairment losses, management considers (1) the
length of time and the extent to which the fair value has been less than cost,
(2) adverse conditions specifically related to the security, an industry, or a
geographic area, (3) the historic and implied volatility of the fair value of
the security, (4) changes in the rating of the security by a rating agency, (5)
recoveries or additional declines in fair value subsequent to the balance sheet
date, (6) failure of the issuer of the security to make scheduled interest or
principal payments, and (7) the payment structure of the debt security and the
likelihood of the issuer being able to make payments that increase in the
future.
Other than as discussed above,
management does not believe that any material changes in our critical accounting
policies have occurred since December 31, 2008.
26
SELECTED
FINANCIAL DATA
The following table sets forth certain
selected financial data for the nine months ended September 30, 2009 and 2008
and is qualified in its entirety by the detailed information and unaudited
financial statements, including the notes thereto, included elsewhere in this
quarterly report.
As
of or For the Nine Months
|
||||||||
Ended
September 30,
|
||||||||
2009
|
2008
|
|||||||
Per
Share Data
|
||||||||
Basic
net (loss)/income per common share
|
($
|
0.51 | ) |
$
|
1.49 | |||
Diluted
net (loss)income per common share
|
($
|
0.51 | ) |
$
|
1.49 | |||
Dividends
Declared
|
$
|
.60 |
$
|
.60 | ||||
Book
Value
|
$
|
12.35 |
$
|
14.70 | ||||
Significant
Ratios
|
||||||||
Return
on Average Assets (a)
|
(.16 | %) | .77 | % | ||||
Return
on Average Equity (a)
|
(2.68 | %) | 12.31 | % | ||||
Dividend
Payout Ratio (b)
|
(178.16 | %) | 53.70 | % | ||||
Average
Equity to Average Assets
|
6.15 | % | 6.25 | % |
Note:
|
(a)
Annualized
|
(b)
|
Cash
dividends paid on common stock as a percent of net income
(loss)
|
RESULTS
OF OPERATIONS
Overview
Consolidated net loss available to
common shareholders for the nine months ended September 30, 2009 was $3.1
million, compared to net income of $9.1 million for the same period of
2008. Basic and diluted losses per common share for the first nine
months of 2009 were ($.51), compared to basic and diluted income per common
share of $1.49 for the same period of 2008. The decrease in net
income resulted primarily from $10.8 million of other-than-temporary impairment
charges related to available-for-sale securities, $4.3 million in increased loan
loss provision expense and $2.3 million of increased Federal Deposit Insurance
Corporation (“FDIC”) deposit insurance premiums. The increase in FDIC
premiums resulted from the special assessment charge of $.8 million recognized
in June 2009, the revised FDIC rate structure and the credit which offset 2008
premiums charged. Core operations remained strong as our net interest
income for the first nine months of 2009 increased $2.0 million when compared to
the same period of 2008. Our net interest margin increased from 3.67%
for the first nine months of 2008 to 3.68% for the first nine months of
2009. The provision for loan losses was $10.8 million for the nine
months ended September 30, 2009, compared to $6.6 million for the same period of
2008. Interest expense on our interest-bearing liabilities decreased
$8.6 million due to the low interest rate environment, our decision to only
increase special pricing for full relationship customers and certificates of
deposit renewing at lower interest rates due to the short duration of our
portfolio. The increased provision was necessary to provide specific
allocations for impaired loans where management has determined that the
collateral supporting the loans is not adequate to cover the loan balance and
due to increases in the qualitative factors affecting the allowance for loan
losses as a result of the current recession and distressed economic
environment.
Other
operating income decreased $12.1 million during the first nine months of 2009
when compared to the same period of 2008. This decrease is primarily
attributable to the recognition of $10.8 million in other-than-temporary
impairment charges and $.2 million realized losses on the investment
portfolio. Trust department income and income earned on bank owned life
insurance have also declined as compared to the same time period in 2008 due to
decreases in the market values of assets under management and reduced interest
rates. Management has also noted a decrease in consumer spending as
service charge income has shown a decline of $.6 million during the first nine
months of 2009. These declines were offset slightly by $.5 million of
increased insurance commissions as a result of the Insurance Group’s acquisition
of books of business late in 2008. Operating expenses increased $4.1
million in the first nine months of 2009 when compared to the same period of
2008. This increase is due primarily to a $2.3 million increase of
FDIC premiums, which is inclusive of the $.8 million special assessment charge,
and increases in personnel costs, other real estate owned expenses, and
amortization expenses of intangibles.
27
Consolidated
net loss available to common shareholders for the third quarter of 2009 was $6.0
million, compared to net income of $1.9 million for the same period of
2008. Basic and diluted losses per common share were ($.97) for the
third quarter of 2009, compared to basic and diluted income per common share of
$.30 for the same period of 2008. The net interest margin for the
third quarter of 2009 was 3.53%, compared to 3.67% for the same period of
2008. This decrease is primarily attributable to the increase in
interest-earning assets of $77.3 million and a decrease in rates during the
third quarter 2009 when compared to the third quarter 2008. Third
quarter 2009 operating expenses increased by 15% when compared to operating
expenses for the third quarter of 2008 due to increased personnel costs,
increased FDIC premiums and increases in other real estate owned and
amortization of intangibles.
Net
Interest Income
Net interest income is the largest
source of operating revenue and is the difference between the interest earned on
interest-earning assets and the interest expense incurred on interest-bearing
liabilities. For analytical and discussion purposes, net interest
income is adjusted to a fully taxable equivalent (FTE) basis to facilitate
performance comparisons between taxable and tax-exempt assets. Fully
taxable equivalent income is determined by increasing tax-exempt income by an
amount equal to the federal income taxes that would have been paid if this
income were taxable at the statutorily applicable rate. The following
table sets forth the average balances, net interest income and expense, and
average yields and rates of our interest-earning assets and interest-bearing
liabilities for the nine months ended September 30, 2009 and 2008.
For
the nine months ended September 30,
|
||||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||||
(Dollars
in thousands)
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
||||||||||||||||||
Interest-Earning
Assets:
|
||||||||||||||||||||||||
Loans
|
$ | 1,132,999 | $ | 51,606 | 6.09 | % | $ | 1,064,525 | $ | 55,935 | 7.02 | % | ||||||||||||
Investment
securities
|
330,823 | 14,827 | 5.99 | 367,494 | 16,391 | 5.96 | ||||||||||||||||||
Other
interest earning assets
|
65,614 | 65 | .14 | 17,530 | 538 | 4.09 | ||||||||||||||||||
Total
earning assets
|
$ | 1,529,436 | 66,498 | 5.81 | % | $ | 1,449,549 | 72,864 | 6.71 | % | ||||||||||||||
Interest-bearing
liabilities
|
||||||||||||||||||||||||
Interest-bearing
deposits
|
$ | 1,122,255 | 15,385 | 1.83 | % | $ | 1,052,791 | 23,972 | 3.04 | % | ||||||||||||||
Short-term
borrowings
|
44,231 | 237 | .72 | 53,629 | 852 | 2.12 | ||||||||||||||||||
Long-term
borrowings
|
277,033 | 8,768 | 4.23 | 247,053 | 8,208 | 4.44 | ||||||||||||||||||
Total
interest-bearing liabilities
|
$ | 1,443,519 | 24,390 | 2.26 | % | $ | 1,353,473 | 33,032 | 3.25 | % | ||||||||||||||
Net
interest income and spread
|
$ | 42,108 | 3.55 | % | $ | 39,832 | 3.46 | % | ||||||||||||||||
Net
interest margin
|
3.68 | % | 3.67 | % |
Note: Interest
income and yields are presented on a fully taxable equivalent basis using a 35%
tax rate.
28
Net
interest income on an FTE basis increased $2.3 million during the first nine
months of 2009 over the same period in 2008 due to an $8.6 million (26.2%)
decrease in interest expense, offset by a $6.4 million (8.7%) decrease in
interest income. The decrease in interest income resulted primarily
from a decrease in interest rates on loans, an increase in non-accrual assets
and our desire to maintain higher cash levels when compared to the first nine
months of 2008. A reversal of approximately $28,000 is reflected in
the “Other interest earning assets” line item for September 30, 2009 due to the
accrual of stock dividends issued by the Federal Home Loan Bank (“FHLB”) of
Atlanta at a rate of 0.80% for the fourth quarter of 2008. The
Corporation was notified during the first quarter of 2009 that the FHLB of
Atlanta would not pay a dividend for the fourth quarter 2008. The
decreases in interest rates throughout 2008 and the increase in non-accruing
assets during 2009 contributed to the decrease in the average rate on our
average earning assets of 90 basis points, from 6.71% for the first nine months
of 2008 to 5.81% for the first nine months of 2009 (on a fully tax equivalent
basis).
Interest
expense decreased during the first nine months of 2009 when compared to the same
period of 2008 due to a reduction in interest rates on interest-bearing
liabilities. Average interest-bearing liabilities increased in the
first nine months of 2009 by $90.0 million when compared to the same time period
for 2008, with interest-bearing deposits increasing by approximately $69.5
million. The effect of the decreasing rate environment throughout
2008, our decision to only increase special rates for full relationship
customers and the short duration of our portfolio resulted in a 99 basis point
decrease in the average rate paid on our average interest-bearing liabilities
from 3.25% for the nine months ended September 30, 2008 to 2.26% for the same
period of 2009.
The net
result of the aforementioned factors was a 1 basis point increase in the net
interest margin during the first nine months of 2009 to 3.68% from 3.67% for the
same time period of 2008.
The
following table sets forth the average balances, net interest income and
expense, and average yields and rates of our interest-earning assets and
interest-bearing liabilities for the three months ended September 30, 2009 and
2008.
For
the Three Months Ended September 30,
|
||||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||||
(Dollars
in thousands)
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
||||||||||||||||||
Interest-Earning
Assets:
|
||||||||||||||||||||||||
Loans
|
$ | 1,140,369 | $ | 17,076 | 5.94 | % | $ | 1,088,725 | $ | 18,485 | 6.75 | % | ||||||||||||
Investment
securities
|
326,413 | 4,541 | 5.52 | 370,462 | 5,621 | 6.04 | ||||||||||||||||||
Other
interest earning assets
|
89,996 | 61 | .29 | 20,283 | 128 | 2.51 | ||||||||||||||||||
Total
earning assets
|
$ | 1,556,778 | 21,678 | 5.52 | % | $ | 1,479,470 | 24,234 | 6.52 | % | ||||||||||||||
Interest-bearing
liabilities
|
||||||||||||||||||||||||
Interest-bearing
deposits
|
$ | 1,103,462 | 4,835 | 1.74 | % | $ | 1,060,458 | 7,330 | 2.75 | % | ||||||||||||||
Short-term
borrowings
|
45,523 | 82 | .71 | 52,095 | 230 | 1.76 | ||||||||||||||||||
Long-term
borrowings
|
276,770 | 2,916 | 4.18 | 277,825 | 3,016 | 4.32 | ||||||||||||||||||
Total
interest-bearing liabilities
|
$ | 1,425,755 | 7,833 | 2.18 | % | $ | 1,390,378 | 10,576 | 3.03 | % | ||||||||||||||
Net
interest income and spread
|
$ | 13,845 | 3.34 | % | $ | 13,658 | 3.49 | % | ||||||||||||||||
Net
interest margin
|
3.53 | % | 3.67 | % |
Note: Interest
income and yields are presented on a fully taxable equivalent basis using a 35%
tax
rate.
29
On a
fully tax-equivalent basis, net interest income for the third quarter of 2009
increased $0.2 million in comparison to the third quarter of
2008. This slight increase resulted from a $2.7 million decrease in
interest expense during the period offset by a decrease in interest income of
$2.6 million. The decrease in interest expense resulted from a
decrease in rates paid on interest-bearing deposits, which offset the $35.4
million increase in average liabilities. The decrease in interest
income is due to a combination of decreased interest rates and the increase in
non-accruing assets. Average loans increased by $51.6 million while
the average balance in investment securities declined by $44.0
million. Average interest-bearing liabilities increased by $35.4
million (2.5%) during the third quarter of 2009 when compared to the third
quarter of 2008. This increase resulted primarily from increases in
interest-bearing deposits offset by a decrease in short-term
borrowings. The effective rate on these liabilities decreased by 85
basis points when comparing the third quarter of 2009 to the third quarter of
2008. Overall, the net interest margin decreased by 14 basis points
from 3.67% to 3.53% when comparing the third quarter of 2009 to the third
quarter of 2008.
Provision
for Loan Losses
The provision for loan losses was $10.8
million for the first nine months of 2009, compared to $6.6 million for the same
period of 2008. The increase in the provision was in response to the
increase in net charge-offs, specific allocations for impaired loans (primarily
acquisition and development loans) where management has determined that the
collateral supporting the loans is not adequate to cover the loan balance and
increases in the qualitative factors as a result of the current recession and
distressed economic environment during 2008 and the first nine months of
2009. Additional information regarding risk elements in the loan
portfolio and management’s assessment of the adequacy of the allowance for loan
losses is provided below under the heading “Allowance and Provision for Loan
Losses”.
Other
Operating Income
Other operating income decreased $12.1
million during the first nine months of 2009 when compared to the same period of
2008. The decrease is primarily attributable to the recognition of $10.8 million
in other-than-temporary impairment charges, a $.2 million realized loss on the
investment portfolio, as a result of moving two securities to trading, and a
decrease of $.6 million in service charge income due to decreased consumer
spending. Trust department revenue and income on our bank owned life insurance
policies also decreased due to declines in the market values of assets under
management and reduced interest rates, respectively. These declines
were offset slightly by a $.5 million increase in insurance commissions as a
result of the Insurance Group’s acquisition of books of business late in
2008.
Other
operating income for the third quarter of 2009 decreased $8.3 million when
compared to the third quarter of 2008. The decrease is primarily
attributable to the $8.7 million other-than-temporary impairment charge on the
investment portfolio. Insurance commissions increased 30.9% in the
third quarter compared to the same period in 2008 due primarily to acquisitions
late in 2008. The composition of operating income is illustrated in
the following table. For comparative purposes, the securities losses
of $10.9 million for the nine months ended September 30, 2009 and securities
gain of $.5 million for the nine months ended September 30, 2008 have been
excluded from the nine-month ended table as well as the securities losses of
$8.5 million for the three-month period in 2009. However, these
amounts are reflected in other operating income on the consolidated statements
of operations.
Income as % of Total Other
Operating
Income
|
Income as % of Total Other
Operating
Income
|
|||||||||||||||
Nine
Months Ended
|
Three
Months Ended
|
|||||||||||||||
September
30, 2009
|
September
30, 2008
|
September
30, 2009
|
September
30, 2008
|
|||||||||||||
Service
charges
|
36 | % | 39 | % | 37 | % | 42 | % | ||||||||
Trust
department
|
23 | % | 24 | % | 24 | % | 26 | % | ||||||||
Insurance
commissions
|
18 | % | 13 | % | 17 | % | 14 | % | ||||||||
Bank
owned life insurance
|
3 | % | 5 | % | 3 | % | 4 | % | ||||||||
Other
income
|
20 | % | 19 | % | 19 | % | 14 | % | ||||||||
100 | % | 100 | % | 100 | % | 100 | % |
30
Other
Operating Expenses
Other
operating expenses increased $4.1 million (13%) for the first nine months of
2009 when compared to the first nine months of 2008. For the third
quarter 2009, other operating expenses increased $1.5 million (15%) when
compared to the same time period of 2008. The increases for both
periods were due to increases in personnel expenses, occupancy and equipment
expenses as we continue our expansion in Morgantown, West Virginia, Frederick,
Maryland and in the markets served by the Insurance Group. In
addition, expense for the Corporation’s defined benefit pension plan increased
$.7 million in the first nine months of 2009 when compared to the first nine
months of 2008. This increase is a result of the decline in market
value of the plan assets and the lower discount rate. We have also
recognized increases in other expenses directly attributable to the FDIC
assessments of $2.3 million when compared to the same time period in
2008. The composition of operating expense is illustrated in the
following table.
Expense as % of Total Other Operating
Expenses
|
||||||||||||||||
Nine
Months ended
|
Three
months ended
|
|||||||||||||||
September
30,
2009
|
September
30,
2008
|
September
30,
2009
|
September
30,
2008
|
|||||||||||||
Salaries
and employee benefits
|
50 | % | 54 | % | 48 | % | 54 | % | ||||||||
Occupancy,
equipment and data processing
|
18 | % | 19 | % | 20 | % | 22 | % | ||||||||
Other
|
32 | % | 27 | % | 32 | % | 24 | % | ||||||||
100 | % | 100 | % | 100 | % | 100 | % |
Applicable
Income Taxes
In reporting interim financial
information, income tax provisions should be determined under the procedures set
forth in ASC Topic, Income Taxes, in
Section 740-270-30. This guidance provides that at the end of
each interim period the company should make its best estimate of the effective
tax rate expected to be applicable for the full fiscal year. The rate
so determined should be used in providing for income taxes on a current
year-to-date basis. The effective tax rate should reflect anticipated
investment tax credits, foreign tax rates, percentage depletion, capital gains
rates, and other available tax planning alternatives. However, in
arriving at this effective tax rate no effect should be included for the tax
related to significant, unusual or extraordinary items that will be separately
reported or reported net of their related tax effect in reports for the interim
period or for the fiscal year.
Based
on the guidance in ASC Topic 740, management has concluded that the
other-than-temporary impairment charge meets the definition of a “significant,
unusual or extraordinary item that will be separately reported” based on the
following:
|
·
|
The
impairment charge related to credit loss is significant and is a highly
unusual event for investments which were investment grade at the time of
purchase and have become impaired as a result of the severe decline in the
economy and an illiquid credit
market.
|
|
·
|
The
other-than-temporary impairment is reported as a separate line in the
Consolidated Statements of Income.
|
The
effective tax benefit rate for the first nine months of 2009 was 61%, compared
to an effective tax rate of 33% for the first nine months of
2008. The effective tax rate for the year-ended December 31, 2008 was
29%. The decrease thus far in 2009 when compared to the same time
period in 2008 is primarily attributable to the other-than-temporary impairment
charge of $8.7 million recognized in the third quarter of 2009 and the increased
provision expense in the third quarter. The year-to-date loss coupled
with forecasted favorable, permanent book to tax adjustments results in an
income tax benefit for the Corporation resulting in the 61% effective tax
benefit rate.
FINANCIAL
CONDITION
Balance
Sheet Overview
Total assets were $1.7 billion at
September 30, 2009, an increase of $42.6 million since December 31,
2008. During this time period, gross loans increased $3.8 million,
cash and interest-bearing deposits in banks increased $80.4 million, deferred
tax assets decreased $6 million and our investment portfolio decreased $36.5
million. The increase in loans is due to funding committments in the
commercial portfolio. Cash and due from banks increased as management
made the decision not to replace called investments and to maintain cash in
order to increase our liquidity position. Total liabilities increased
by approximately $9.6 million during the first nine months of 2009, reflecting
increases in total deposits of $14.2 million offset by a $4.3 million decrease
in short-term borrowings. The increase in deposits is due to strong
retail deposit growth in money market and certificates of deposit products,
which allowed management to repay $42.0 million in wholesale
funding. The increase of $33.1 million in shareholders’ equity is
primarily attributable to the $30.0 million raised in January 2009 through our
sale of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the
“Preferred Stock”) and a related warrant to purchase common stock, and a $9.4
million decrease in the accumulated other comprehensive loss due to a decrease
in the unrealized losses in the investment portfolio at September 30, 2009,
offset by the year to date net loss and the payment of
dividends.
31
Loan
Portfolio
The
following table presents the composition of our loan portfolio at the dates
indicated:
(Dollars
in millions)
|
September
30, 2009
|
December
31, 2008
|
||||||||||||||
Commercial
|
$ | 609.2 | 53 | % | $ | 575.9 | 51 | % | ||||||||
Residential
– Mortgage
|
400.8 | 35 | 403.8 | 36 | ||||||||||||
Installment
|
120.6 | 11 | 140.2 | 12 | ||||||||||||
Residential
– Construction
|
7.8 | 1 | 14.6 | 1 | ||||||||||||
Total
Loans
|
$ | 1,138.4 | 100 | % | $ | 1,134.5 | 100 | % |
Comparing
loans at September 30, 2009 to loans at December 31, 2008, our loan portfolio
has increased by $3.9 million (0.3%). Continued growth in commercial
loans ($33.3 million) was offset by a decline in our residential mortgage and
construction portfolio ($9.8 million) and a decline in our installment portfolio
($19.6 million). The decrease in installment loans is primarily attributable to
a decline in the indirect loan portfolio resulting from a slowdown in economic
activity and management’s de-emphasis of this form of lending
product. The decrease in the residential mortgage portfolio is
attributable to the increased amount of loan refinancings that are occurring as
consumers seek long-term fixed rate loans. We are using secondary
market outlets to satisfy these loan requests. The decrease in
construction loans is due to the current recession which has had, and continues
to have, a material and adverse effect on economic growth and the housing
market. The growth in the commercial portfolio is a result of
continuous growth in our new market areas and funding of previous loan
commitments. At September 30, 2009, approximately 72% of the
commercial loan portfolio was collateralized by real estate, compared to 74% at
December 31, 2008.
Risk
Elements of Loan Portfolio
The following table presents the risk
elements of our loan portfolio at the dates indicated. Management is
not aware of any potential problem loans other than those listed in this table
or discussed below.
(Dollars
in thousands)
|
September
30, 2009
|
December
31, 2008
|
||||||
Non-accrual
loans
|
$ | 43,272 | $ | 24,553 | ||||
Accruing
loans past due 90 days or more
|
2,596 | 3,476 | ||||||
Total
|
$ | 45,868 | $ | 28,029 | ||||
Total as a percentage of total
loans
|
4.03 | % | 2.47 | % | ||||
Restructured
loans
|
$ | 26,512 | $ | 468 |
Performing
loans considered impaired loans, as defined and identified by management,
amounted to $84.5 million at September 30, 2009 and $56.5 million at December
31, 2008. Loans are identified as impaired when the loan is classified as
substandard and management determines that it is probable that the borrower will
not be able to pay principal and interest according to the contractual terms of
the loan. These loans consist primarily of acquisition and
development loans. The fair values are generally determined based
upon independent third party appraisals of the collateral or discounted cash
flows based upon the expected proceeds. Specific allocations have
been made where management believes there is insufficient collateral and no
secondary source of repayment is available.
As of
September 30, 2009, we had $60.6 million in funded real estate acquisition and
development loans throughout our market areas, compared to $74.6 million at
December 31, 2008. We rely on various monitoring policies and
procedures and the extensive experience of our lending and credit personnel to
help mitigate the risks related to this type of lending
activity.
32
During
the past several years, there has been significant coverage in the media
regarding the topic of “sub-prime” loans and the resulting increase in loan
delinquencies and foreclosures. A sub-prime loan is defined generally as a loan
to a borrower with a weak credit record or a reduced repayment capacity. These
borrowers typically pose a higher risk of defaults and foreclosure. We generally
do not make sub-prime loans. When we do make such loans, the decision to lend is
based on the presence of facts and circumstances that management believes
mitigate the risks inherent in this type of loan. Management believes that, as
of September 30, 2009, our exposure to risk related to sub-prime loans is very
low. However, it should be noted that the current economic recession, driven in
large part by the recent global banking crisis, has adversely affected local
housing markets as well as the demand for and availability of
credit.
Allowance
and Provision for Loan Losses
An
allowance for loan losses is maintained to absorb losses from the loan
portfolio. 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.
We use
the methodology outlined in FDIC Statement of Policy on Allowance for Loan
Losses. The starting point for this methodology is to segregate the loan
portfolio into two pools, non-homogeneous (i.e., commercial) and homogeneous
(i.e., consumer and residential mortgage) loans. The two pools are further
segmented by loan type and by loan classification, including uncriticized
(pass), other assets especially mentioned and substandard. The uncriticized
(pass) pools for commercial real estate and residential real estate are further
segmented based upon the geographic locations of the underlying collateral. Each
loan pool is analyzed with general allowances and specific allocations being
made as appropriate. For general allowances, the previous eight quarters of loss
activity are used in the estimation of losses in the current portfolio. These
historical loss amounts are modified by the following qualitative factors:
levels of and trends in delinquency rates and non-accrual loans; trends in
volumes and terms of loans; effects of changes in lending policies; experience,
ability, and depth of management; national and local economic trends and
conditions; and concentrations of credit in the determination of the general
allowance. The qualitative factors are updated each quarter by information
obtained from internal, regulatory, and governmental sources. Specific
allocations of the allowance for loan losses are made for those loans on the
“Watchlist” in which the collateral value is less than the outstanding loan
balance with the allocation being the dollar difference between the two. The
Watchlist represents loans, identified and closely monitored by management,
which possess certain qualities or characteristics that may lead to collection
and loss issues. Allocations are not made for loans that are cash secured, for
the Small Business Administration and Farm Service Agency guaranteed portion of
loans, or for loans that are sufficiently collateralized.
The
allowance for loan losses is based on estimates, and actual losses will vary
from current estimates. These estimates are reviewed quarterly, and as
adjustments, either positive or negative, become necessary, a corresponding
increase or decrease is made in the allowance for loan losses. The methodology
used to determine the adequacy of the allowance for loan losses is consistent
with prior years. An estimate for probable losses related to unfunded lending
commitments, such as letters of credit and binding but unfunded loan commitments
is also prepared. This estimate is computed in a manner similar to the
methodology described above, adjusted for the probability of actually funding
the commitment.
The
following table presents a summary of the activity in the allowance for loan
losses for the nine months ended September 30 (dollars in
thousands):
2009
|
2008
|
|||||||
Balance,
January 1
|
$ | 14,347 | $ | 7,304 | ||||
Gross
charge offs
|
(8,879 | ) | (2,981 | ) | ||||
Recoveries
|
624 | 625 | ||||||
Net
credit losses
|
(8,255 | ) | (2,356 | ) | ||||
Provision
for loan losses
|
10,837 | 6,570 | ||||||
Balance
at end of period
|
$ | 16,929 | $ | 11,518 | ||||
Allowance
for Loan Losses to loans outstanding (as %)
|
1.49 | % | 1.05 | % | ||||
Net
charge-offs to average loans outstanding
|
||||||||
during
the period, annualized (as %)
|
0.97 | % | 0.30 | % |
33
The
allowance for loan losses increased to $16.9 million at September 30, 2009,
compared to $14.3 million at December 31, 2008. The provision for
loan losses was $10.8 million for the first nine months of 2009, compared to
$6.6 million for the same period of 2008. The increase in the
provision for loan losses in the first nine months of 2009 when compared to the
same period of 2008 was in response to the increase in net charge-offs and
non-performing loans, the results of our quarterly review of the adequacy of the
qualitative factors affecting the allowance, and specific allocations for
impaired loans. As part of our loan review process, management has
noted an increase in foreclosures and bankruptcies in the geographic areas where
we operate. Additionally, the current economic environment has caused
a decline in real estate sales. Consequently, we have closely
reviewed and applied sensitivity analysis to collateral values to more
adequately measure potential future losses. Where necessary, we have
obtained new appraisals on collateral. Specific allocations of the
allowance have been provided in these instances where losses may
occur.
Net
charge-offs relating to the installment loan portfolio represent 13% of our
total net charge-offs for the first nine months of 2009. Generally,
installment loans are charged-off after they are 120 days contractually past
due. Loans past due 30 days or more were $2.8 million or 2.3% of the
installment portfolio at September 30, 2009, compared to $4.9 million or 3.5% at
December 31, 2008.
Management
believes that the allowance for loan losses at September 30, 2009 is adequate to
provide for probable losses inherent in our loan portfolio. Amounts
that will be recorded for the provision for loan losses in future periods will
depend upon trends in the loan balances, including the composition of the loan
portfolio, changes in loan quality and loss experience trends, potential
recoveries on previously charged-off loans and changes in other qualitative
factors.
Investment
Securities
At
September 30, 2009, the total cost basis of the available-for-sale investment
portfolio was $357.5 million, compared to a fair value of $317.9
million. Unrealized gains and losses on securities available-for-sale
are reflected in accumulated other comprehensive loss, a component of
shareholders’ equity.
The
following table presents the composition of our securities portfolio
available-for-sale at amortized cost and fair values at the dates
indicated:
September 30, 2009
|
December 31, 2008
|
|||||||||||||||||||||||
(Dollars in millions)
|
Amortized
Cost
|
Fair
Value
(FV)
|
FV
As %
of
Total
|
Amortized
Cost
|
Fair
Value
(FV)
|
FV
As %
of
Total
|
||||||||||||||||||
Securities
Available-for-Sale:
|
||||||||||||||||||||||||
U.S.
government and agencies
|
$ | 93.8 | $ | 94.7 | 30 | % | $ | 111.9 | $ | 113.6 | 32 | % | ||||||||||||
Residential
mortgage-backed agencies
|
63.8 | 67.2 | 21 | 80.3 | 82.6 | 23 | ||||||||||||||||||
Collateralized
mortgage obligations
|
42.9 | 34.7 | 11 | 51.8 | 40.6 | 12 | ||||||||||||||||||
Obligations
of states and political subdivisions
|
97.1 | 100.5 | 32 | 95.9 | 93.5 | 26 | ||||||||||||||||||
Collateralized
debt obligations
|
59.9 | 20.8 | 6 | 70.3 | 24.3 | 7 | ||||||||||||||||||
Total
Investment Securities
|
$ | 357.5 | $ | 317.9 | 100 | % | $ | 410.2 | $ | 354.6 | 100 | % |
Total
investment securities have decreased $36.7 million since December 31,
2008. U.S. government agencies decreased by $18.9 million during the
first nine months of the year due to calls in the portfolio. Residential
mortgage-backed agencies and collateralized mortgage obligations decreased by
$21.3 million as a result of increased paydowns on the underlying
loans. The collateralized debt obligations portfolio consists
primarily of trust preferred securities issued by trust subsidiaries of
financial institutions and insurance companies that are collateralized by junior
subordinated debentures issued by those parent institutions. The $3.5
million decrease in this sector is due to a decline in the market value of these
securities directly attributable to the current economic environment and its
impact on the financial services industry. The decreases in these
sectors were offset by an increase in state and political subdivisions of $7.0
million.
At September 30, 2009, the securities
classified as available-for-sale included a net unrealized loss of $39.6
million, which represents the difference between the fair value and amortized
cost of securities in the portfolio. The comparable amount at
December 31, 2008 was an unrealized loss of $55.6 million. Typically,
the fair values of securities available-for-sale will generally decrease
whenever interest rates increase, and the fair values will typically increase in
a declining rate environment. However, fair values have also been
affected by factors such as marketability, liquidity and the current economic
environment.
34
As
discussed in Note F to the consolidated financial statements presented elsewhere
in this report, the Corporation measures fair market values based on the fair
value hierarchy established in ASC Topic 820, Fair Value Measurements and
Disclosures. In April 2009, FASB issued additional guidance in ASC
Subparagraphs 820-10-35-51A and 820-10-35-51B on determining when the volume and
level of activity for the asset or liability has significantly decreased and
provides a list of factors that a reporting entity should evaluate to determine
whether there has been a significant decrease in the volume and level of
activity for the asset or liability in relation to normal market activity for
the asset or liability. When the reporting entity concludes there has been a
significant decrease in the volume and level of activity for the asset or
liability, further analysis of the information from that market is needed and
significant adjustments to the related prices may be necessary to estimate fair
value. The new guidance also clarifies in ASC Subparagraphs
820-10-35-51E and 820-10-35-51F that when there has been a significant decrease
in the volume and level of activity for the asset or liability, some
transactions may not be orderly. In those situations, the entity must evaluate
the weight of the evidence to determine whether the transaction is orderly. The
guidance provides a list of circumstances that may indicate that a transaction
is not orderly. The hierarchy gives the highest priority to unadjusted quoted
prices in active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level 3
measurements). Level 3 prices or valuation techniques require inputs that are
both significant to the valuation assumptions and are not readily observable in
the market (i.e. supported with little or no market activity). These
Level 3 instruments are valued based on both observable and unobservable inputs
derived from the best available data, some of which is internally developed, and
considers risk premiums that a market participant would require.
Approximately $20.8 million (6%) of our
securities available-for-sale were valued using significant unobservable inputs
(Level 3 assets). These securities are pooled trust preferred
securities and are classified as collateralized debt obligations and contributed
approximately $39.2 million to the unrealized loss reported in our accumulated
other comprehensive loss on the Statement of Financial Condition. The
terms of the debentures underlying trust preferred securities allow the issuer
of the debentures to defer interest payments for up to 20 quarters, and, in such
case, the terms of the related trust preferred securities allow their issuers to
defer dividend payments for up to 20 quarters. Some of the issuers of
the trust preferred securities in our investment portfolio have defaulted and/or
deferred payments ranging from 4.20% to 30.1% of the total collateral balances
underlying the securities. The securities were designed to include
structural features that provide investors with credit enhancement or support to
provide default protection by subordinated tranches. These features
include over-collateralization of the notes or subordination, excess interest or
spread which will redirect funds in situations where collateral is insufficient,
and a specified order of principal payments. There are securities in
our portfolio that are under-collateralized which does represent additional
stress on our tranche. However, in these cases, the terms of the
securities require excess interest to be redirected from subordinate tranches as
credit support, which provides additional support to our
investment.
As part of its other-than-temporary
impairment analysis, management reviewed all of the underlying issuers for each
trust preferred security in the portfolio. Various credit factors
were analyzed and as a result, management identified issuers we considered to
represent collateral at risk. The total collateral at risk for each
security was then compared to the amount of collateral that would need to move
to deferral or default in order to cause a break in yield for a given class of
bonds. A break in yield means that deferrals or defaults have reached
such a level that the tranche would not receive all of the contractual cash
flows (principal and interest) by the maturity date. This is indicative of a
permanent credit loss. This information was reviewed along with the
results of the cash flow tests described below to assess whether a security is
other-than-temporarily impaired.
The
following table provides a summary of these securities and the credit status of
the securities as of September 30, 2009.
(Dollars
in Thousands)
|
||||||||||||||||||||||||||||||||||||||||||||
Investment
Description
|
First
United Level 3 Investments
|
Security
Credit Status
|
||||||||||||||||||||||||||||||||||||||||||
Deal
|
Class
|
Book
Value
|
Fair
Market
Value
|
Unrealized
Gain/(Loss)
|
Lowest
Credit
Rating
|
Original
Collateral
|
Deferrals/
Defaults
as
% of
Original
Collateral
|
Performing
Collateral
|
Collateral
Support
|
Collateral
Support
as
% of
Performing
Collateral
|
Collateral
at
Risk
(Internal
Assessment)
|
|||||||||||||||||||||||||||||||||
Preferred
Term Security I
|
Mezz
|
967 | 815 | (152 | ) |
CC
|
277,500 | 19.46 | % | 233,500 | (11,492 | ) | -4.92 | % | - | |||||||||||||||||||||||||||||
Preferred
Term Security XI
|
|
B-1
|
1,500 | 722 | (778 | ) |
CC
|
601,775 | 17.82 | % | 499,871 | (64,564 | ) | -12.92 | % | 7,500 | ||||||||||||||||||||||||||||
Preferred
Term Security XV*
|
B-1
|
4,590 | 1,688 | (2,902 | ) |
CC
|
598,300 | 21.99 | % | 470,644 | (90,467 | ) | -19.22 | % | 5,000 | |||||||||||||||||||||||||||||
Preferred
Term Security XVI*
|
C
|
2,418 | 733 | (1,685 | ) |
CC
|
606,040 | 25.93 | % | 452,018 | (87,200 | ) | -19.29 | % | - | |||||||||||||||||||||||||||||
Preferred
Term Security XVII
|
C
|
1,478 | 395 | (1,083 | ) |
CC
|
481,470 | 17.02 | % | 401,797 | (37,937 | ) | -9.44 | % | - | |||||||||||||||||||||||||||||
Preferred
Term Security XVII
|
C
|
|
4,435 | 1,183 | (3,252 | ) |
CC
|
481,470 | 17.02 | % | 401,797 | (37,937 | ) | -9.44 | % | - | ||||||||||||||||||||||||||||
Preferred
Term Security XVIII
|
C
|
|
2,003 | 587 | (1,416 | ) |
CCC
|
676,565 | 19.81 | % | 545,265 | (62,878 | ) | -11.53 | % | - | ||||||||||||||||||||||||||||
Preferred
Term Security XVIII
|
C
|
|
3,004 | 880 | (2,124 | ) |
CCC
|
676,565 | 19.81 | % | 545,265 | (62,878 | ) | -11.53 | % | - | ||||||||||||||||||||||||||||
Preferred
Term Security XIX
|
C
|
1,512 | 479 | (1,033 | ) |
CC
|
700,535 | 14.70 | % | 600,223 | (38,384 | ) | -6.39 | % | 54,745 | |||||||||||||||||||||||||||||
Preferred
Term Security XIX
|
C
|
2,520 | 798 | (1,722 | ) |
CC
|
700,535 | 14.70 | % | 600,223 | (38,384 | ) | -6.39 | % | 54,745 | |||||||||||||||||||||||||||||
Preferred
Term Security XIX
|
C
|
3,525 | 1,117 | (2,408 | ) |
CC
|
700,535 | 14.70 | % | 600,223 | (38,384 | ) | -6.39 | % | 54,745 | |||||||||||||||||||||||||||||
Preferred
Term Security XIX
|
C
|
1,512 | 479 | (1,033 | ) |
CC
|
700,535 | 14.70 | % | 600,223 | (38,384 | ) | -6.39 | % | 54,745 | |||||||||||||||||||||||||||||
Preferred
Term Security XXII
|
C-1
|
5,050 | 1,030 | (4,020 | ) |
C
|
1,386,600 | 22.90 | % | 1,073,662 | (147,307 | ) | -13.72 | % | 47,000 | |||||||||||||||||||||||||||||
Preferred
Term Security XXII
|
C-1
|
2,028 | 412 | (1,616 | ) |
C
|
1,386,600 | 22.90 | % | 1,073,662 | (147,307 | ) | -13.72 | % | 47,000 | |||||||||||||||||||||||||||||
Preferred
Term Security XXIII
|
C-1
|
1,981 | 703 | (1,278 | ) |
CCC
|
1,388,000 | 17.11 | % | 1,153,304 | (62,205 | ) | -5.39 | % | 90,000 | |||||||||||||||||||||||||||||
Preferred
Term Security XXIII
|
D-1
|
2,037 | 416 | (1,621 | ) |
CC
|
1,388,000 | 17.11 | % | 1,153,304 | (166,416 | ) | -14.43 | % | 90,000 | |||||||||||||||||||||||||||||
Preferred
Term Security XXIII
|
D-1
|
6,102 | 1,249 | (4,853 | ) |
CC
|
1,388,000 | 17.11 | % | 1,153,304 | (166,416 | ) | -14.43 | % | 90,000 | |||||||||||||||||||||||||||||
Preferred
Term Security XXIV*
|
C-1
|
1,636 | 341 | (1,295 | ) |
CC
|
1,050,600 | 28.49 | % | 754,135 | (185,237 | ) | -24.56 | % | 31,000 | |||||||||||||||||||||||||||||
Preferred
Term Security I-P-I
|
B-2
|
2,000 | 1,314 | (686 | ) |
B+
|
192,100 | 9.11 | % | 174,600 | 10,831 | 6.20 | % | - | ||||||||||||||||||||||||||||||
Preferred
Term Security I-P-IV
|
B-1
|
3,000 | 2,024 | (976 | ) |
B
|
312,700 | 4.16 | % | 299,700 | 23,162 | 7.73 | % | 13,000 | ||||||||||||||||||||||||||||||
Preferred
Term Security I-P-IV
|
B-1
|
5,000 | 3,374 | (1,626 | ) |
B
|
312,700 | 4.16 | % | 299,700 | 23,162 | 7.73 | % | 13,000 | ||||||||||||||||||||||||||||||
ALESC
11A*
|
D
|
1,630 | 20 | (1,610 | ) |
C
|
667,095 | 20.17 | % | 525,047 | (94,725 | ) | -18.04 | % | 4,200 | |||||||||||||||||||||||||||||
Total
Level 3 Securities Available
for Sale
|
59,928 | 20,759 | (39,169 | ) |
* Security
has been deemed other-than-temporarily impaired and loss has been
recognized in accordance with ASC Section 320-10-35.
|
Management systematically evaluates
securities for impairment on a quarterly basis. Based upon
application of new accounting guidance for subsequent measurement in Topic 320
(ASC Section 320-10-35) management must assess whether (a) it has the
intent to sell the security and (b) it is more likely than not that the
Corporation will be required to sell the security prior to its anticipated
recovery. If neither applies, then declines in the fair value of
securities below their cost that are considered other-than-temporary declines
are split into two components. The first is the loss attributable to
declining credit quality. Credit losses are recognized in earnings as
realized losses in the period in which the impairment determination is
made. The second component consists of all other
losses. The other losses are recognized in other comprehensive
income. In estimating other-than-temporary impairment losses,
management considers (1) the length of time and the extent to which the fair
value has been less than cost, (2) adverse conditions specifically related to
the security, an industry, or a geographic area, (3) the historic and implied
volatility of the security, (4) changes in the rating of a security by a rating
agency, (5) recoveries or additional declines in fair value subsequent to the
balance sheet date, (6) failure of the issuer of the security to make scheduled
interest payments, and (7) the payment structure of the debt security and the
likelihood of the issuer being able to make payments that increase in the
future. Due to the duration and the significant market value decline
in the pooled trust preferred securities held in our portfolio, we performed
more extensive testing on these securities for purposes of evaluating whether or
not an other-than-temporary impairment has occurred.
35
Twenty-two
of the pooled trust preferred securities in our portfolio have been in an
unrealized loss position for over 12 months. Although some of the
securities have been in a loss position for over one year, this is not an
automatic indication of an other-than-temporary impairment. Rather,
individual facts and circumstances may indicate that a decline in fair value
longer than 12 months may be temporary. Given the extraordinary
market conditions prevalent over the past nine months and the current economic
recession, additional consideration has been given to the length of time the
securities have been in a loss position and the likelihood that a market
recovery will be longer than an otherwise orderly market would
dictate.
The
factors to be considered in reaching a conclusion about the existence of
impairment may be both subjective and objective and include knowledge and
experience about past and current events as well as assumptions about future
events. In the case of the trust preferred securities, the decline in
fair value is attributable to adverse conditions in the market, adverse
conditions in the financial industry, as well as adverse conditions related to
the underlying issuers of the securities (all of whom operate in the financial
industry).
The
meltdown of the sub-prime mortgage market during the past two years has resulted
in the occurrence of unprecedented events in the financial services
industry. Large banking houses and investment firms have gone out of
business and/or consolidated, many banks have been closed by regulators and the
capital structures of many organizations have significantly
weakened. These events, in turn, have significantly and adversely
affected all sectors of the local, national and global economies and have
contributed to a national and worldwide liquidity and credit
crisis. The Federal Reserve Bank and the government have taken steps
to lower interest rates, inject capital into banks and financial companies,
establish outlets to sell troubled assets and have developed programs to modify
troubled mortgage loans. The new accounting guidance in ASC Topic 820
has been provided to relieve the uncertainties of fair market accounting
applications in markets where there has been a significant decrease in the
volume and level of activity resulting in non-orderly transactions and in ASC
Topic 320 to provide relief from other-than-temporary impairment not related to
credit problems. The fair market values of the pooled trust preferred
securities have shown the effects of all of these factors since the underlying
issuers all operate in some realm of the financial industry, most of them
community banks.
The
economic environment and its impact on the financial services industry have
virtually eliminated the market for the pooled trust preferred securities in our
portfolio. Management has determined that there has been a significant decrease
in the volume and level of activity in these securities. There are
few recent transactions in the market for these securities relative to
historical levels. There were no new pooled trust preferred issuances
during 2008 and there have been none to date in 2009. Trading
activity for pooled trust preferred securities indicates only three total trades
during the first quarter of 2009 and zero trades during the third quarter of
2009, compared to a high of 116 trades in the first quarter of
2008. The volume has declined from a high of $376 million in the
first quarter of 2007 to $0 during the second and third quarters of
2009. The trading and issuance data presented, along with information
from traders, indicates that there is currently an inactive and inefficient
market in pooled trust preferred securities which is contributing to the
depressed pricing on these securities. Price quotations are clearly
indicative of distressed trades and vary significantly from prices achieved
during an active market. Comparing each issuer’s estimate of cash
flows and, taking into consideration all available market data and
nonperformance risk, there is a significant increase in the implied liquidity
risk premiums and yields on the securities. This has led to a wide
bid-ask spread as buyers for the securities are seeking “fire-sale” prices and
owners of the securities are not willing to accept such pricing.
All of
the above mentioned issues, coupled with the general interest rate environment,
have had an adverse impact on the underlying banks and insurance company issuers
of the pooled trust preferred securities. The generally accepted
accounting principles that we use to prepare our financial statements require
management to consider all available evidence in its evaluation of the
realizable value of an investment. Judgment is required to determine
whether factors exist that indicate an impairment loss has been incurred at the
end of a reporting period. The judgment may be based on both
subjective and objective factors. At the time of purchase, nineteen
of the Trust Preferred securities were rated A and seven were rated
BBB. In its analysis, management considered the credit ratings as
part of its overall evaluation of the underlying
collateral. Management also recognizes that there have been instances
over the past several months where highly rated securities have
failed. Two of the preferred term securities in our portfolio were
downgraded by Moody’s in the fourth quarter of 2008 and an additional eight were
downgraded in March 2009. During the quarter ended June 30, 2009, the
remaining preferred term securities in our portfolio were downgraded below
investment grade by Fitch Ratings. Due to the credit
downgrades, management performed an in-depth analysis of the underlying issuers
in every trust preferred security owned by the Corporation and shock tests of
collateral values were performed in order to determine how much stress the
securities could withstand before a loss in principal would be
experienced.
36
For
securities that are considered beneficial interests under the guidance of ASC
Subtopic 325-40, Investments –
Other – Beneficial Interests in Securitized Financial Assets, (ASC
Section 325-40-35), management also monitors cash flow projections for
significant adverse changes. The guidance removes the requirement to estimate
cash flows from the views of a market participant but rather to base the
estimate of cash flows on current information and events. Further, in
making the other-than-temporary assessment, the holder should consider all
relevant information about past events, current conditions, and reasonable and
supportable forecasts when estimating future cash flows. This
information should include remaining payment terms of the security, prepayment
speeds, the financial condition of the issuer(s), expected defaults, and the
value of any underlying collateral.
The
guidance in ASC Subtopic 325-40 requires that the present value of the current
estimated cash flows be compared to the present value of cash flows at the last
reporting date. If the present value of the original cash flows
estimated at the initial transaction date (or at the last date previously
revised) is greater than the present value of the current estimated cash flows,
the change is considered adverse (that is, an other-than-temporary impairment
should be considered to have occurred). The following assumptions
were used in our cash flow tests:
|
1.
|
Default Rate –
0.75% applied annually to bank and insurance collateral; 15% recovery
after two years.
|
|
·
|
Based
upon FDIC data, the default data since the late 70’s demonstrates that BIF
(Bank Insurance Fund) insured institutions defaulted at a rate of
approximately 36 basis points (bps) per
year.
|
|
·
|
Based
upon A.M. Best number of impairments experienced in the insurance industry
of 72 bps per year.
|
|
·
|
On
11/21/08, Standard & Poor’s published “Global Methodology for Rating
Trust Preferred/Hybrid Securities Revised”. This study lists a
recovery assumption of 15%.
|
|
2.
|
Prepayment Speed
– 1% annually; 100% at
maturity;
|
|
·
|
Based
upon a preferred term security historical collateral redemption summary;
updated since 9/30/08 to reflect the slow-down in pre-payment speeds and
the reluctance on the part of banks to release capital in the current
market environment. Anticipated life to maturity is used
because auction take-out is currently considered
unlikely.
|
|
3.
|
LIBOR Rate is
assumed to remain constant for all
periods
|
|
4.
|
Additional Defaults
and Deferrals – actual defaults that have been experienced in the
pools and actual and announced deferrals have been incorporated into
expected cash flows for each individual
security.
|
|
5.
|
Discount Rate –
the rate equal to the current yield used to accrete the beneficial
interest as required in FASB ASC paragraph
325-40-35-6
|
In accordance with FASB ASC section
325-40-35, the present value of cash flow for the Preferred Term Securities at
9/30/09 was compared to the present value of the cash flows previously projected
at 6/30/09. The results showed that the present value of the
current estimated cash flows were greater than or equal to the present value of
cash flows at the last reporting date for all securities except for
six. As a result, management determined that we do not expect to
recover the securities’ entire amortized cost basis on those six issues and as
such, they were deemed other-than-temporarily impaired at
9/30/2009. Based on this calculation, a credit loss in the amount of
approximately $8.7 million was recognized in earnings for this
period. In addition, two of these securities were moved to held
for trading since the securities showed no future cash flow
potential.
On
October 13, 2008, as part of the U.S. government’s economic stabilization plan,
the U.S. Department of the Treasury (the “Treasury”) announced two plans, the
Troubled Asset Relief Program Capital Purchase Program (“CPP”) and the Temporary
Liquid Guarantee Program (“TLGP”). The regulators highly encouraged
participation in the programs in order to build capital levels, supply
additional liquidity to the banking industry, and improve financial ratios for
the large regional and national banks and the community banks. A
third program, the Capital Assistance Program, was adopted during the first
quarter of 2009. Many of the banks who issued the trust preferred
securities in our portfolio have announced participation in one or more of these
programs. Management believes that these programs should help to
bolster confidence in the industry and, eventually, provide capital and
liquidity to the banking industry, but a long recovery is
anticipated.
Management does not intend to sell
these securities nor is it more likely than not that the Corporation will be
required to sell the securities prior to recovery. The risk-based
capital ratios require that banks set aside additional capital for securities
that are rated below investment grade. Securities rated one level
below investment grade require a 200% risk weighting. Additional
methods are applicable to securities rated more than one level below investment
grade. As of September 30, 2009, management believes that we maintain
sufficient capital and liquidity to cover the additional capital requirements of
these securities and future operating expenses. Additionally, we do
not anticipate any material commitments or expected outlays of capital in the
near term.
37
Deposits
The
following table presents the composition of our deposits as of the dates
indicated:
(Dollars
in millions)
|
September
30, 2009
|
December
31, 2008
|
||||||||||||||
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||
Non-interest
bearing demand deposits
|
$ | 107.6 | 9 | % | $ | 107.7 | 9 | % | ||||||||
Interest-bearing
demand deposits
|
413.3 | 33 | 430.9 | 35 | ||||||||||||
Savings
deposits
|
31.3 | 3 | 33.1 | 3 | ||||||||||||
Time
deposits less than $0.1
|
296.5 | 24 | 298.8 | 24 | ||||||||||||
Time
deposits $0.1 or more
|
388.4 | 31 | 352.4 | 29 | ||||||||||||
Total
Deposits
|
$ | 1,237.1 | 100 | % | $ | 1,222.9 | 100 | % |
Deposits increased $14.2 million during
the first nine months of 2009 when compared to deposits at December 31,
2008. Interest-bearing demand deposits decreased $17.6 million,
non-interest bearing demand deposits decreased slightly by $0.1 million and
savings deposits declined by $1.8 million. During the second quarter
of 2009, management repaid $42 million of brokered money market
deposits. Time deposits increased $33.7 million due to a successful
promotion of the 13 and 24-month certificate of deposit products. We
are shifting our focus to longer-term liabilities as we anticipate a flat to
rising interest rate environment in the future.
Borrowed
Funds
The
following table presents the composition of our borrowings at the dates
indicated:
(Dollars
in millions)
|
September
30, 2009
|
December
31, 2008
|
||||||
Short-term
borrowings
|
$ | 0.0 | $ | 8.5 | ||||
Securities
sold under agreements to repurchase
|
46.2 | 42.0 | ||||||
Total
short-term borrowings
|
$ | 46.2 | $ | 50.5 | ||||
FHLB
advances
|
$ | 240.7 | $ | 241.5 | ||||
Junior
subordinated debt
|
35.9 | 35.9 | ||||||
Total
long-term borrowings
|
$ | 276.6 | $ | 277.4 |
Total short-term borrowings decreased
by approximately $4.3 million during the first nine months of 2009 due primarily
to the Corporation being in an overnight investment position at September 30,
2009 offset by an increase of $4.2 million in repurchase
agreements. Long-term borrowings decreased during the first nine
months of 2009 by $0.8 million due to scheduled monthly amortization of
long-term advances.
Liquidity
and Capital Resources
We derive
liquidity through increased customer deposits, maturities in or sale of the
investment portfolio, loan repayments and income from earning
assets. When deposits are not adequate to fund customer loan demand,
liquidity needs can be met in the short-term funds markets through arrangements
with our correspondent banks or through the purchase of brokered certificates of
deposit. The Bank is also a member of the FHLB of Atlanta, which
provides another source of liquidity. As discussed in Note H to the consolidated
financial statements presented elsewhere in this report, we may from time to
time access capital markets and/or borrow funds from private investors to meet
some of our liquidity needs. We actively manage our liquidity
position through the Asset and Liability Management Committee of the Board of
Directors. Monthly reviews by management and quarterly reviews by the
committee under prescribed policies and procedures are designed to ensure that
we will maintain adequate levels of available funds.
In
response to current economic conditions, management has performed an extensive
review of the Bank’s liquidity position and has identified areas to increase
liquidity over the next three to six months. We have identified
alternative methods to reduce the pledges on securities in our investment
portfolio. We are reducing our indirect lending and investing excess
cash flow in short-term investments, and have identified the availability of a
money market funding source from our in-house broker dealer. In
addition, the TLGP, which was extended to June 30, 2010, has also allowed us to
release investment collateral.
38
Management
believes that we have adequate liquidity available to respond to current and
anticipated liquidity demands and is unaware of any trends or demands,
commitments, events or uncertainties that will materially affect our ability to
maintain liquidity at satisfactory levels.
The
following table presents the Corporation’s capital ratios at September 30,
2009:
Required
|
Required
|
|||||||||||
For
Capital
|
To
Be
|
|||||||||||
Adequacy
|
Well
|
|||||||||||
Actual
|
Purposes
|
Capitalized
|
||||||||||
Total
Capital (to risk-weighted assets)
|
10.61 | % | 8.00 | % | 10.00 | % | ||||||
Tier
1 Capital (to risk-weighted assets)
|
9.23 | 4.00 | 6.00 | |||||||||
Tier
1 Capital (to average assets)
|
8.75 | 3.00 | 5.00 |
At
September 30, 2009, First United Corporation and the Bank were categorized as
“well capitalized” under federal banking regulatory capital
requirements. As noted above, pursuant to the Treasury’s CPP, the
Corporation sold 30,000 shares of Preferred Stock and a related warrant to
purchase 326,323 shares of common stock for an exercise price of $13.79 per
share to the Treasury for an aggregate purchase price of $30
million. The proceeds from this transaction count as Tier 1 capital
and the warrant qualifies as tangible common equity. Information
about the terms of these securities is provided in Note J to the consolidated
financial statements presented elsewhere in this report.
On August
17, 2009, the Corporation paid a cash dividend on the Series A Preferred Stock
in the amount of $375,000. The third quarter dividend will be paid on
November 17, 2009.
First
United Corporation paid a cash dividend of $0.20 per common share on July 31,
2009. On September 23, 2009, the Board of Directors declared another
dividend of an equal amount, to be paid on November 2, 2009 to shareholders of
record as of October 14, 2009.
First
United Corporation is pursuing options to raise capital during the fourth
quarter of 2009 in order to better position the Bank for future opportunities
and to build capital reserves as the Company progresses through the economic
recovery.
Contractual
Obligations, Commitments and Off-Balance Sheet Arrangements
Loan commitments are made to
accommodate the financial needs of our customers. Letters of credit
commit us to make payments on behalf of customers when certain specified future
events occur. The credit risks inherent in loan commitments and
letters of credit are essentially the same as those involved in extending loans
to customers, and these arrangements are subject to our normal credit
policies. Loan commitments and letters of credit totaled $112.6
million and $4.5 million, respectively, at September 30, 2009, compared to
$142.3 million and $5.9 million, respectively, at December 31,
2008. We are not a party to any other off-balance sheet
arrangements.
See Note
I to the consolidated financial statements presented elsewhere in this report
for further disclosure on Borrowed Funds. There have been no other
significant changes to contractual obligations as presented at December 31,
2008.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
Our primary market risk is interest
rate fluctuation and we have procedures in place to evaluate and mitigate this
risk. This market risk and our procedures are described in First
United Corporation’s Annual Report on Form 10-K for the year ended December 31,
2008 under the caption “Management’s Discussion and Analysis of Financial
Condition and Results of Operation – Interest Rate
Sensitivity”. Management believes that no material changes in our
market risks or in the procedures used to evaluate and mitigate these risks have
occurred since December 31, 2008.
39
Item
4. Controls and Procedures
We maintain disclosure controls and
procedures that are designed to ensure that information required to be disclosed
in our reports filed under the Securities Exchange Act of 1934 with the SEC,
such as this Quarterly Report, is recorded, processed, summarized and reported
within the periods specified in those rules and forms, and that such information
is accumulated and communicated to our management, including the Chief Executive
Officer (“CEO”) and the Chief Financial Officer (“CFO”), as appropriate, to
allow for timely decisions regarding required disclosure. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are
met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls is also
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, controls may
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate.
An evaluation of the effectiveness of
these disclosure controls as of September 30, 2009 was carried out under the
supervision and with the participation of Management, including the CEO and the
CFO. Based on that evaluation, Management, including the CEO and the
CFO, has concluded that our disclosure controls and procedures are, in fact,
effective at the reasonable assurance level.
During the third quarter of 2009, there
was no change in our internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
Part
II. OTHER INFORMATION
Item
1. Legal Proceedings
None.
Item
1A. Risk Factors
The risks and uncertainties to which
our financial condition and operations are subject are discussed in detail in
Item 1A of Part I of the Annual Report of First United Corporation on Form 10-K
for the year ended December 31, 2008. Management does not believe
that any material changes in our risk factors have occurred since December 31,
2008.
Item
2. Unregistered Sales of Equity 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.
40
Item
6. Exhibits
The
exhibits filed or furnished with this quarterly report are listed in the Exhibit
Index that follows the signatures, which index is incorporated herein by
reference.
41
SIGNATURES
Pursuant to the requirements 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
6, 2009
|
/s/ William B. Grant | |
William
B. Grant, Chairman of the Board
|
||
and
Chief Executive Officer
|
||
Date November
6, 2009
|
/s/ Carissa L. Rodeheaver | |
Carissa
L. Rodeheaver, Executive Vice President
|
||
and
Chief Financial Officer
|
42
EXHIBIT
INDEX
Exhibit
|
Description
|
|
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
|
|
Certification
of the CEO and the CFO pursuant to Section 906 of the Sarbanes-Oxley Act
(furnished herewith)
|
43