FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended September 30, 1999
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
incorporation or organization) Identification no.)
19 South Second Street, Oakland, Maryland 21550-0009
(address of principal executive offices) (zip code)
(301) 334-4715
Registrant's telephone number, including area code
Not applicable
Former name, address and former fiscal year, if changed since
last report.
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter periods that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Common stock, $.01 Par value--6,085,171 shares outstanding as of
September 30, 1999 Preferred stock, No par value--No shares
outstanding as of September 30, 1999.
- -01-
INDEX
FIRST UNITED CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1999
(Unaudited), December 31, 1998, and September 30, 1998(Unaudited).
Consolidated Statements of Income (Unaudited) - Nine months
ended September 30, 1999 and 1998 and three months ended September 30, 1999
and 1998.
Consolidated Statement of Cash Flows (Unaudited) - Nine
months ended September 30, 1999 and 1998.
Notes to Unaudited Consolidated Financial Statements.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Item 2. Changes in Securities.
Item 3. Defaults upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
SIGNATURES
-02-
FIRST UNITED CORPORATION
Consolidated Balance Sheet
(In Thousands)
Sept. 30, Dec. 31, Sept. 30,
Assets 1999 1998 1998
(Unaudited) (*) (Unaudited)
-----------------------------
Cash and due from banks $15,675 $13,633 $15,024
Investment securities:
U.S. Treasury Securities 602 1,921 1,925
Obl. of other U S Gov. Agen. 40,390 45,082 44,561
Obl. of St. and Loc. Govt 25,753 22,327 23,006
Other investments 90,771 31,365 30,942
-------------------------
Total investment securities 157,516 100,695 100,434
Federal funds sold 21,750 - -
Loans and Leases 568,784 508,972 483,764
Reserve for poss. credit losses (3,910) (3,304) (3,021)
---------------------------
Net loans 564,874 505,668 480,743
Bank premises and equipment 9,518 9,136 9,526
Acc. int. Rec. and other assets 19,653 11,982 11,300
----------------------------
Total Assets $788,986 $641,114 $617,027
============================
* The balance sheet at December 31, 1998 has been derived from
the audited financial statements at that date.
See notes to unaudited consolidated financial statements.
() Indicates Deduction
-03-
FIRST UNITED CORPORATION
Consolidated Balance Sheet
Sept. 30, Dec. 31, Sept. 30,
1999 1998 1998
(Unaudited) (*) (Unaudited)
Liabilities ------------------------------
Deposits
Non-int. bearing deposits $ 64,394 $ 54,554 $ 55,592
Interest bearing deposits 525,324 456,946 452,111
---------------------------
Total deposits 589,718 511,500 507,703
Reserve for taxes, int., &
other liabilities 8,339 5,594 5,074
Federal Home Loan Bank borrowings
and other borrowed money 109,000 64,575 45,250
Dividends payable 948 971 1,947
Other Long Term Debt 23,000 - -
------------------------------
Total Liabilities 731,005 582,640 559,974
Shareholders' Equity
Preferred stock -no par value
Authorized and unissued; 2,000 Shares
Capital Stock -par value $.01 per share:
Authorized 25,000 shares; issued and
outstanding 6,085 shares at September 30,
1999, 6,155 outstanding at December
31, 1998, and 6,175 outstanding at
September 30, 1998 61 62 62
Surplus 20,269 21,384 21,780
Retained earnings 39,507 36,559 34,452
Accumulated other
comprehensive income (1,856) 469 759
---------------------------
Total Shareholders' Equity 57,981 58,474 57,053
---------------------------
Total Liabilities and
Shareholders' Equity $788,986 $641,114 $617,027
============================
* The balance sheet at December 31, 1998 has been derived from
the audited financial statements at that date.
See Notes to unaudited consolidated financial statements.
() Indicates Deduction
-04-
FIRST UNITED CORPORATION
Consolidated Statement Of Income
(In Thousands, except per share data) Nine Months
Ended September 30,
1999 1998
-------------------
(Unaudited)
Interest income
Interest and fees on loans and leases $ 34,525 $ 30,446
Interest on investment securities:
Taxable 3,989 3,715
Exempt from federal income tax 835 580
--------------------
4,824 4,295
Interest on federal funds sold 217 117
--------------------
Total interest income 39,566 34,858
Interest expense
Interest on deposits:
Savings 538 630
Interest-bearing transaction acct. 2,736 2,516
Time, $100,000 or more 3,542 2,536
Other time 9,122 9,360
Interest on Federal Home Loan Bank
Borrowings & other borrowed
money 2,887 1,112
--------------------
Total interest expense 18,825 16,154
--------------------
Net interest income 20,741 18,704
Provision for possible credit losses 1,396 816
--------------------
Net interest income after provision
for possible credit losses 19,345 17,888
Other operating income
Trust department income 1,269 1,050
Service charges on deposit accts. 1,470 1,872
Insurance premium income 520 189
Security gains 116 85
Other income 1,581 1,521
--------------------
Total other operating income 4,956 4,717
-05-
Other operating expenses
Salaries and employees benefits 7,628 7,092
Occupancy expense of premises 731 798
Equipment expense 1,258 1,264
Data processing expense 646 450
Deposit assess. and related fees 84 118
Other expense 5,166 4,730
--------------------
Total other operating expenses 15,513 14,452
--------------------
Income before income taxes 8,788 8,153
Applicable income taxes (3,017) (2,842)
--------------------
Net income $5,771 $5,311
====================
Earnings per share $0.94 $0.85
====================
See Notes to Unaudited consolidated financial statements.
-06-
FIRST UNITED CORPORATION
Consolidated Statement Of Income
(In Thousands, except per share data) Three Months
Ended September 30,
1999 1998
-------------------
(Unaudited)
Interest income
Interest and fees on loans and leases $ 12,063 $ 10,501
Interest on investment securities:
Taxable 1,553 1,255
Exempt from federal income tax 312 221
-------------------
1,865 1,476
Interest on federal funds sold 112 25
-------------------
Total interest income 14,040 12,002
Interest expense
Interest on deposits:
Savings 288 168
Interest-bearing transaction acct. 992 859
Time, $100,000 or more 1,092 856
Other time 3,311 3,168
Interest on Federal Home Loan Bank
Borrowings & other borrowed
money 1,223 604
-------------------
Total interest expense 6,906 5,655
-------------------
Net interest income 7,134 6,347
Provision for possible credit losses 560 341
-------------------
Net interest income after provision
for possible credit losses 6,574 6,006
Other operating income
Trust department income 432 350
Service charges on deposit accts. 477 628
Insurance premium income 352 59
Security gains 106 82
Other income 515 525
------------------
Total other operating income 1,882 1,648
-07-
Other operating expenses
Salaries and employees benefits 2,622 2,373
Occupancy expense of premises 251 276
Equipment expense 447 437
Data processing expense 231 178
Deposit assess. and related fees 30 34
Other expense 1,810 1,457
---------------------
Total other operating expenses 5,391 4,755
---------------------
Income before income taxes 3,065 2,899
Applicable income taxes (1,057) (1,012)
---------------------
Net income $2,008 $1,887
=====================
Earnings per share $0.33 $0.30
=====================
See Notes to Unaudited consolidated financial statements.
-08-
FIRST UNITED CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Nine Months
Ended September 30,
1999 1998
--------------------
(Unaudited)
Operating activities
Net Income $ 5,771 $ 5,311
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible credit losses 1,396 816
Provision for depreciation 1,990 1,147
Net accretion & amortization of investment
security discounts & premiums 191 156
Realized gain on sale
of investment securities (116) (85)
Increase in acc. interest
& other assets (7,671) (2,439)
Increase in accrued interest
& other liabilities 2,722 990
--------------------
Net cash provided by operating activities $ 4,283 $ 5,896
Investing activities
Proceeds from maturities of available-for-
sale securities $104,311 $ 60,233
Purchases of available-for-sale securities (163,515) (62,570)
Proceeds form maturities of held-to-maturity
securities - 5,530
Purchases of held-to-maturity securities - (8,625)
Net increase in loans (60,602) (42,823)
Purchases of premises & equipment (2,372) (1,423)
-------------------
Net cash used in investing activities $(122,178) $(49,678)
Financing activities
Increase in Federal Home Loan Bank borrowings
and other borrowed money $ 44,425 $ 39,025
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts 15,671 (4,175)
Net increase in certificates of deposit 62,547 11,818
Cash dividends paid or declared (2,841) (3,767)
Proceeds from Issuance of Long Term Debt 23,000 -
Acquisition and retirement of Common Stock (1,115) (1,681)
Net cash provided by -------------------
financing activities $ 141,687 41,220
Cash and cash equivalents at beg. of year $ 13,633 $ 17,586
Increase (decrease) in cash & cash equiv. 23,792 (2,562)
--------------------
Cash & cash equivalents at end of period $ 37,425 $ 15,024
====================
See Notes to unaudited consolidated financial statements.
-09-
FIRST UNITED CORPORATION
Note to Unaudited Consolidated Financial Statements
September 30, 1999
Note A -- Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all the information and footnotes required
for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation, consisting of
normal recurring items have been included. Operating results for the nine
month period ended September 30, 1999, are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999. The
enclosed consolidated financial statements should be read in conjunction with
the consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1998.
Earnings per share are based on the weighted average number of shares
outstanding of 6,113 and 6,222 for the nine months ended September 30, 1999
and 1998, respectively.
Note B - Comprehensive Income
Accumulated other comprehensive income represents the unrealized gains and
losses on the company's available-for-sale securities, net of income taxes.
During the first nine months of 1999 and 1998, total comprehensive income,
net income plus the change in unrealized gains (losses) on available-for-sale
securities, amounted to $3,915 million and $5,792 million, net of income
taxes, respectively.
Note C - Trust Preferred Securities
First United Capital Trust, a Delaware business trust organized by the
Company on July 19, 1999, issued $23 million of aggregate liquidation amount
of 9.375% Preferred Securities (the Capital Securities). The payment terms
require the Trust to distribute 9.375% per $10 liquidation amount of Capital
Securities on March 31, June 30, September 30, and December 31 of each year,
beginning September 30, 1999.
The common securities of the Trust (Common Securities) are wholly owned by
the Company. The Common Securities are the only class of Trust securities
with general voting powers. For financial reporting purposes, the Trust is
treated as a wholly owned subsidiary of the Company. The Capital Securities
represent preferred undivided interests in the assets of the Trust, and are
classified in the Company's consolidated balance sheet as other long-term
debt, with distributions on the securities included in in interest expense.
-10-
The proceeds from the issuance of the Capital Securities and Common
Securities were used by the Trust to purchase $23 million aggregate principal
amount of junior subordinated debentures (Junior Subordinated Debentures)
issued by the Company to the Trust.
The Junior Subordinated Debentures represent the sole asset of the Trust,
and payments under the Junior Subordinated Debentures are the sole source of
cash flow for the Trust.
-11-
Part I. Financial Information
Item II. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Consolidated net income for the quarter ended September 30, 1999 totaled
$2.01 million, which is $.121 million more than was recorded for the third
quarter of 1998. This translates into $.33 per share for the current period.
For the same quarter of 1998, each share earned $.30. Consolidated net income
for the nine month period ended September 30, 1999 totaled $5.77 million,
which is $.46 million more than was recorded for the same period of 1998.
This translates into $.94 per share for the year. For the same period of
1998, each share earned $.85. Return on Average Equity (ROAE)increased
slightly from 12.92%, at December 31, 1998, to 13.19% as of September 30,
1999.
The "efficiency ratio" is a key measuring tool for profitability and
operating efficiency. The calculation for the efficiency ratio is noninterest
expense divided by net operating revenue,(net interest income plus other
operating income) excluding nonrecurring items and securities gains and
losses. A lower ratio equals higher profitability and operating efficiencies.
The Corporation's efficiency ratio was 59.02% for the period ended September
30, 1999. This represents a slight decline in efficiency from year end 1998
when the ratio was 58.98%.
Fee income from our Business Manager, PrimeVest, and Trust Sevices has
increased 16.88% or $.26 million compared to the same period in 1998. Driven
by these three income sources, other operating income increased 10.55% in
comparison to September 30, 1998. Other operating income for the first nine
months of 1999 was $4.96 million compared to $4.72 million for the same
period in 1998. Other operating expense for the first nine months of 1999
was $15.51 million compared to $14.45 million for the same period in 1998.
This 7.39% increase is a direct result of salaries and empolyee benefits
increasing from $7.09 million in 1998 to $7.63 million in 1999. This
represents an increase of 7.56%, primarily due to the purchase of Gonder
Insurance Agency in the second quarter of 1999 and the Corporation's
continued policy of rewarding its employees for exceeding their goals.
The loan growth in the third quarter continued to be strong. In the third
quarter, net loans grew $17.62 million to a total of $564.87 million. The
growth for the same quarter of 1998 was $16.78 million, bringing the total to
$480.74 million. Year to date 1999, net loans have grown $59.21 million.
The majority of this growth has been in the installment portfolio which has
grown $57.09 million in 1999.
As a result of our loan growth, interest income at September 30, 1999 was
$39.57 million compared to $34.86 at September 30, 1998. This total
represents an increase of $4.72 million or 13.54%.
Total investment securities have increased $56.82 million or 5.64% since
December 31, 1998. The proceeds from the sale of Junior Subordinated
Debentures to First United Capital Trust were used by the Company to purchase
investment securities. These securities include rated trust preferred
securities, bank qualified municipal bonds, and mortgage backed securities.
The securities were purchased as part of a plan to defease the cost of the
Capital Securities.
-12-
The corporation's interest expense year to date was $2.67 million higher
than was recorded for the same period in 1998. Interest expense increased
$1.25 million from the same quarter last year. The increase in expense can be
attributed to deposit growth of $82.02 million from September 30, 1998 to
September 30, 1999 as well as growth of $63.75 million in Federal Home Loan
Bank Borrowings and other borrowed funds in the same time frame. The deposits
of the Corporation grew $78.22 million year to date and $ 50.56 million in
the third quarter. The year to date increase in deposits includes $36.47
million in brokered certificates of deposit. These deposits were sought as an
alternative to additional borrowings. To help fund the liquidity needs of
the Corporation, additional borrowings from the Federal Home Loan Bank of
Atlanta and various correspondent banks were utilized. Borrowed funds increased
from $64.58 million at December 31, 1998 to $109.00 million at September
30, 1999. This represents an increase of $44.42 million or 68.78%. As
always, it is of utmost importance that we constantly evaluate the funding
sources available to the Corporation to choose the one that not only provides
the greatest cost benefit but also allows us the flexibility to be
competitive in today's market place.
Net interest income for the first nine months of 1999 increased
9.59% from the same period in 1998, to a total of $20.74 million. The result
was a Corporate net interest margin of 4.38% in comparison to the net
interest margin of 4.56% for the year ending 1998. The decline can be
attributed to the intense competition for traditional deposits which has
driven our cost of funds upward. Although the margin is within the
expectations of the Corporation, varying market conditions and rising deposit
costs constantly cause us to reevaluate our acceptable margin on loans and
deposits. Return on Average Assets (ROAA) has decreased 9.68% to 1.12% at
September 30, 1999 compared to 1.24% at December 31, 1998.
The provision for possible credit losses was $1.40 million for the first
nine months of 1999 compared to $.82 million for the same period in 1998.
Net charge-offs for the first nine months were $0.79 million, which equates
to 0.14% of our net loan total of $564.87 million. For the same period of
1998, net charge-offs were $.45 million or 0.09% of the September 30, 1998
net loans of $480.74 million. The increase in the provision for possible
credit losses was made to maintain an adequate reserve in light of the strong
loan growth experienced year to date and to provide for the increase in net
charge offs. Our loan quality continues to be strong as demonstated by the
over 30-day delinquency ratio of 1.13% of gross loans, a number which compares
very favorably with our peers. Nonperforming loans were .27% of total loans
as of September 30, 1999, and our loan loss reserve was .69% of total loans,
representing 296.89% of nonperforming loans.
-13-
Summary of Loan Loss Experience
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
September 30, 1999
----------------
Balance at the Beginning of the period 1/1/99 $3,304
Charge-offs:
Domestic:
Commercial, financial and agricultural 223
Real estate - mortgage 43
Installment loans to individuals 805
----------------
1,071
----------------
Recoveries:
Domestics:
Commercial, financial and agricultural 130
Real estate - mortgage 38
Installment loans to individuals 113
---------------
281
---------------
Net Charge-offs 790
---------------
Additions charged to operations 1,396
---------------
Balance at end of period $3,910
===============
Ratio of net charge-offs during the period to average
Loans outstanding during the period .14%
===============
Risk Elements of Loan Portfolio
The following table provides a comparison of the Risk Elements of the Loan
Portfolio in the format prescribed by Item III-C of Industry Guide 3. The
Bank has no foreign loans or loans defined as troubled debt restructurings.
Further, the Bank has no potential problem loans other than those in the
table below. First United's non-accrual loans increased $.034 million in the
first nine months of 1999 from the year end total of $.46 million.
September 30 Dec. 31
1999 1998
----------------------
Non-accrual loans $494 $460
Accruing loans past due 90 days or more 823 544
Information with respect to non-accrual loans at September 30, 1999 and
December 31,1998 are as follows:
Non-accrual Loans $494 $460
Interest income that would have been recorded
under original terms 7 30
Interest income recorded during the period 7 6
-14-
A strength of First United has always been its capital position.
Shareholders' equity remained strong at $57.98 million, a .84% decrease from
December 31, 1998, which was $58.47 million. Risk based capital, which is an
expression of the Corporation's stability and security was 15.27%, which is
more than the 13.40% reported at December 31, 1998. Both are in excess of the
regulatory minimum of 8.00 percent.
The Corporation through First United Capital Trust, a Delaware business
trust, issued $23 million of aggregate liquidation amount of 9.375% Preferred
Securities on August 25, 1999. The payment terms require the Trust to
distribute 9.375% per $10 liquidation amount of Capital Securities on March
31, June 30, September 30, and December 31 of each year, beginning September
30, 1999.
The proceeds from the issuance of the Preferred Securities were used by
the Trust to purchase $23 million aggregate principal amount of junior
subordinated debentures issued by the Company to the Trust. These debentures,
which are included in the Corporation's risk based capital calculations, were
issued to enhance the capital position of First United Bank & Trust and to
allow the Bank to continue its growth. The debentures are scheduled to
mature on September 30, 2029. The Trust may redeem the Preferred Securities
if the Trust repays the junior subordinated debentures on or after September
30, 2004.
On July 31, 1996, the Board of Directors ratified a stock buy back
program. The Corporation's management has authority to repurchase up to 5
percent of the outstanding shares of First United Corporation at a price
management deems appropriate. On April 29, 1998 the Board of Directors
ratified an amendment to the Plan which would enable the Corporation's
management to repurchase an additional 5 percent or 309,048 shares. As of
September 30, 1999 the Corporation has repurchased 421,189 shares at a price
of $7.37 million. This represents 6.47% of the approved 10 percent.
No shares were repurchased during the third quarter.
The Corporation paid cash dividends of $.155 on February 1, 1999, May 1,
1999, and August 1, 1999. On September 15, 1999, the Corporation declared
another dividend of equal amount, to be paid November 1, 1999, to
shareholders of record at October 20, 1999.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults upon Senior Securities.
None.
-15-
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
-16-
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of1934,
the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
FIRST UNITED CORPORATION
Date 10/29/99 /s/ WILLIAM B. GRANT
---------- ----------------------------------------
William B. Grant, Chairman of the Board
and Chief Executive Officer
Date 10/29/99 /s/ Robert W. Kurtz
---------- ----------------------------------------
Robert W Kurtz, President and Chief
Financial Officer
-17-
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 10/29/99
---------- ----------------------------------------
William B. Grant, Chairman of the
Board and Chief Executive Officer
Date 10/29/99
---------- ---------------------------------------
Robert W. Kurtz, President and Chief
Financial Officer
-18-
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