UNITED STATES SECURITIES AND EXCHANGE COMMISSION FORM 10-K
WASHINGTON, DC 20549
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-14237
FIRST UNITED CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 52-1380770
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
19 South Second Street
Oakland, Maryland 21550-0009
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (301) 334-9471
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months, and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosures of delinquent filers pursuant
to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of the
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. X
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of February 29, 2000: Common Stock $.01
Par Value-$72,963,276
The number of shares outstanding of the registrant's classes of common
stock as of February 29, 2000: 6,080,273 Shares
Documents Incorporated by Reference
Portions of the registrant's definitive proxy statement for the annual
shareholders meeting to be held April 25, 2000, are incorporated by
reference into Part III.
[2]
First United Corporation
Table of Contents
PART I
Item 1. Business 3-6
Item 2. Properties 6-7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II
Item 5. Market for the Registrant's Common Stock and Related
Shareholder Matters 7-8
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8-23
Item 7A. Quantitative and Qualitative Disclosure About
Market Risk 24
Item 8. Financial Statements and Supplementary Data 24-43
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 43
PART III
Item 10. Directors and Executive Officers of the Registrant 44-45
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial Owners and
Management 45
Item 13. Certain Relationships and Related Transactions 45
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 45
Signatures 46
[3]
PART I
Item 1. BUSINESS
FIRST UNITED CORPORATION
First United Corporation (the "Corporation") headquartered in Oakland,
Maryland, is a one-bank holding company with two non-bank subsidiaries.
The Corporation was organized under the laws of the State of Maryland
in 1985. In 1995, the Corporation merged two of its three wholly owned
banking subsidiaries, First United Bank of West Virginia, N.A. and
Myersville Bank, with its other wholly owned banking subsidiary,
First United Bank & Trust.
First United Bank & Trust, a Maryland state chartered company,
Oakfirst Life Insurance Corporation, an Arizona reinsurance company, and
First United Capital Trust, a Delaware statutory business trust are the
only direct subsidiaries of the Corporation.
FIRST UNITED BANK & TRUST
First United Bank & Trust is a commercial bank whose predecessor bank,
First United National Bank & Trust, was originally chartered in 1900. The
deposits of First United Bank & Trust are insured by the Federal Deposit
Insurance Corporation (FDIC).
First United Bank & Trust operates twenty-two banking offices, five
facilities in Garrett County, Maryland, six in Allegany County, Maryland,
three in Washington County, Maryland, two in Frederick County, Maryland,
two in Mineral County, West Virginia, one in Hampshire County, West
Virginia, two in Berkeley County, West Virginia and one in Hardy County,
West Virginia. First United Bank & Trust also operates a total of
twenty-nine Automated Teller Machines (ATM's), ten of which are located
in Garrett County, Maryland, eight in Allegany County, Maryland, four
in Washington County, Maryland, three in Frederick County, Maryland,
and one each in Mineral, Hampshire, Berkeley and Hardy Counties in
West Virginia. First United Bank & Trust provides a complete range of
retail and commercial banking services to a customer base in Garrett,
Allegany, Washington and Frederick Counties in Maryland, in Mineral,
Hampshire, Berkeley and Hardy Counties in West Virginia and to residents
in surrounding regions of Pennsylvania and West Virginia. The customer
base in the aforementioned geographical area consists of individuals,
businesses and various governmental units. The services provided by First
United Bank & Trust include checking, savings, NOW and Money Market
deposit accounts, business loans, personal loans, mortgage loans, lines
of credit and consumer-oriented financial services including IRA and KEOGH
accounts. In addition, First United Bank & Trust provides full brokerage
services through a networking arrangement with PrimeVest Financial Services,
Inc., a full service broker-dealer. First United Bank & Trust also provides
safe deposit and night depository facilities and a complete line of trust
services. As of December 31, 1999, First United Bank & Trust had total
deposits of $600.74 million and total loans of $569.18 million. The total
market value of assets under the supervision of the Trust Department was
approximately $285 million.
First United Bank & Trust wholly owns two active subsidiaries. Gonder
Insurance Agency, Inc. is a full line insurance agency located in Oakland,
Maryland. First United Bank & Trust acquired the agency in May, 1999. First
United Auto Finance, LLC, is a Maryland limited liability company that
engages in the business of indirect automobile leasing. First United
Bank & Trust formed the company in October, 1998.
OAKFIRST LIFE INSURANCE CORPORATION
Oakfirst Life Insurance Corporation is a reinsurance company that
reinsures credit life and credit accident and health insurance written
by American General Assurance Company on consumer loans made by First
United Bank & Trust. Oakfirst Life Insurance Corporation, which was
chartered in 1989, is a wholly owned subsidiary of the Corporation.
[4]
Competition
The Corporation's banking subsidiary, First United Bank & Trust
competes with various other state banking associations, national banks,
branches of major regional banks, savings and loan associations, savings
banks, mortgage companies and credit unions, as well as other financial
service institutions such as insurance companies, brokerage firms and
various other investment firms. In addition to this local competition,
First United Bank & Trust also competes for banking business with
institutions located outside the states of Maryland and West Virginia.
Supervision and Regulation of Banking Entities
The Corporation is a registered bank holding company subject to reg-
ulation and examination by the Board of Governors of the Federal Reserve
System under the Bank Holding Company Act of 1956 (the "Act"). The
Corporation is required to file with the board of governors, quarterly
and annual reports and any additional information that may be required
according to the Act. The Act also requires every bank holding company
to obtai the prior approval of the Federal Reserve Board before ac-
quiring direct or indirect ownership or control of more than 5% of the
voting shares of any bank which is not already majority owned. The Act
also prohibits a bank holding company, with certain exceptions, from
engaging in or acquiring direct or indirect control of more than 5% of
the voting shares of any company engaged in non-banking activities. One
of the principal exceptions to these provisions is engaging in or ac-
quiring shares of a company engaged in activities found by the Federal
Reserve Board to be so closely related to banking or managing banks as
to be a proper incident thereto.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") was enacted in December 1991. FDICIA was primarily designed
to provide additional financing for the FDIC by increasing its borrowing
ability. The FDIC was given the authority to increase deposit insurance
premiums to repay any such borrowing. In addition, FDICIA identifies
capital standard categories for financial institutions: well capitalized,
adequately capitalized, under-capitalized, significantly undercapitalized,
and critically undercapitalized. FDICIA imposes progressively more res-
trictive constraints on operations, management and capital distributions
depending on the category in which an institution is classified. Pursuant
to FDICIA, undercapitalized institutions must submit recapitalization plans,
and a holding company controlling a failing institution must guarantee such
institution's compliance with its plan.
During 1995, the Bank Insurance Fund (BIF) reached the funding levels
required by FDICIA. As a result of the well capitalized position of First
United Bank & Trust, the Bank incurred a reduction in its FDIC premium. As
a result of its continued well capitalized position, the Bank paid $.05
million of FDIC premiums in 1999 and zero in 1998, respectively.
FDICIA also requires the various regulatory agencies to prescribe
certain non-capital standards for safety and soundness relating generally
to operations, management, asset quality and executive compensation and
permits regulatory action against a financial institution that does not
meet such standards. The statute also imposes limitations on certain mergers
and consolidations between insured depository institutions with different
home states.
First United Bank & Trust is also a Maryland chartered trust company.
Its operation is subject to Federal and state laws applicable to commercial
banks with trust powers and to regulation by the Federal Reserve Board, the
FDIC, and the State. The Corporation is examined periodically by the Federal
Reserve Board, the state banking subsidiary is regularly examined by the
FDIC and Maryland Commissioner of Financial Regulation. Oakfirst Life
Insurance Corporation is periodically examined by the Arizona Department
of Insurance.
In accordance with Federal Reserve regulations, the subsidiary bank is
limited as to the amount it may loan affiliates, including the Corporation,
unless such loans are collateralized by specific obligations. Additionally,
banking law limits the amount of dividends that a bank can pay without prior
approval from bank regulators. For additional information, see Note 12 to
the consolidated financial statements.
Recent Legislation
The Gramm-Leach-Bliley Act of 1999 authorizes a bank holding company that
meets specified conditions to become a "financial holding company" and
thereby engage in a broader array of financial activities than previously
permitted. Such activities can include insurance underwriting and investment
banking. The Gramm-Leach-Bliley Act also authorizes banks to engage through
[5]
"financial" subsidiaries in certain of the activities permitted for
financial holding companies.
Governmental Monetary and Credit Policies and Economic Controls
The earnings and growth of the banking industry and ultimately of First
United Bank & Trust are affected by the monetary and credit policies of
governmental authorities, including the Federal Reserve System. An important
function of the Federal Reserve System is to regulate the national supply of
bank credit in order to control recessionary and inflationary pressures. Among
the instruments of monetary policy used by the Federal Reserve to implement
these objectives are open market operations in U.S. Government securities,
changes in the discount rate of member bank borrowings, and changes in reserve
requirements against member bank deposits. These means are used in varying
combinations to influence overall growth of bank loans, investments and
deposits and may also affect interest rates charged on loans or paid for
deposits. The monetary policies of the Federal Reserve authorities have had a
significant effect on the operating results of commercial banks in the past
and are expected to continue to have such an effect in the future.
In view of changing conditions in the national economy and in the money
markets, as well as the effect of actions by monetary and fiscal authorities,
including the Federal Reserve System, no prediction can be made as to possible
future changes in interest rates, deposit levels, loan demand or their effect
on the business and earnings of the Corpo-ration and its subsidiaries.
Employees
At December 31, 1999, the Corporation and its subsidiaries employed
approximately 351 individuals, of whom 68 were officers, 158 were full-time
employees, and 125 part-time employees.
Executive Officers of the Corporation
Information concerning the executive officers of the Corporation is
contained on page 5 of the Corporation's definitive Proxy Statement for the
annual shareholders meeting to be held April 25, 2000, and in Part III,
Item 10 of this Annual Report on Form 10-K under the caption "Directors and
Executive Officers of the Registrant," incorporated herein.
Risk Factors
The following factors should be considered carefully in evaluating an
investment in shares of common stock of the Corporation.
Regulatory Risks. The banking industry is subject to many laws and
regulations. Regulations protect depositors, not shareholders. These reg-
ulations and laws increase the Bank's operating expenses and affect the
Bank's earnings and also put the Bank at a disadvantage with less regulated
competitors, such as finance companies, mortgage banking companies, and
leasing companies.
Exposure to Local Economic Conditions. Most of the Bank's loans are
made to borrowers located in the Maryland and West Virginia counties in
which the Bank and its branches are located. A decline in local economic
conditions would affect the Bank's earnings.
Credit Risks and Inadequacy of Loan Loss Reserve. When borrowers default
and do not repay the loans made to them by the Bank, the Bank loses money.
Experience shows that some borrowers either will not pay on time or will not
pay at all. Then, the Bank will cancel, or "write off," the defaulted loan
or loans. A "write off " reduces the Bank's reserve for possible credit
losses. The Bank accounts for losses by reserving what it believes to be
an adequate amount to absorb any anticipated losses. If the Bank's reserve
for possible credit losses is not sufficient, the Bank would have to record
a larger loss provision, reducing current period earnings.
Interest Rate Risk. The Bank's earnings depend greatly on its net interest
income, the difference between the interest earned on loans and investments
and the interest paid on deposits and borrowings. If the interest rate paid
on deposits is high and the interest rate earned on loans and investments is
low, net interest income is small and the Bank earns less. Because interest
rates are established by competition, the Bank cannot control its net interest
[6]
income.
Risks Associated with Real Estate Lending. The Bank makes many real estate
secured loans. Real estate loans are in demand when interest rates are low and
economic conditions are favorable. Even when economic conditions are favorable
and interest rates are low, these conditions may not continue. The Bank may
lose money if the borrower does not pay a real estate loan. If real estate
values decrease, then the Bank may lose more money when borrowers default.
No Assurance of Growth. The Bank's ability to increase assets and earnings
depends upon many factors, including competition for deposits and loans, the
Bank's branch locations, avoidance of credit losses, and hiring and training
of personnel. Many of these factors are beyond the Bank's control.
Competition. Other banks and non-banks, including savings and loan ass-
ociations, credit unions, insurance companies, leasing companies, small loan
companies, finance companies, and mortgage companies, compete with the Bank.
Some of the Bank's competitors offer services and products that the Bank does
not offer. Larger banks and non-bank lenders can make larger loans and
service larger customers. Changes in the law now permit interstate banking
which may increase competition. Increased competition may decrease the Bank's
earnings.
No Assurance of Cash or Stock Dividends. Whether dividends may be paid to
shareholders depends on the Bank's earnings, its capital needs, law and
regulations, and other factors. The Bank's payment of dividends in the past
does not mean that the Bank will be able to pay dividends in the future.
Stock Not Insured. Investments in the shares of the Corporation's common
stock are not deposits that are insured against loss by the government.
Risk Involved in Acquisitions. Part of the Bank's growth may come from
buying other banks, companies, or offices or branches of these banks or
companies. A newly purchased bank or company or branch may not be profitable
after the Bank buys it and may lose money, particularly at first. The new
bank, company or branch may bring with it unexpected liabilities or bad
loans, bad employee relations, or the new bank, company or branch may
lose customers.
Risk of Claims. Customers may sue the Bank for losses due to the Bank's
alleged breach of fiduciary duties, errors and omissions of employees,
officers and agents, incomplete documentation, the Bank's failure to comply
with applicable laws and regulations, or many other reasons. Also, employees
of the Bank conduct all of the Bank's business. The employees may knowingly
or unknowingly violate laws and regulations. Bank management may not be aware
of any violations until after their occurrence. This lack of knowledge will
not insulate the Bank from liability. Claims and legal actions may result in
legal expenses and liabilities that may reduce the Bank's profitability and
hurt its financial condition.
Developments in Technology. Financial services use technology, including
telecommunications, data processing, computers, automation, Internet-based
banking, debit cards, and "smart" cards. Technology changes rapidly. The
Bank's ability to compete successfully with other banks and non-banks may
depend on whether it can exploit technological changes. The Bank may not
be able to exploit technological changes and expensive new technology may
not make the Bank more profitable.
Anti-Takeover Effects of Certain Charter and Bylaw Provisions. The
Corporation's Articles of Incorporation and Bylaws divide the Corporation's
Board of Directors into three classes and each class serves for a staggered
three-year term. No director may be removed except for cause, and then only
by a vote of at least two-thirds of the total eligible shareholder votes.
In addition, Maryland law contains anti-takeover provisions that apply to
the Corporation. These provisions may discourage or make it more difficult
for another company to buy or merge with the Corporation or may affect the
market price of the Corporation's common stock.
Item 2. PROPERTIES
The main office of the Corporation and First United Bank & Trust occupies
approximately 29,000 square feet at 19 South Second Street, Oakland,
Maryland, and is owned by the Corporation. First United Bank & Trust operates
a network of twenty-two banking offices throughout Garrett, Allegany,
Washington and Frederick Counties, Maryland and Mineral, Hampshire, Berkeley
and Hardy Counties, West Virginia. All of the banking offices of First United
Bank & Trust are owned by the Corporation except for nine of these offices,
which are leased.
[7]
The properties of the Corporation which are not owned are held under long-
term leases. Total rent expense for 1999, 1998, and 1997 was $.28, $.32, and
$.26 million, respectively.
Item 3. LEGAL PROCEEDINGS
The Corporation and its subsidiaries are at times, and in the ordinary
course of business, subject to legal actions. Management, upon the advice of
counsel, is of the opinion that losses, if any, resulting from the settlement
of current legal actions will not have a material adverse effect on the
financial condition of the Corporation.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
The common stock of First United Corporation is listed on The Nasdaq Stock
Market SM . There are 25,000,000 shares of common stock authorized and the
total number of shares outstanding as of December 31, 1999, was 6,085,221.
As of December 31, 1999, the Corporation had approximately 2,404 holders of
record of its common stock. There are also 2,000,000 shares of preferred
stock authorized with no shares outstanding as of December 31, 1999. The
following tables reflect the high and low trades during the period, as
well as the closing price for the years ended December 31, 1999 and 1998.
1999 High Low Close
1st Quarter $18.00 $15.88 $16.25
2nd Quarter 16.13 15.00 15.38
3rd Quarter 15.50 14.50 14.50
4th Quarter 15.13 13.25 14.44
1998 High Low Close
1st Quarter $20.00 $17.50 $19.38
2nd Quarter 20.50 19.63 20.00
3rd Quarter 20.50 18.00 18.13
4th Quarter 21.50 16.13 16.63
Cash Dividends
Cash dividends were paid by the Corporation on the dates indicated as
follows:
1999 1998
February $.155 $.15
May .155 .15
August .155 .15
November .155 .15
Quotes for the Stock can be found on The Nasdaq Stock Market SM under the
symbol "FUNC." Market Makers for the Stock are:
Ferris Baker Watts Advest, Inc.
12 North Liberty St. 90 State House Square
Cumberland, MD 21502 Hartford, CT 06103
(301) 724-7161 (860) 509-1000
(800) 776-0629 (800) 797-9642
113 S. Potomac St.
Hagerstown, MD 21740
(800) 733-7111
Scott and Stringfellow, Inc.
909 East Main Street
Richmond, VA 23219
(804) 643-1811
(800) 552-7757
[8]
On July 31, 1996, as part of the Corporation's capital plan, the Board
of Directors authorized the Corporation's officers to repurchase up to 5%
of its outstanding common stock. 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% or 309,048 shares. Purchases
of the Corporation's stock under the program were completed in brokered
transactions or directly from the Corporation's market makers. As of
December 31, 1999, 422,489 shares have been repurchased and retired under
the Plan authorized by the Board of Directors.
Item 6. SELECTED FINANCIAL DATA
(In thousands, except per share data)
1999 1998 1997 1996 1995
Balance Sheet Data
Total Assets $793,280 $641,114 $569,030 $523,621 $487,169
Total Deposits 598,572 511,500 500,060 452,539 424,294
Total Net Loans 564,773 505,668 438,738 380,594 358,464
Total Borrowings 127,000 64,575 6,225 8,000 3,000
Total Shareholders'
Equity 58,096 58,474 56,714 56,815 55,504
Operating Data
Interest Income $ 54,843 $ 47,242 $ 43,348 $ 39,273 $ 37,274
Interest Expense 27,146 21,915 18,978 16,376 14,721
Net Interest Income 27,697 25,327 24,370 22,897 22,553
Provision for Credit
Losses 2,066 1,176 935 749 0
Other Operating Income 7,199 6,316 6,037 4,869 4,290
Other Operating Expense 20,739 19,058 19,530 17,394 18,390
Income Before Tax 12,091 11,409 9,942 9,623 8,453
Income Tax 4,130 3,982 3,297 3,144 2,849
Net Income $ 7,961 $ 7,427 $ 6,645 $ 6,479 $ 5,604
Per Share Data
Net Income $ 1.30 $1.20 $1.05 $1.00 $0.86
Dividends Paid .62 .60 .56 .51 .46
Book Value $ 9.55 $9.50 $9.05 $8.82 $8.54
Per Share Data has been restated to reflect the 5% stock dividend paid
on March 29, 1996.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This section presents management's discussion and analysis of the financial
condition and results of operations of First United Corporation and subsidiaries
(collectively, the "Corporation") including First United Bank & Trust
(the "Bank"), Oakfirst Life Insurance Corporation, Gonder Insurance Agency,
Inc., and First United Auto Finance, LLC.
This discussion and analysis should be read in conjunction with the finan
cial statements which appear elsewhere in this report.
[9]
EARNINGS ANALYSIS
OVERVIEW
The Corporation's net earnings for 1999 increased to $7.96 million, or 7.19%
over the $7.43 million reported for 1998. Earnings for the year represent a
record level of performance for the Corporation, exceeding the previous record
of $7.43 million achieved in 1998. Return on average assets was 1.12%, 1.24%,
and 1.21% in 1999, 1998, and 1997, respectively.
The return on average shareholders' equity for 1999 increased to 13.56% from
the 12.92% reported in 1998. The return on average shareholders' equity was
11.70% in 1997. Earnings per share increased to $1.30 in 1999 from $1.20 in
1998, compared with $1.05 in 1997.
During the first and second quarters of 1997 the Company engaged the services
of Alex Sheshunoff Management Services, Inc., a highly respected financial
consulting group, to facilitate a process improvement program. Based on the
recommendations of the Alex Shesunoff Management Services, Inc., and the vision
of the executive management, several positions in the organization were changed,
new positions were created, and a few positions were eliminated. All employees
were offered a severance package during the restructuring process, and 63
employees chose to accept this package. Throughout this process First United
Bank & Trust maintained its tradition of no lay-offs affecting its employees.
For those employees accepting the voluntary severance package, the Board of
Directors authorized a total of $554,000 to be charged against earnings during
the first six months of 1997.
Forward-Looking Statements
The Corporation has made certain "forward-looking" statements with respect
to this discussion. Such statements should not be construed as guarantees of
future performance. Actual results may differ from "forward-looking" information
as a result of any number of unforeseeable factors, which include, but are not
limited to, the effect of prevailing economic conditions, the overall direction
of government policies, unforeseeable changes in the general interest rate
environment, competitive factors in the marketplace, and business risk ass-
ociated with credit extensions and trust activities, and other risk factors
discussed under the heading "Risk Factors," beginning on page 5 above. These
and other factors could lead to actual results which differ materially from
management's statements regarding future performance.
Net Interest Income
The primary source of earnings continued to be net interest income-the
difference between interest income and related fees on earning assets, and the
interest expense incurred on deposits and other borrowed funds. This segment of
earnings is affected by changes in interest rates, account balances and the mix
of earning assets and interest bearing funding sources.
Total interest income for 1999 increased 16.09% over 1998, from $47.24
million to $54.84 million, primarily due to growth in earning assets. Total
interest expense at $27.15 million represented an increase of 23.87% from
$21.92 million in 1998. This increase was the result of growth in depository
accounts as well as the effect of higher market rates being paid. Interest on
the recently issued other long term debt resulted in an increase of $.78
million to interest expense. During 1999, the Corporation increased its use of
borrowings from the Federal Home Loan Bank of Atlanta. Interest on this type of
borrowing increased by $2.61 million to a total of $4.34 million. The net effect
of these changes was a 9.36% increase in net interest income to $27.70 million
in 1999 from $25.33 million in 1998. This compares to $24.37 million in 1997.
The improvement in 1998 represents an increase of 3.94% over 1997's net interest
income. Table 3 analyzes the changes in net interest income attributable to
volume and rate components.
For analytical purposes, net interest income is adjusted to a taxable equiv-
alent basis. This adjustment facilitates performance comparisons between taxable
and tax-exempt assets by increasing tax-exempt income by an amount equal to the
federal income taxes which would have been paid if this income were taxable at
the statutorily applicable rate. The taxable equivalent net interest margin
decreased to 4.23% in 1999 from 4.56% in 1998, compared with 4.83% in 1997.
Table 2 compares the components of the net interest margin and the changes
occurring between 1999, 1998 and 1997.
[10]
Allowance for Possible Credit Losses
The reserve for possible credit losses is based on management's continuing
evaluation of the quality of the loan and lease 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 and leases.
The Corporation utilizes the methodology outlined in FDIC Statement of Policy
on Allowance for Loan and Lease 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) loans. 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 potential losses in the current portfolio. These historical loss
amounts are modified by the following qualitative factors: levels of and trends
in delinquency and non-accruals, 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 the gathering of information from internal, reg-
ulatory, and governmental sources. Specific allocations are made for those
loans in which the collateral value is less than the outstanding loan balance
with the allocation being the dollar difference between the two. Allocations
are made for loan commitments using the methodology outlined above.
Allocations are not made for loans that are cash secured or for the SBA
guaranteed portion of loans.
During 1999, management continued to place emphasis on procedures for credit
analysis, problem loan detection, and delinquency follow-ups. As a result of
these efforts, the provision for credit losses in 1999 increased to $2.07
million or 0.36% of gross loans. The provision for credit losses was $1.18
million and $.94 million for the years ended December 31, 1998 and 1997,
respectively. Gross charge-offs for the years ended December 31, 1999, 1998, and
1997 totaled $1.40, $.71, and $.64 million, respectively.
Table 8 presents the activity in the allowance for loan losses by major loan
category for the past five years. Table 9 presents management's allocation of
the allowance for loan losses by major loan catagory. Specific allocations in
any particular category may be reallocated in the future to reflect current
conditions. Accordingly, the entire allowance is considered available to
absorb losses in any category.
Other Operating Income
The Corporation and its subsidiaries continue to seek ways of obtaining add-
itional other operating income. Many of the changes the Corporation implemented
in 1997 are fueling the growth in other operating income. Non-interest income
for 1999, at $7.20 million, increased 13.98% over the $6.32 million earned in
1998. Income from our insurance subsidiaries increased $.68 million or
256.40% over 1998 levels. Due to the competitive nature of today's market,
service charges on deposits declined $.24 million or 10.77%. The Corporation
experienced an increase of $.26 million in fees from Trust and Fiduciary
activities. The growth in these nontraditional services mentioned above
accounted for most of the 1998 increase of 4.64% in non-interest income
over the $6.04 million earned in 1997.
Other Operating Expense
Non-interest expense increased $1.68 million or 8.82% from $19.06 million
in 1998 to $20.74 million in 1999. The increase can be explained by large
increases in several categories. Expenses relating to Year 2000 readiness,
fees and incentives paid to members of our indirect lending network, and
contract labor used in improving our internal technology accounted for most
of the increase. While some of these expenses will continue to grow, others
represent investments in future efficiencies. Salaries and employee benefits
increased $.88 million or 9.25% in 1999 to a total of $10.40 million. The
1998 total of $9.52 million represented an increase of $.29 million or 3.16%
over the 1997 total of $9.23 million. This increase is due in part to the
acquisition of Gonder Insurance Agency (Gonder). Salaries and benefits related
to Gonder equaled $.29 million for the year ending December 31, 1999. Another
factor contributing to the increase was the further expansion of the corporate
incentive pay program. This program rewards sales associates who exceed their
expected levels of production.
The Corporation incurred a decrease in 1999 of $.07 million in occupancy
expense of premises to $.97.[11] million. This decrease is due to the 1998
closings of three in-store branches. Occupancy expense of premises was comp-
arable at $1.04 million and $.99 million in 1998 and 1997, respectively.
Expenditures to further increase the role of technology in improving the
efficiency of customer service delivery and internal processing activities
accounted for much of the increase in equipment expenses. Expansion of the Cust-
omer Service Center also contributed to an increase in equipment related
expenses. It is anticipated that the long run efficiencies gained by projects
such as these will be a net benefit to the earnings performance of the Corp-
oration.
Impact of The Year 2000
Project Overview-The Corporation began its Year 2000 project in 1997 to pre-
pare its systems for the century date change. This situation arose when computer
systems and programs were originally designed eliminating the first two digits
of the century, thereby saving valuable and costly disk and memory space. With-
out appropriate Year 2000 computer system renovations, such systems may not have
recognized a date using "00" as the Year 2000. This could have resulted in a
system failure or miscalculations causing disruptions of operations, a temp-
orary inability to process transactions, send invoices, or engage in similar
normal business activity.
Project Readiness-The Federal Financial Institutions Examination Council
guidelines required that the Corporation's Year 2000 project plan contain these
phases: Awareness, Assessment, Renovation, Validation, and Implementation. As of
December 31, 1999, we have completed all these phases, as well as undergone two
independent reviews of our Year 2000 efforts by an independent third party. The
Corporation has successfully completed the transition into the Year 2000 with no
material issues. All systems and outside connections to outside vendors were
properly tested and validated. There were no disruptions in service to our custo
mers or system availability. As with any business, the Corporation is depend-
ent on third parties for many of our mission-critical functions. We closely
monitored the progress of these third parties in regards to the readiness
of their systems for the Year 2000. The Corporation considers all mission-
critical vendor-supplied products and services to be compliant.
Costs-Costs involved in the Year 2000 issue included modifying software, hiring
Year 2000 solution providers, testing and validation of all systems, and ass-
uring customer awareness. The estimated total cost of the project is expected to
be approximately $.364 million. Costs incurred and expensed through December 31,
1999, were approximately $.339 million. The majority of the remaining cost is
associated with retesting mission critical systems for any foreseen problems
after the date change.
Applicable Income Taxes
Applicable income taxes are detailed in Note 9 of the Corporation's audited
consolidated financial statements. Income tax expense amounted to $4.13 million
in 1999 as compared with $3.98 million in 1998 and $3.30 million in 1997. These
amounts represented effective tax rates of 34.16%, 34.90%, and 33.16% for 1999,
1998, and 1997, respectively.
Investment Securities
Investment securities classified as available-for-sale are held for an in-
definite period of time and may be sold in response to changing market and int-
erest rate conditions as part of the asset/liability management strategy.
Available-for-sale securities are carried at market value, with unrealized gains
and losses excluded from earnings and reported as a separate component of other
comprehensive income included in stockholders' equity, net of income taxes. The
Corporation does not currently follow a strategy of making security purchases
with a view to near-term resales and therefore, does not own trading sec-
urities. For additional information, see Notes 1 and 3 to the Corporation's
audited consolidated financial statements.
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (Statement No.
133), was issued. Statement 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and hedging activities. This statement is effective for fin-
ancial statements issued for all quarters of all fiscal years beginning after
June 15, 1998. As permitted, the Corporation early adopted this Statement on
July 1, 1998. With. the exception of the reclassification listed below, the
adoption of Statement No. 133 did not have a material impact on the
Corporation's
[12]
consolidated financial statements as the Company does not enter into derivative
contracts. In connection with the adoption of this statement, $25.27 million of
the investment securities previously classified as held-to-maturity were re-
classified to available-for-sale. As the securities were marked to market coin-
cident with the reclassification, the change resulted in an increase of $.25
million, net of tax, to other comprehensive income.
Total investment securities available-for-sale increased $53.84 million or
55.66% in 1999 from $96.73 million in 1998 to $150.56 million in 1999. Invest-
ment securities were purchased with the proceeds of long term debt that was
issued late in the third quarter of 1999. The Corporation reported a decrease of
$1.02 million or 53.36% during 1999 in its U.S. Treasury securities from $1.92
million in 1998 to $.90 million in 1999. Total obligations of state and pol-
itical subdivision investments increased $7.00 million or 31.34% in 1999 to
$29.32 million. Other investments, which include mortgage back securities,
increased $40.40 million or 128.80% to a total of $71.76 million. The changes
in composition of the investment portfolio represent an effort by management
to extend the maturity of the portfolio and to obtain a higher yield.
The Corporation manages its investment portfolios utilizing policies which
seek to achieve desired levels of liquidity, manage interest rate sensitivity
risk, meet earnings objectives and provide required collateral support for dep-
osit activities. Excluding the U.S. Government sponsored agencies, the Corp-
oration had no concentrations of investment securities from any single issues
that exceeded 10% of shareholders' equity. Table 4 exhibits the distribution, by
type, of the investment portfolio for the three years ended December 31, 1999,
1998 and 1997, respectively.
Loan and Lease Portfolio
The Corporation, through its Bank, is actively engaged in originating loans
to customers primarily in Garrett, Allegany, Washington and Frederick Counties
in Maryland; Mineral, Hardy, Berkeley and Hampshire Counties in West Virginia
and the surrounding regions of West Virginia and Pennsylvania. The Corporation
has policies and procedures designed to mitigate credit risk and to maintain the
quality of the Corporation's loan portfolio. These policies include underwriting
standards for new credits and the continuous monitoring and reporting of asset
quality and the adequacy of the Reserve for Possible Credit Losses. These pol-
icies, coupled with ongoing training efforts, have provided an effective check
and balance for the risk associated with the lending process. Lending authority
is based on the level of risk, size of the loan and the experience of the lend-
ing officer. Table 5 presents the composition of the Corporation's loan and
lease portfolio.
It has been the historical policy of the Corporation to make the majority of
its loan commitments in the market area it serves. However, with the competitive
nature of the banking industry, the Corporation is forced to look in non-
traditional markets to expand its business. The Corporation had no foreign loans
in its portfolio as of December 31, 1999.
During 1999, gross loans increased $60.21 million or 11.83% to a total of
$569.18 million. In comparison, gross loans at year-end 1998 increased $67.58
million or 15.31% to a total of $508.97 million as compared to the 1997 bal-
ances. The indirect lending portfolio experienced substantial growth in 1999.
This portfolio grew 62.30% from $100.36 million at December 31, 1998 to $162.88
million as of December 31, 1999. The Corporation continued to expand its pre-
sence in the indirect market by forming an automobile leasing company in late
1998. As of December 31, 1999, the Corporation has booked 219 leases
totaling $6.43 million. This product should continue to see substantial
growth in the years to come. Table 5 details the dollar amount and percentage
distribution of the various key categories of credit in the loan portfolio.
Funding for loan growth during 1999 and 1998 was provided by increased levels
of deposits from within our market area, brokered deposits, and from borrowings
from the Federal Home Loan Bank of Atlanta ("FHLB").
It is the policy of the Corporation to place a loan on non-accrual status
whenever there is substantial doubt about the ability of a borrower to pay prin-
cipal or interest on the outstanding credit. Management considers such factors
as payment history, the nature of the collateral securing the loan and the over-
all economic situation of the borrower when making a non-accrual decision. Non-
accrual loans are closely monitored by management. A non-accruing loan is res-
tored to accrual status when principal and interest payments have been
brought current, it becomes well-secured or is in the process of collection and
the prospects of future contractual payments are no longer in doubt.
[13]
At December 31, 1999, the Corporation had $.38 million of non-accrual loans.
Table 7 details the historical activity of non-accrual loans.
Deposit and Other Funding
Deposit liabilities increased to $598.57 million at December 31, 1999, from
$511.50 million at December 31, 1998, or an increase of 17.02%. The increase of
$87.07 million in deposits includes $36.47 million of brokered deposits. In
order to support the high levels of loan demand, these deposits were sought as
an alternative to additional borrowings from the FHLB and various upstream
correspondent banks. Traditional deposits raised through a variety of deposit
campaigns accounted for the remaining growth. Borrowings from the FHLB increased
from $64.58 million at December 31, 1998 to $104.00 million at December 31,
1999. This represents an increase of 61.05% over the previous year. The Corp-
oration has an approved credit line with the FHLB which equals 29% of First
United Bank & Trust's total assets. As of December 31, 1999, the approved
credit line equaled $227 million. Available borrowings are $139.50 million.
The increased competition from other banks, brokerage firms, and other
financial outlets has caused the Corporation to look to non-traditional
sources to cost effectively meet its liquidity needs.
First United Capital Trust (the Trust), a Delaware Business trust organized
by the Corporation 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. Under the Federal Reserve Board's current
risk-based capital guidelines, the capital securities are includable in the
Corporation's Tier I and Tier II capital. For financial statement purposes these
securities are classified as other borrowed funds. See Note 8 for additional
detail.
Capital Resources
The Bank and the Corporation are subject to risk-based capital regulations
which were adopted by Federal banking regulators. These guidelines are used to
evaluate capital adequacy, and are based on an institution's asset risk profile
and off-balance sheet exposures, such as unused loan commitments and stand-by
letters of credit. The regulatory guidelines require that a portion of total
capital be Tier 1 Capital, consisting of common shareholders' equity, trust
issued preferred securities, and perpetual preferred stock, less goodwill and
certain other deductions. The remaining capital, or Tier 2 capital, consists
of elements such as subordinated debt, mandatory convertible debt, trust issued
preferred securities, and grandfathered senior debt, plus the reserve for
possible credit losses, subject to certain limitations.
Under the risk-based capital regulations, banking organizations are required
to maintain a minimum 8% (10% for well capitalized banks) total risk-based cap-
ital ratio (total qualifying capital divided by risk-weighted assets), including
a Tier 1 ratio of 4%. The risk-based capital rules have been further supple-
mented by a leverage ratio, defined as Tier 1 capital divided by average assets,
after certain adjustments. The minimum leverage ratio is 3% for banking org-
anizations that do not anticipate significant growth and have well-diversified
risk (including no undue interest rate risk exposure), excellent asset qual-
ity, high liquidity and good earnings. Other banking organizations not in
this category are expected to have ratios of at least 4-5%, depending on
their particular condition and growth plans. Higher capital ratios could
be required if warranted by the particular circumstances or risk profile of a
given banking organization. In the current regulatory environment, banking comp-
anies must stay well capitalized in order to receive favorable regulatory treat-
ment on acquisition and other expansion activities and favorable risk-based dep-
osit insurance assessments. The Corporation's capital policy establishes guide-
lines meeting these regulatory requirements, and takes into account current or
anticipated risks and future growth opportunities.
On December 31, 1999, the Corporation's total risk-based capital ratio was
15.03%, well above the regulatory minimum of 8%. The Corporation's total risk-
based capital ratios for year-end 1998 and 1997 were 13.40% and 14.82%, res-
pectively.
Total shareholders' equity remained stable, decreasing slightly from $58.47
million at year-end 1998 to $58.10 million at year-end 1999. The slight decline
in shareholders' equity can be explained by increased shareholder dividends and
losses in accumulated other comprehensive income. Total shareholders' equity at
December 31,
[14]
1997 was $56.71 million. The equity to assets ratio at December 31, 1999, was
7.32%, compared with 9.12% and 9.97% at year-end 1998 and 1997, respectively.
On July 31, 1996, as part of the Corporation's capital plan, the Board of
Directors also authorized the Corporation's officers to repurchase up to 5% of
its outstanding common stock. Purchases of the Corporation's stock under the
program were completed in brokered transactions or directly from the Corp-
oration's market makers. 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% or 309,048 shares. As of December 31, 1999,
422,489 or 6.49% of the previously outstanding shares have been repurchased
and retired under the Plan authorized by the Board of Directors.
Cash dividends of $.62 per share were paid during 1999, compared with $.60
and $.56 in 1998 and 1997, respectively. This represents a dividend payout rate
(dividends per share divided by net income per share) of 47.69%, 50.00%, and
53.33% for 1999, 1998, and 1997, respectively.
ASSET AND LIABILITY MANAGEMENT
Introduction
The Asset and Liability Management Committee of the Corporation seeks to
assess and manage the risks associated with fluctuating interest rates while
maintaining adequate liquidity. This is accomplished by formulating and imp-
lementing policies that take into account the sources and uses of funds,
maturity and repricing distributions of assets and liabilities, pricing
strategies, and marketability of assets.
Liquidity
The objective of liquidity management is to assure that the withdrawal
demands of depositors and the legitimate credit needs of the Corporation's del-
ineated market areas are accommodated. Total liquid assets, represented by cash,
federal funds sold, interest bearing deposits in banks, investment securities
available for sale and loans and leases maturing within one year, amounted to
$90.58 million, or 11.42% of total assets at December 31, 1999. This compares
with $70.77 million, or 11.04% of 1998 year-end assets, and $90.43 million, or
15.89% of 1997 year-end assets.
Additional liquidity of $139.5 million is available from unused lines of
credit at various upstream correspondent banks and the FHLB of Atlanta.
Interest Rate Sensitivity
Interest rate sensitivity refers to the degree that earnings will be impacted
by changes in the prevailing level of interest rates. Interest rate risk arises
from mismatches in the repricing or maturity characteristics between assets and
liabilities. Management seeks to avoid fluctuating net interest margins, and to
enhance consistent growth of net interest income through periods of changing int
erest rates. The Corporation uses interest sensitivity gap analysis and sim-
ulation models to measure and manage these risks. The interest rate sensitivity
gap analysis assigns each interest-earning asset and interest-bearing
liability to a time frame reflecting its next repricing or maturity date. The
differences between total interest-sensitive assets and liabilities at each time
interval represent the interest sensitivity gap for that interval. A positive
gap generally indicates that rising interest rates during a given interval
will increase net interest income, as more assets than liabilities will
reprice. A negative gap position would benefit the Corporation during a
period of declining interest rates.
In order to manage interest sensitivity risk, management of the Corporation
formulates guidelines regarding asset generation and pricing, funding sources
and pricing, and off-balance sheet commitments. These guidelines are based on
management's outlook regarding future interest rate movements, the state of the
regional and national economy, and other financial and business risk factors.
Management uses computer simulations to measure the effect on net interest
income of various interest rate scenarios. Key assumptions used in the computer
simulations include cash flows and maturities of interest rate sensitive assets
and liabilities, changes in asset volumes and pricing and management's capital
plans. This modeling reflects interest rate changes and the related impact on
net income over specified periods. Management
[15]
does not use derivative financial instruments to manage its interest rate
sensitivity. At December 31, 1999, the static gap analysis prepared by manage-
ment indicated that the Corporation was liability sensitive over the next year.
In computing the effect on pre-tax income of changes in interest rates, manage-
ment has assumed that any changes would immediately effect earnings. Normally
when an organization is liability sensitive there is a positive impact to income
when interest rates decline. The simulation analysis shown below shows a pos-
itive impact when interest rates decline 100 or 200 basis points in 1999 and a
negative impact in 1998. Management explains the 1998 effect due to the then
current position of interest rates, whereby certain liability accounts were
priced at a level where management felt they could not be reduced further in
rate, therefore, the full impact of repricing liabilities in the declining rate
environment was not realized. Based on the simulation analysis performed at year
end, the Corporation estimates the following changes in income before taxes
assuming the indicated interest rate changes:
December 31, 1999
+200 basis point increase ($2.040 million)
+100 basis point increase ($1.020 million)
- -100 basis point decline $.280 million
- -200 basis point decline $.559 million
December 31, 1998
+200 basis point increase ($.948 million)
+100 basis point increase ($.474 million)
- -100 basis point decline ($.146 million)
- -200 basis point decline ($.292 million)
This estimate is based on assumptions that may be affected by unforeseeable
changes in the general interest rate environment and any number of unforeseeable
factors. Rates on different assets and liabilities within a single maturity
category adjust to changes in interest rates to varying degrees and over varying
periods of time. The relationships between prime rates and rates paid on purch-
ased funds are not constant over time. Management can respond to current or
anticipated market conditions by lengthening or shortening the Corporation's
sensitivity through loan repricings or changing its funding mix. The rate of
growth in interest-free sources of funds will influence the level of interest-
sensitive funding sources. In addition, the absolute level of interest rates
will affect the volume of earning assets and funding sources.
As a result of these limitations, the interest-sensitive gap is only one factor
to be considered in estimating the net interest margin. Table 13 presents the
Corporation's interest rate gap position at December 31, 1999. This is a
point in time position which is continually changing and is not necessarily
indicative of the Corporation's position at any other time.
[16]
Distribution of Assets, Liabilities and Shareholders' Equity
Interest Rates and Interest Differential-Tax Equivalent Basis
(In thousands )
Table 1
For the Years Ended December 31,
1999 1998 1997
Average Annual Average Annual Average Annual
Balance Interest Rate Balance Interest Rate Balance Interest Rate
Federal funds
sold $ 5,541 $ 413 7.45% $ 1,463 $ 129 8.82% $ 2,506 $ 181 7.22%
Investments:
Taxable 89,636 5,799 6.47% 76,562 4,734 6.18% 82,709 5,159 6.24%
Non taxable 24,818 1,813 7.31% 17,743 1,262 7.11% 14,146 1,056 7.47%
Total investment
securities 114,454 7,612 6.65% 94,305 5,996 6.36% 96,855 6,215 6.42%
Other interest
earning
assets 7,733 424 5.48% 3,093 227 7.34% 2,579 188 7.29%
Loans 546,300 47,217 8.64% 472,007 41,563 8.81% 415,663 37,365 8.99%
Total earning
assets 674,028 55,666 8.26% 570,868 47,915 8.40% 517,603 43,949 8.50%
Reserve for
possible credit
losses (3,790) (2,998) (2,343)
Other non-earning
assets 42,955 34,581 33,665
Total non-earning
assets 39,165 31,583 31,322
Total
Assets $713,193 $602,451 $548,925
Liabilities and
Shareholders' Equity
Deposits:
Noninterest-bearing
deposits $ 54,924 - - $ 53,430 $ - - $ 51,807 $ - -
Interest-bearing
demand
deposits 124,943 3,793 3.04% 111,076 3,244 2.92% 103,627 2,934 2.83
Savings
deposits 48,923 707 1.45% 55,542 842 1.52% 63,522 1,135 1.79
Time deposits
$100,000 or
more 90,903 5,166 5.68% 59,814 3,528 5.90% 46,417 2,663 5.74
Time deposits
less than
$100,000 233,533 12,363 5.29% 222,908 12,573 5.64% 214,376 11,933 5.57
Federal Home Loan
Bank and other
borrowed
funds 96,613 5,117 5.30% 36,225 1,728 4.77% 7,211 313 4.34
Total deposits
and
borrowings 646,839 27,146 4.20% 538,995 21,915 4.07% 486,960 18,978 3.90%
Other
liabilities 7,648 6,007 5,154
Shareholders'
equity 58,706 57,449 56,811
Total Liabilities
and Shareholders'
Equity $713,193 $602,451 $548,925
**The above table reflects the average rates earned or paid stated on a tax
equivalent basis assuming a tax rate of 34%. The average balances of
non-accrual loans for the years ended December 31, 1999, 1998, and 1997, which
were reported in the average loan balances for these years, were $581, $678,
and $617, respectively. The fully taxable equivalent adjustments for the years
ended December 31, 1999, 1998, and 1997 were $823, $673, and $601, respectively.
[17]
Net Interest Margin
( In thousands )
Table 2
1999 1998 1997
Average Tax Equivalent Average Tax Equivalent Average Tax Equivalent
Balance Rate Balance Rate Balance Rate
Earning
Assets $674,028 8.26% $570,868 8.40% $517,603 8.50%
Interest-
bearing
Liab-
ilities 591,915 4.20% 485,565 4.07% 435,154 3.90%
Net
Benefit
of
Non-
interest-
bearing Sources 0.39% .45% 0.46%
Average
Cost of
Funds 4.03% 3.84% 3.67%
NET INTEREST
MARGIN 4.23% 4.56% 4.83%
The above table reflects the average rates earned or paid stated on a tax
equivalent basis assuming a tax rate of 34%.
Interest Variance Analysis (1)
( In thousands )
Table 3
1999 Compared To 1998 1998 Compared To 1997
Increase Increase
(Decrease) Due To (Decrease) Due To
Volume Rate Net Volume Rate Net
Interest income:
Federal Funds
Sold $ 304 $ (20) $ 284 ($ 92) $ 40 ($ 52)
Taxable
Investments 846 219 1,065 (380) (45) (425)
Non-Taxable
Investments 517 34 551 256 (50) 206
Loans 6,419 (765) 5,654 4,964 (766) 4,198
Other Interest
Earning Assets 254 (57) 197 38 1 39
Total Interest
Income 8,340 (589) 7,751 4,786 (820) 3,966
Interest expense:
Interest-bearing 421 128 549 218 92 $310
Savings (96) (39) (135) (121) (172) (293)
Time Deposits 562 (772) (210) 481 159 640
Time Deposits
$100,000 or more 1,766 (128) 1,638 790 75 865
Federal Home Loan
Bank & Other
Borrowed Funds 777 - 777 - - -
Total Interest
Expense 5,922 (691) 5,231 2,752 185 2,937
Net Interest
Income $2,418 $ 102 $2,520 $2,034 ($1,005) $1,029
(1) The change in interest income/expense due to both volume and rate has been
allocated to volume and rate changes in proportion to the relationship of the
absolute dollar amounts of the change in each. The above table is compiled on
a tax equivalent basis. The fully taxable equivalent adjustments for the years
ended December 31, 1999 and 1998 were $823 and $673, respectively.
[18]
Investment Security Maturities, Yields, and Market Values
( In thousands )
Table 4
December 31, 1999
U.S. Federal State &
Treasury Yield Agencies Yield Municipal Yield Other Yield Total Yield
Maturity Amortized Cost
Available-for-Sale
Within One
Year $ 599 7.13% $ 4,938 5.75% $ 1,513 6.64% $ 190 6.81%$ 7,240 6.08%
One to Five
Years 2296 6.05% 25,591 6.35% 1,877 6.91% 738 6.05% 28,502 6.37%
Five to Ten
Years - 0.00% 19,471 6.33% 5,118 6.75% 1,400 6.10% 25,989 6.40%
Over Ten
Years - 0.00% - 0.00% 22,283 7.48% 72,677 6.93% 94,960 7.06%
Total
Amortized
Cost $ 895 $50,000 $30,791 $75,005 $155,394 6.78%
Taxable
Equivalent
Yield 6.78% 6.29% 7.29% 6.90% 6.78%
Market
Value $ 896 $48,584 $29,323 $71,762 $150,565
December 31,
1998
Amortized
Cost $ 1,901 $44,842 $21,876 $27,708 $ 96,327
December 31,
1997
Amortized
Cost $10,136 $31,298 $15,451 $37,257 $ 94,142
The above yields have been adjusted to reflect a tax equivalent basis assuming
a tax rate of 34%. The above table includes certain securities which have no
maturity. Therefore, these securities are classified as maturing over ten years.
[19]
Summary of Loan and Lease Portfolio
( In thousands )
Table 5
Loans Outstanding as of December 31,
1999 1998 1997 1996 1995
Commercial, Financial, &
Agricultural $ 80,853 $ 81,537 $ 67,399 $ 56,325 $ 56,893
Real Estate-Construction 7,873 11,315 11,716 21,097 10,696
Real Estate-Mortgage 278,564 286,514 287,153 249,389 242,789
Installment 195,459 129,477 75,124 55,969 50,206
Lease Financing 6,433 129 - - -
Total $569,182 $508,972 $441,392 $382,780 $360,584
Percentage of Portfolio as of December 31,
1999 1998 1997 1996 1995
Commercial, Financial,
& Agricultural 14.21% 16.02% 15.27% 14.72% 15.78%
Real Estate-Construction 1.38% 2.22% 2.65% 5.51% 2.97%
Real Estate-Mortgage 48.94% 56.29% 65.06% 65.15% 67.33%
Installment 34.34% 25.44% 17.02% 14.62% 13.92%
Lease Financing 1.13% .03% - - -
Total 100.00% 100.00% 100.00% 100.00% 100.00%
Maturities of Loan and Lease Portfolio
(In thousands)
Table 6
December 31, 1999
Maturing
Maturing After One Maturing
Within But Within After Five
One Year Five Years Years Total
Commercial, Financial &
Agricultural $ 9,612 $ 50,024 $ 21,217 $ 80,853
Real Estate-Construction 0 7,873 0 7,873
Real Estate-Mortgage 7,379 31,577 239,608 278,564
Installment 45,061 141,809 8,589 195,459
Lease Financing - 6,433 - 6,433
Total $62,052 $237,716 $269,414 $569,182
Classified by Sensitivity to Change in Interest Rates
Fixed-Interest Rate Loans $53,046 $172,967 $ 98,665 $324,678
Adjustable-Interest Rate Loans 9,006 64,749 170,749 244,504
Total $62,052 $237,716 $269,414 $569,182
[20]
Risk Elements of Loan and Lease Portfolio
( In thousands )
Table 7
For the Years Ended December 31
1999 1998 1997 1996 1995
Non-accrual Loans and Leases $379 $460 $562 $ 976 $1,075
Accruing Loans and Leases
Past Due 90 Days or More 763 544 563 659 963
Information with respect to non-accrual loans and leases at December 31,1998
and 1997 is as follows:
1999 1998
Interest income that would have been recorded
under original terms $ 7 $ 30
Interest income recorded during the period. 3 6
Activity in the Reserve for Credit Losses
Table 8 ( In thousands )
Summary of Loan and Lease Loss Experience
For the Years Ended December 31
1999 1998 1997 1996 1995
Balance at Beginning of Period $ 3,304 $ 2,654 $ 2,186 $ 2,120 $ 2,350
Loans and Leases Charged Off:
Commercial, Financial, and
Agricultural 229 163 135 476 19
Real Estate-Mortgage 78 205 211 135 205
Installment 1,089 340 292 236 186
Total Charged Off 1,396 708 638 847 410
Recoveries of Loans and Leases:
Commercial, Financial,
and Agricultural 223 43 52 29 59
Real Estate-Mortgage 39 28 39 8 31
Installment 173 111 80 127 90
Total Recoveries 435 182 171 164 180
Net Loans and Leases Charged Off 961 526 467 683 230
Provision Charged to Operations 2,066 1,176 935 749 -
Balance at the End of Period 4,409 3,304 2,654 2,186 2,120
Loans and Leases at End
of Period $569,182 $508,972 $441,392 $382,780 $360,584
Daily Average Balance of
Loans and Leases $546,300 $472,007 $415,663 $364,309 $352,720
Allowance for Loan
and Lease Losses
to Loans Outstanding 0.77% 0.65% 0.60% 0.57% 0.59%
Net Charge Offs to Average
Loans and Leases Outstanding 0.18% 0.11% 0.11% 0.19% 0.07%
[21]
Allocation of the Reserve for Credit Losses
( In thousands )
Table 9
December 31
1999 1998 1997 1996 1995
Commercial $ 1,017 $ 957 $ 784 $ 509 $ 301
Real Estate-Mortgage 800 966 1,095 923 1,214
Home Equity 134 136 93 73 48
Consumer 2,145 942 443 201 206
Commitments 272 279 239 180 171
Lease Financing 30 - - - -
Unallocated 11 24 - 300 180
Total $4,409 $3,304 $2,654 $2,186 $2,120
Average Deposit Balances
Table 10 ( In thousands )
Deposits by Major Classification for the Years Ended December 31,
1999 1998 1997
Average Average Average
Balance Yield Balance Yield Balance Yield
Noninterest-bearing
demand deposits $ 54,924 $ 53,430 $ 51,807
Interest-bearing
demand deposits 124,943 3.04% 111,076 2.92% 103,627 2.83%
Savings deposits 48,923 1.45% 55,542 1.52% 63,522 1.79%
Time deposits
$100,000 or more 90,903 5.68% 59,814 5.90% 46,417 5.74%
Time deposits less
than $100,000 233,533 5.29% 222,908 5.64% 214,376 5.57%
Total $553,226 $502,770 $479,749
[22]
Maturity of Time Deposits
( In thousands )
Table 11 December 31, 1999
Greater than Less Than
$100,000 $100,000
Maturities
3 Months or Less $ 26,467 $ 34,631
3 - 6 Months 37,828 14,303
6-12 Months 68,012 30,527
Over 1 Year 106,342 36,473
Total $238,649 $115,934
Summary of Significant Ratios
Table 12
1999 1998 1997
Return on Average Assets 1.12% 1.24% 1.21%
Return on Average Equity 13.56% 12.92% 11.70%
Dividend Payout Ratio 47.69% 50.00% 53.33%
Total Equity to Total Assets at Year End 7.32% 9.12% 9.97%
Total Risk-based Capital Ratio 15.03% 13.40% 14.82%
Tier I Capital to Risk Weighted Assets 13.77% 12.68% 14.16%
Tier I Capital to Average Assets 11.25% 9.71% 10.33%
[23]
Summary of Interest Sensitivity Analysis
(In thousands)
Table 13
As of December 31, 1999
0-90 91-365 1-5 Over 5
Days Days Years Years TOTAL
Assets
Rate Sensitive
Interest Bearing
Deposits in Banks $ 20,750 $ - $ - $ - $ 20,750
Federal Funds Sold 615 - - - 615
Securities
(Available-for-Sale)(1) 26,772 22,087 18,832 82,874 150,565
Federal Home Loan
Bank Stock 5,200 - - - 5,200
Loans (2) 98,375 121,369 271,358 78,080 569,182
Total Rate Sensitive $151,712 $143,456 $290,190 $160,954 $746,312
Liabilities
Rate Sensitive Deposits
Savings $ 44,729 $ - $ - $ - $ 44,729
Investors' Choice 5,570 - - - 5,570
Time Deposits Less
Than $100,000 26,467 105,840 106,342 - 238,649
Time Deposits
$100,000 or More 34,631 44,830 36,473 - 115,934
IMMA, PMA & Trust DDA 60,798 - - - 60,798
ONE & NOW Accounts 74,044 - - - 74,044
Federal Home Loan Bank borrowings
and Other Borrowed Funds 20,000 25,000 82,000 - 127,000
Total Rate Sensitive (3) $266,239 $175,670 $224,815 $ - $666,724
GAP ( Rate Sensitive Assets less Rate
Sensitive Liabilities ) ($114,527)($32,214) $65,375 $160,954 $ 79,588
GAP to Total Assets -14.44% -4.06% 8.24% 20.29% 10.03%
Cumulative GAP
to Total Assets -14.44% -18.50% -10.26% 10.03% -
(1) Securities are based on estimated maturities at book value.
(2) Adjustable Rate Loans are shown in the time frame corresponding to
the next contractual interest rate adjustment.
(3) Transaction Accounts such as IMMA, ONE, and NOW are generally
assumed to be subject to repricing within one year. This
is based on the Corporation's historical experience with respect to
such accounts.
[24]
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding the exposure of the Company's financial instruments
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations-Interest Rate Sensitivity" on pages 14 and 15 of the Annual Report to
Stockholders for the year ended December 31, 1999. The Company's principal
market risk exposure is to interest rates.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) The following audited consolidated financial statements and
related documents are set forth in this Annual Report on Form
10-K on the following pages:
Page Number
Independent Auditors' Report 26
Consolidated Statements of Financial Condition 27
Consolidated Statements of Income 28
Consolidated Statements of Changes in Shareholders' Equity 29
Consolidated Statements of Cash Flows 30
Notes to Consolidated Financial Statements 31-42
(b) The following supplementary data is set forth in this Annual
Report on Form 10-K on the following pages:
Quarterly Results of Operations 43
[25]
Report of Management
Financial Statements
First United Corporation (the "Corporation") is responsible for the prep-
aration, integrity and fair presentation of its published financial statements
as of December 31, 1999, and for the year then ended. The consolidated financial
statements of the Corporation have been prepared in accordance with generally
accepted principles and, as such, include some amounts that are based on
judgments and estimates of management.
Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining effective internal
control over financial reporting presented in conformity with generally accepted
accounting principles and the instructions to the Consolidated Financial State-
ments for Bank Holding Companies with Total Consolidated Assets of $150 million
or more (FR Y-9 C instructions). The system contains monitoring mechanisms, and
actions are taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of an internal control
including the possibility of human error and the circumvention or overriding of
controls. Accordingly, even effective internal control can provide only reason-
able assurance with respect to financial statement preparation. Further, because
of changes in conditions, the effectiveness of internal control may vary over
time.
Management assessed the Corporation's internal control over financial report-
ing presented in conformity with generally accepted accounting principles and
FR Y-9 C instructions as of December 31, 1999. This assessment was based on
criteria for effective internal control over financial reporting described in
"Internal Control-Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
believes that the Corporation maintained effective internal control over
financial reporting presented in conformity with generally accepted accounting
principles and FR Y-9 C instructions as of December 31, 1999.
Compliance with Laws and Regulations
Management is responsible for compliance with the federal and state laws and
regulations concerning dividend restrictions and federal laws and regulations
concerning loans to insiders designated by the FDIC as safety and soundness laws
and regulations.
Management has assessed compliance by First United Bank & Trust ("the Bank")
with the designated laws and regulations relating to safety and soundness. Based
on this assessment, management believes that the Bank complied, in all sign-
ificant respects, with the designated laws and regulations related to safety and
soundness for the year ended December 31, 1999.
William B. Grant Robert W. Kurtz
Chairman and Chief Executive Officer President and Chief Financial Officer
First United Corporation First United Corporation
and and
First United Bank & Trust First United Bank & Trust
[26]
Report of Independent Auditors
Board of Directors and Shareholders
First United Corporation
We have audited the accompanying consolidated statements of financial
condition of First United Corporation and subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial state-
ments. An audit also includes assessing the accounting principles used and sign-
ificant estimates made by management, as well as evaluating the overall finan-
cial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of First United
Corporation and subsidiaries at December 31, 1999 and 1998, and the consolidated
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
Baltimore, Maryland
February 4, 2000
[27]
First United Corporation and Subsidiaries
Consolidated Statements of Financial Condition
(In thousands, except per share amounts)
December 31
1999 1998
Assets
Cash and due from banks $ 20,879 $ 13,633
Federal funds sold 615 -
Interest-bearing deposits in banks 20,750 363
Investment securities available for sale at market value
(amortized cost-$155,391 and $95,964 at
December 31, 1999 and 1998, respectively) 150,565 96,728
Federal Home Loan Bank stock, at cost 5,200 3,604
Loans and leases 569,182 508,972
Reserve for possible credit losses (4,409) (3,304)
Net loans and leases 564,773 505,668
Bank premises and equipment 9,760 9,136
Accrued interest receivable and other assets 20,738 11,982
Total Assets $793,280 $641,114
Liabilities and Shareholders' Equity
Liabilities:
Noninterest-bearing deposits $ 54,012 $ 54,554
Interest-bearing deposits 544,560 456,946
Total deposits 598,572 511,500
Federal Home Loan Bank borrowings and
other borrowed funds 127,000 64,575
Reserve for taxes, interest and other liabilities 8,643 5,594
Dividends payable 969 971
Total Liabilities 735,184 582,640
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
and 6,155 shares at
December 31, 1999 and 1998, respectively 61 62
Surplus 20,269 21,384
Retained earnings 40,729 36,559
Accumulated comprehensive income (2,963) 469
Total Shareholders' Equity 58,096 58,474
Total Liabilities and Shareholders' Equity $793,280 $641,114
See notes to consolidated financial statements
[28]
First United Corporation and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share amounts)
Year ended December 31
1999 1998 1997
Interest income
Interest and fees on loans and leases $ 47,014 $ 41,322 $ 37,125
Interest on investment securities:
Taxable 6,223 4,961 5,347
Exempt from federal income taxes 1,193 830 695
7,416 5,791 6,042
Interest on federal funds sold 413 129 181
Total interest income 54,843 47,242 43,348
Interest expense
Interest on deposits:
Savings 707 843 1,135
Interest-bearing transaction accounts 3,793 3,366 2,934
Time, $100,000 or more 5,166 3,528 2,663
Other time 12,363 12,450 11,933
Interest on Federal Home Loan Bank borrowings
and other borrowed funds 5,117 1,728 313
Total interest expense 27,146 21,915 18,978
Net interest income 27,697 25,327 24,370
Provision for possible credit losses 2,066 1,176 935
Net interest income after provision for
possible credit losses 25,631 24,151 23,435
Other operating income
Trust Department income 1,755 1,495 1,275
Service charges on deposit accounts 1,996 2,237 2,322
Insurance premium income 940 264 295
Security gains 115 238 91
Other income 2,393 2,082 2,054
TOTAL 7,199 6,316 6,037
Other operating expense
Salaries and employee benefits 10,402 9,521 9,229
Occupancy expense of premises 971 1,038 985
Equipment expense 1,808 1,676 1,656
Data processing expense 876 627 581
Deposit assessment and related fees 109 155 164
Restructuring costs - - 554
Other expense 6,573 6,041 6,361
20,739 19,058 19,530
Income before income taxes 12,091 11,409 9,942
Applicable income taxes 4,130 3,982 3,297
Net income $ 7,961 $ 7,427 $ 6,645
Earnings per share $1.30 $1.20 $1.05
See notes to consolidated financial statements.
[29]
First United Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
(In thousands, except per share amounts)
Accumulated
Total
Capital Retained Comprehensive Shareholders'
Stock Surplus Earnings Income Equity
Balance at
January 1, 1997 $64 $26,661 $29,877 $ 213 $56,815
Net unrealized gains on investment
securities, net of income tax
benefit of $40 64 64
Net income for the year 6,645 6,645
Comprehensive income 6,709
Aquisition and retirement
of common stock (1) (3,200) (3,201)
Cash dividends-$.56 per share (3,609) (3,609)
Balance at
December 31, 1997 63 23,461 32,913 277 56,714
Net unrealized gains on
investment securities,
net of income tax benefit of $121 192 192
Net income for the year 7,427 7,427
Comprehensive income 7,619
Dividend reinvestment and stock
purchase plan 28 28
Aquisition and retirement
of common stock (1) (2,105) (2,106)
Cash dividends-$.60 per share (3,781) (3,781)
Balance at
December 31, 1998 62 21,384 36,559 469 58,474
Net unrealized losses on
investment securities,
net of income tax benefit of$2,159 (3,432) (3,432)
Net income for the year 7,961 7,961
Comprehensive income 4,529
Aquisition and retirement of
common stock (1) (1,115) (1,116)
Cash dividends-$.62 per share (3,791) (3,791)
Balance at
December 31, 1999 $61 $20,269 $40,729 ($2,963) $58,096
See notes to consolidated financial statements.
[30]
First United Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Year ended December 31
1999 1998 1997
Operating activities
Net income $ 7,961 $ 7,427 $ 6,645
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for possible credit losses. 2,066 1,176 935
Provision for depreciation 1,648 1,549 1,460
Net accretion and amortization of
investment security discounts and premiums (210) 222 (116)
Gain on sale of investment securities (115) (238) (91)
Increase in accrued interest receivable
and other assets (8,756) (3,121) (1,440)
Increase (decrease) in reserve for taxes,
interest and other liabilities 3,049 534 (236)
Net cash provided by operating activities 5,643 7,549 7,157
Investing activities
Proceeds from maturities and sales of
investment securities available for sale 185,527 59,775 74,960
Purchases of available for sale
investment securities (264,454) (62,570) (56,774)
Purchases of investment securities
held-to-maturity - (8,625) (8,490)
Proceeds from maturities of investment
securities held-to-maturity - 5,530 6,048
Net increase in loans (61,171) (68,108) (59,079)
Purchase of premises and equipment (2,272) (1,435) (1,379)
Net cash used in investing activities (142,370) (75,433) (44,714)
Financing activities
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts 13,006 (1,180) 5,367
Net increase in certificates of deposit 74,066 12,620 42,154
Increase (decrease) in Federal Home Loan
Bank borrowings and other borrowed funds 39,425 58,350 (1,775)
Cash dividends paid (3,793) (3,781) (3,609)
Proceeds from issuance of common stock - 28 -
Aquisition and retirement of common stock (1,116) (2,106) (3,201)
Proceeds from issuance of other
long term debt 23,000 - -
Net cash provided by financing activities 144,588 63,931 38,936
Increase (decrease) in cash
and cash equivalents 7,861 (3,953) 1,379
Cash and cash equivalents at
beginning of year 13,633 17,586 16,207
Cash and cash equivalents at
end of year $21,494 $13,633 $17,586
See notes to consolidated financial statements.
[31]
First United Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except per share amounts)
1. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying financial statements of First United Corporation (Corp-
oration) include the accounts of its wholly owned subsidiaries, First United
Bank & Trust (Bank) and Oakfirst Life Insurance Corporation (Non-Bank). All
significant intercompany accounts and transactions have been eliminated.
Business
First United Corporation is a registered bank holding company, incorporated
under the laws of Maryland. It is the parent company of First United Bank &
Trust and Oakfirst Life Insurance Corporation. First United Bank & Trust prov-
ides a complete range of retail and commercial banking services to a customer
base serviced by a network of twenty-two offices and twenty-nine automated
teller machines. This customer base includes individuals, businesses and var-
ious governmental units. Oakfirst Life Insurance Corporation is a reinsurance
company that reinsures credit life and credit accident and health insurance
written by American General Assurance Company on consumer loans made by First
United Bank & Trust.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles that require the
Corporation to make estimates and assumptions that affect the reported amounts
of certain assets and liabilities at the date of the financial statements as
well as the reported amount of revenues and expenses during the reporting
period.
Actual results could differ from these estimates.
Investments
Securities available-for-sale: Beginning in 1999, all security purchases are
classified as available-for-sale. Available-for-sale securities are stated at
fair market value, with the unrealized gains and losses, net of tax, reported
as a separate component of other comprehensive income in the Corporation's
shareholders' equity.
Securities held-to-maturity: Debt securities are classified as held-to-
maturity when the Corporation has the positive intent and ability to hold the
securities to maturity. Held-to-maturity securities are stated as amoritized
cost.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization is included in interest
income from investments. Interest and dividends are included in interest income
from investments. Realized gains and losses, and declines in value judged to
be other-than-temporary are included in net securities gains (losses). The cost
of securities sold is based on the specific identification method.
At December 31, 1999 and 1998, there were no securities held in the invest-
ment portfolio which were classified as held to maturity or trading.
Interest on Loans and Leases
Interest on loans and leases is recognized based upon the principal amount
outstanding. It is the Corporation's policy to generally discontinue the
accrual of interest on loans (including impaired loans) when circumstances ind-
icate that collection of principal or interest is doubtful. After a loan is
placed on non-accrual, interest is recognized only to the extent of cash rec-
eived.
Bank Premises and Equipment
Bank premises and equipment are carried at cost, less accumulated provision
for depreciation. The provision for depreciation for financial reporting
generally has been made by using the straight-line method based on the estimated
useful lives of the assets, which range from 18 to 31.5 years for buildings and
4 to 20 years for equipment. The provision for depreciation for general tax purp
oses and for the Alternative Minimum Tax generally has been made using the
double-declining balance method and the ACRS method based on the estimated
useful lives of the assets which range from 18 to 31.5 years for buildings and 4
to 10 years for equipment.
1. Summary of Significant Accounting Policies (continued)
Reserve for Credit Losses
The reserve for credit losses is maintained at a level believed adequate by
management to absorb potential losses. Management's determination of the ad-
equacy of the loan loss reserve is based upon the impact of economic conditions
[32]
on the borrower's ability to repay, past collection experience, the risk
characteristics of the loan portfolio, estimated fair value of underlying
collateral for collateral dependent loans, and such other factors which, in
management's judgement, deserve current recognition. Management's evaluation is
inherently subjective as it requires estimates concerning the underlying
collateral values on impaired loans that may be susceptible to change.
Income Taxes
The Corporation accounts for income taxes using the liability method. Under
the liability method, the deferred tax liability or asset is determined based on
the difference between the financial statement and tax bases of assets and liab-
ilities (temporary differences) and is measured at the enacted tax rates that
will be in effect when these differences reverse. Deferred tax expense is deter-
mined by the change in the liability or asset for deferred taxes adjusted for
changes in any deferred tax asset allowance.
Statement of Cash Flow
The Corporation has defined cash and cash equivalents as those amounts inc-
luded in the balance sheet captions "Cash and due from banks" and "Federal funds
sold." The Corporation paid $25,593, $21,646, and $18,329 in interest on dep-
osits and other borrowed funds for the years ending December 31, 1999, 1998, and
1997, respectively.
Earnings Per Share
Earnings per share ("basic") was computed based on the weighted average
number of common shares outstanding of 6,106, 6,209, and 6,343 for 1999, 1998,
and 1997, respectively. The Corporation does not have any common stock equiv-
alents.
Comprehensive Income
On January 1, 1998, the Corporation adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (Statement No. 130). State-
ment No. 130 establishes standards for the reporting and disclosure of comp-
rehensive income and its components in the financial statements. The adoption of
Statement No. 130 had no impact on the Corporation's consolidated financial
statements. For purposes of comparability, prior years' financial statements
have been reclassified to conform to the requirements of Statement No. 130.
Accumulated comprehensive represents the unrealized gains and losses on the
Company's investment securities, net of income taxes. For the years ended
December 31, 1999, 1998, and 1997 total comprehensive income, net income plus
the change in unrealized gains on investment securities, amounted to $4,529 ,
$7,619, and $6,709 net of income taxes, respectively.
Business Segments
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information," was effective July 1, 1998.
This Statement establishes standards for the way public enterprises report
information about operating segments in the financial statements. Based on the
guidance provided by the Statement, the Corporation does not have more than one
operating segment which would require additional disclosure in accordance with
the Statement.
2. Regulatory Capital Requirements
The Corporation and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly add-
itional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Corp-
oration and the Bank must meet specific capital guidelines that involve quantit-
ative measures of its assets, liabilities, and certain off-balance sheet items
as calculated under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Bank to maintain minimum amounts and ratios of
total and Tier I capital to risk-weighted assets, and of Tier I capital to
average assets (leverage). Management believes, as of December 31, 1999, that
the Corporation and the Bank meet all capital adequacy requirements to which it
is subject.
As of December 31, 1999, the Corporation and the Bank were well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios must be maintained. Management is not aware of any condition or
event which has caused the well capitalized position to change.
[33]
2. Regulatory Capital Requirements (continued)
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
December 31, 1999
Total Capital
(to Risk Weighted Assets)
Consolidated $87,607 15.03% $46,635 8.00% $58,293 10.00%
First United Bank 75,930 13.10% 46,377 8.00% 57,971 10.00%
Tier I Capital
(to Risk Weighted Assets)
Consolidated 80,264 13.77% 23,317 4.00% 34,976 6.00%
First United Bank 71,521 12.34% 23,189 4.00% 34,783 6.00%
Tier I Capital
(to Average Assets)
Consolidated 80,264 11.25% 21,396 3.00% 35,660 5.00%
First United Bank 71,521 10.82% 19,824 3.00% 33,039 5.00%
December 31, 1998
Total Capital
(to Risk Weighted Assets)
Consolidated $61,778 13.40% $36,870 8.00% $46,099 10.00%
First United Bank 49,915 10.89% 36,665 8.00% 45,831 10.00%
Tier I Capital
(to Risk Weighted Assets)
Consolidated 58,474 12.68% 18,440 4.00% 27,660 6.00%
First United Bank 46,611 10.17% 18,332 4.00% 27,499 6.00%
Tier I Capital
(to Average Assets)
Consolidated 58,474 9.71% 18,073 3.00% 30,123 5.00%
First United Bank 46,611 8.07% 17,328 3.00% 28,880 5.00%
3. Investment Securities
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (Statement No.
133), was issued. Statement No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and hedging activities. This statement as amended
is effective for financial statements issued for all quarters of all fiscal
years beginning after June 15, 2000. As permitted, the Corporation early adopted
this statement on July 1, 1998. Except for the reclassification described below,
the adoption of Statement No. 133 did not have a material impact on the Corp-
oration's consolidated financial statements as the Company does not enter into
derivative contracts. In connection with the adoption of this statement, $25,266
million of the investment securities previously classified as held-to-maturity
were reclassified to available-for-sale. As the securities were marked to market
coincident with the reclassification, the change resulted in an increase of $25
million to other comprehensive income (net of taxes).
The following is a comparison of amortized cost and market values of
available-for-sale securities and held-to-maturity securities:
Available-for-Sale Securities
Gross Gross
Unrealized Unrealized Market
Cost Gains Losses Value
December 31, 1999
U. S. Treasury securities and
obligations of U. S.
government agencies $ 50,895 $ 6 $ 1,421 $ 49,480
Obligations of states and
political subdivisions 30,790 20 1,487 29,323
Mortgage-backed securities 62,702 - 1,712 60,990
U.S. corporate securities 9,704 40 272 9,472
Total debt securities 154,091 66 4,892 149,265
Equity securities 1,300 1,300
Totals $155,391 $ 66 $ 4,892 $150,565
[34]
3. Investment Securities (continued)
Available-for-Sale Securities
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
December 31, 1998
U. S. Treasury securities and
obligations of U. S.
government agencies $46,743 $277 $ 17 $47,003
Obligations of states and political
subdivisions 21,876 529 78 22,327
Mortgage-backed securities 23,628 68 59 23,637
U.S. corporate securities 2,604 44 - 2,648
Total debt securities 94,851 918 154 95,615
Equity securities 1,113 - - 1,113
Totals $95,964 $918 $154 $96,728
Available-for-Sale Securities
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
December 31, 1997
U. S. Treasury securities and
obligations of U. S.
government agencies $41,434 $267 $ 8 $41,693
Obligations of states and political
subdivisions 6,249 111 - 6,360
Mortgage-backed securities 16,917 108 25 17,000
Total debt securities $64,600 $486 $ 33 $65,053
Held-to-Maturity Securities
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
December 31, 1997
Obligations of states and political
subdivisions $ 9,203 $178 $- $ 9,381
U. S. corporate securities 15,896 83 3 15,976
Total debt securities 25,099 261 3 25,357
Equity securities 4,443 - - 4,443
Totals $29,542 $261 $3 $29,800
During the years ended December 31, 1999, 1998, and 1997, available-for-sale
securities with a fair market value at the date of sale of $24.59, $33.76, and
$4.83 million were sold. The gross realized gains on such sales totaled $14,
$271, and $91 million. The gross realized losses on the sales were $25, $33, and
$3 million. The amortized cost and estimated fair value of debt and marketable
equity securities at December 31, 1999, by contractual maturity, are shown
below. Actual maturities will differ from contractual maturities because the
issuers of the securities may have the right to prepay obligations without prep-
ayment penalties. Equity securities consist of various money market accounts.
These securities have no maturity and therefore are classified in the "Due
after ten years" maturity line.
[35]
3. Investment Securities (continued)
Available-for-Sale Securities
Amortized Market
Cost Value
Due in one year or less $ 7,240 $ 7,239
Due after one year through five years 28,502 27,983
Due after five years through ten years 25,989 24,850
Due after ten years 93,660 90,493
$155,391 $150,565
At December 31, 1999, investment securities with a market value of $30,200
million were pledged to secure public and trust deposits as required or
permitted by law.
4. Reserve for Possible Credit Losses
Activity in the reserve for possible credit losses is summarized as follows:
1999 1998 1997
Balance at January 1 $3,304 $2,654 $2,186
Provision charged to operating expense 2,066 1,176 935
5,370 3,830 3,121
Gross credit losses (1,396) (708) (638)
Recoveries 435 182 171
Net credit losses (961) (526) (467)
Balance at December 31 $4,409 $3,304 $2,654
Non-accruing loans were $379, $460, and $562 at December 31, 1999, 1998, and
1997, respectively. Interest income not recognized as a result of non-accruing
loans was $4, $24, and $20 during the years ended December 31, 1999, 1998, and
1997, respectively.
5. Loans and Leases and Concentrations of Credit Risk
The Corporation through its banking subsidiary is active in originating loans
and leases to customers primarily in Garrett, Allegany, Washington and Frederick
counties in Maryland; and Mineral, Hardy, Berkeley and Hampshire Counties in
West Virginia, and the surrounding regions of West Virginia and Pennsylvania.
The following table presents the Corporation's composition of credit risk by
significant concentration.
December 31, 1999
Loans Loan
& Leases Commitments Total
Commercial, financial and agricultural $ 55,556 $20,726 $ 76,282
Real estate-construction 7,873 3,612 11,485
Real estate-mortgage 278,564 20,389 298,953
Installment 219,035 3,676 222,711
Lease financing 6,433 - 6,433
Letters of credit 1,721 1,721 3,442
$569,182 $50,124 $619,306
[36]
5. Loans and Leases and Concentrations of Credit Risk (continued)
December 31, 1998
Loans Loan
& Leases Commitments Total
Commercial, financial and agricultural $ 80,399 $24,437 $104,836
Real estate-construction 11,315 4,532 15,847
Real estate-mortgage 286,514 20,375 306,889
Installment 129,477 3,369 132,846
Lease financing 129 - 129
Letters of credit 1,138 1,138 2,276
$508,972 $53,851 $562,823
Loan commitments are made to accommodate the financial needs of the Corp-
oration's customers. Letters of credit commit the Corporation to make payments
on behalf of customers when certain specified future events occur. Letters of
credit are issued to customers to support contractual obligations and to insure
job performance. Historically, most letters of credit expire unfunded. Loan
commitments and letters of credit have credit risk essentially the same as that
involved in extending loans to customers and are subject to normal credit
policies. Collateral is obtained based on management's credit assessment of
the customer.
Commercial, financial and agricultural loans are collateralized by real
estate and equipment, and the loan-to-value ratios generally do not exceed 75
percent. Real estate mortgage loans are collateralized by the related property,
and the loan-to-value ratios generally do not exceed 85 percent.
Any consumer real estate mortgage loan exceeding a loan-to-value ratio of 85
percent requires private mortgage insurance. Installment loans are typically
collateralized with loan-to-value ratios which are established based on the
financial condition of the borrower and generally range from 80 percent to 90
percent of the amount of the loan. The Corporation will also make unsecured
consumer loans to qualified borrowers meeting the underwriting standards of the
Corporation.
6. Bank Premises and Equipment
The composition of Bank premises and equipment is as follows:
1999 1998
Bank premises $ 9,428 $ 9,010
Equipment 15,138 13,245
24,566 22,255
Less accumulated depreciation (14,806) (13,119)
Total $ 9,760 $ 9,136
The Corporation recorded depreciation expense of $1,648, $1,549 and $1,460 in
1999, 1998, and 1997, respectively.
7. Fair Value of Financial Instruments
As required by the Statement of Financial Accounting Standards ("SFAS") No.
107, "Disclosures about Fair Value of Financial Instruments," the Corporation
has presented fair value information about financial instruments, whether or not
recognized in the statement of financial condition, for which it is practicable
to estimate that value. Fair value is best determined by values quoted through
active trading markets. Active trading markets are characterized by numerous
transactions of similar financial instruments between willing buyers and willing
sellers. Because no active trading market exists for various types of financial
instruments, many of the fair values disclosed were derived using present
value discounted cash flow or other valuation techniques. As a result, the Corp-
oration's ability to actually realize these derived values cannot be assumed.
The fair values disclosed under SFAS No. 107 may vary significantly between
institutions based on the estimates and assumptions used in the various
valuation methodologies. SFAS No. 107 excludes disclosure of non financial
assets such as buildings as well as certain financial instruments such as
leases. Accordingly, the aggregate fair values presented do not represent the
underlying value of the Corporation.
[37]
7. Fair Value of Financial Instruments (continued)
The actual carrying amounts and estimated fair values of the Corporation's
financial instruments that are included in the statement of financial condition
at December 31 are as follows:
1999 1998
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and due from banks $ 20,879 $ 20,879 $ 13,633 $ 13,633
Federal funds sold 615 615 0 0
Interest-bearing deposits in banks 20,750 20,750 363 363
Investment securities 150,565 150,565 96,728 96,728
Federal Home Loan Bank stock 5,200 5,200 3,604 3,604
Loans 569,182 565,545 508,972 505,927
Deposits 598,572 600,919 511,500 506,243
Federal Home Loan Bank borrowings and
other borrowed funds 127,000 133,779 64,575 64,575
The following methods and assumptions were used by the Corporation in est-
imating its fair value disclosures for financial instruments:
Cash and Cash Equivalents: The carrying amounts as reported in the statement
of financial condition for cash and short-term instruments approximate those
assets' fair values.
Federal Funds Sold: The carrying amount of federal funds sold approximate
their fair values.
Interest-Bearing Deposits in Banks: The carrying amount of interest-bearing
deposits maturing within ninety days approximate their fair values.
Investment Securities: Fair values for investment securities are based on
quoted market values.
Federal Home Loan Bank Stock: The carrying value of Federal Home Loan stock
approximates fair value based on the redemption provisions of the Federal Home
Loan Bank.
Loans Receivable: For variable rate loans that reprice frequently or "in one
year or less," and with no significant change in credit risk, fair values are
based on carrying values. Fair values for fixed rate loans and loans that do not
reprice frequently are estimated using a discounted cash flow calculation that
applies current interest rates being offered on the various loan products.
Deposit Liabilities: The fair values disclosed for demand deposits (e.g.,
interest and non-interest checking, savings, and certain types of money market
accounts) are, by definition, equal to the amount payable on demand at the
reporting date (i.e., their carrying amounts). The carrying amounts for
variable rate certificates of deposit approximate their fair values at the rep-
orting date. Fair values for fixed rate certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates currently
being offered on the various certificates of deposit to the cash flow stream.
Federal Home Loan Bank Borrowings and Other Borrowed Funds: The fair value of
the Corporation's Federal Home Loan Bank borrowings is calculated based on the
discounted value of contractural cash flows, using rates currently existing for
borrowings from the Federal Home Loan Bank with similar remaining maturities.
The fair value of the Corporation's other long-term debt, the trust issued
guaranteed preferred beneficial interests in the Corporation's junior sub-
ordinated deferrable interest debentures, is based upon its quoted market
price.
Off-Balance-Sheet Financial Instruments: In the normal course of business,
the Corporation makes commitments to extend credit and issues standby letters
of credit. As a result of excessive costs, the Corporation considers estimation
of fair values for commitments and standby letters of credit to otherwise be
impracticable. The Corporation's estimate of impairment due to collectibility
concerns related to these off-balance-sheet financial instruments is included in
the reserve for possible credit losses. The Corporation does not have any der-
ivative financial instruments at December 31, 1999 or 1998.
[38]
8. Federal Home Loan Bank (FHLB) Advances and Other Borrowings
Borrowings consist of the following:
December 31, 1999
FHLB advances payable to FHLB Atlanta,
secured by all FHLB advances and certain first mortgage loans:
Due August 25, 2004 @ 5.72%, convertible on August 25, 2002 $ 11,500
Due February 4, 2008 @ 5.49%, convertible on February 4, 2003 10,000
Due September 11, 2008 @ 4.69, convertible on September 11, 2000 25,000
Due April 22, 2009 @ 5.01%, convertible on April 23, 2001 26,000
Due August 6, 2009 @ 4.95, convertible on February 6, 2000 20,000
Due September 8, 2009 @ 6.27%, convertible on September 8, 2004 11,500
Trust issued guaranteed preferred beneficial interests in the
Corporation's Junior subordinated deferrable interest debentures
@ 9.375%, maturing in August 2029 23,000
Total $127,000
December 31, 1998
FHLB advances payable to FHLB Atlanta,
secured by all FHLB advances and certain first mortgage loans:
Due December 2, 1999 @ 5.15% $24,575
Due September 24, 2002 @ 5.66% 5,000
Due February 4, 2008 @ 5.49% 10,000
Due September 11, 2008 @ 4.69% 25,000
Total $64,575
The Corporation, through its banking subsidiary, First United Bank & Trust,
has a credit agreement with the FHLB of Atlanta in an amount up to $227,000. The
line of credit is secured with the first lien on the 1-4 family mortgage port-
folio totaling $181,270 on December 31, 1999.
First United Capital Trust (the Trust), a Delaware Business trust organized
by the Corporation on July 19, 1999, issued $23,000 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. Under the Federal Reserve
Board's current risk-based capital guidelines, the capital securities are
includable in the Corporation's Tier I and Tier II capital ratios. For
financial reporting purposes, the Trust is treated as a wholly owned
subsidiary of the Corporation. The Capital Securities represent preferred
undivided interests in the assets of the Trust, and are classified in the
Corporation's consolidated balance sheet as other long term debt, with dis-
tributions on the securities included in interest expense.
The proceeds from the issuance of the Capital Securities were used by the
Trust to purchase $23,000 aggregate principal amount of junior subordinated
debentures (Junior Subordinated Debentures) issued by the Corporation 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.
Holders of the Capital Securities receive preferential cumulative cash
distributions quarterly on each distribution date at the distribution rate
stated above unless the Corporation exercises its right to extend the payment
of interest on the Junior Subordinated Debentures for up to 20 quarterly
periods, in which case payment of distributions on the Capital Securities will
be deferred for a comparable period. During an extended interest period, the
Corporation may not pay dividends or distributions on, or repurchase, redeem or
acquire any shares of its capital stock. The agreements governing the Capital
Securities, in the aggregate, provide a full, irrevocable and unconditional
guarantee by the Corporation of the payment of distributions on, the redemption
of, and any liquidation distribution with respect to the Capital Securities. The
obligations of the Corporation under this guarantee and the Capital Securities
are subordinate and junior in right of payment to all senior indebtedness of the
Corporation.
The Capital Securities are mandatorily redeemable in whole, but not in part,
upon repayment at the stated maturity dates of the Junior Subordinated Deb-
entures or the earlier redemption of the Junior Subordinated Debentures in whole
upon the occurrence of one or more tax, investment company, or capital treatment
events (Events) set forth in the indentures relating to the Capital Securities,
and in
[39]
whole or in part at any time after September 30, 2004, the stated optional
redemption date, contemporaneously with the Corporation's optional redemption of
the related Junior Subordinated Debentures in whole or in part. The Junior
Subordinated Debentures are redeemable prior to their stated maturity date
at the Corporation's option (i) on or after the stated optional redemption
dates, in whole at any time or in part from time to time, or (ii) in whole,
but not in part, at any time within 90 days following the occurrence and during
the continuation of one or more of the Events, in each case subject to possible
regulatory approval.
The Corporation's banking subsidiary First United Bank & Trust has established
various unsecured lines of credit totaling $8,500 at various upstream
correspondent banks. The Bank has also established a $8,000 reverse repurchase
lines of credit with correspondent banks. As of December 31, 1999, the Corp-
oration had no borrowings with these correspondent banks. The Corporation
utilizes the lines to meet daily liquidity requirements and does not rely on
lines as a source of long term liquidity.
Maturities of FHLB advances and other borrowed funds are as follows:
2000 -, 2001 -, 2002 -, 2003 -, 2004 11,500.
9. Income Taxes
A reconciliation of the statutory income tax at the applicable rates to the
income tax expense included in the statement of income is as follows:
1999 1998 1997
Income before income taxes $12,091 $11,409 $9,942
Statutory income tax rate 34% 34% 34%
Income tax 4,111 3,879 3,380
State franchise tax, net of federal
tax benefit 348 324 257
Effect of nontaxable interest and loan income (516) (430) (390)
Effect of TEFRA interest limitation 67 47 37
Merger costs 31 16 -
Other 89 146 13
Income tax expense for the year $4,130 $3,982 $3,297
Taxes currently payable 4,710 $4,022 $3,568
Deferred taxes (benefit) (580) (40) (271)
Income tax expense for the year $4,130 $3,982 $3,297
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Corporation's deferred tax assets and liabilities as of December 31 are
as follows:
1999 1998
Deferred tax assets:
Reserve for possible credit losses $1,703 $1,083
Deferred loan origination fees 201 222
Merger costs 47 16
Unrealized loss on real property 123 119
Deferred compensation 161 58
Unrealized loss on investment securities 1,864 -
Other 9 10
Total deferred tax assets 4,108 1,508
Valuation allowance (47) (16)
Total deferred tax assets less valuation allowance 4,061 1,492
Deferred tax liabilities:
Pension (423) (265)
Market discount (22) (98)
Excess depreciation (443) (407)
Employee compensation (81) (86)
Unrealized gain on investment securities - (295)
[40]
9. Income Tax (continued)
Prepaid expenses (39) (37)
Other (12) 1
Total deferred tax liability (1,020) (1,187)
Net deferred tax asset $3,041 $ 305
The Corporation made income tax payments of $4,729, $3,406, and $2,920 for the
years ending December 31, 1999, 1998 and 1997, respectively.
10. Employee Benefit Plans
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ( Statement No. 132 ), eff-
ective for financial statements issued for fiscal years beginning after December
15, 1997, revises employers' disclosures about pension and other postretirement
benefit plans.
It does not change the measurement or recognition of those plans. The adoption
of Statement No. 132 did not have an impact on the Corporation's consolidated
financial statements.
1999 1998
Change in Benefit Obligation
Obligation at the beginning of the year $ 8,576 $ 7,143
Service cost 401 308
Interest cost 605 551
Assumptions (1,862) -
Actual (gain) loss 631 1,004
Benefits paid (380) (430)
Obligation at the end of the year $ 7,971 $ 8,576
Change in Plan Assets
Fair value at the beginning of the year $10,278 $ 8,502
Actual return on plan assets 886 1,465
Employer contribution 439 741
Benefits paid (381) (430)
Fair value at the end of the year $11,222 $10,278
Funded Status 3,252 1,701
Unrecognized actuarial gain (1,563) (295)
Unrecognized prior service cost (26) (28)
Unrecognized transition asset (606) (644)
Prepaid benefit cost $ 1,057 $ 734
Discount rate 8.00% 6.75%
Expected return on assets 8.25% 8.50%
Rate of pay increase 3.75% 3.75%
1999 1998 1997
Net Pension cost included the following:
Service costs-benefits earned during the year $ 401 $ 308 $ 259
Interest cost on projected benefit obligation 605 552 494
Actual return on plan assets (886) (1,465) (1,097)
Net amortization and deferral (3) 718 453
Net pension expense included in employee benefits $ 117 $ 113 $ 110
[41]
401(k) Profit Sharing Plan
The First United Bank & Trust 401(k) Profit Sharing Plan ("the 401(k) Plan")
is a defined contribution plan that is intended to qualify under section 401(k)
of the Internal Revenue Code. The 401(k) Plan covers substantially all employees
of the Corporation. Eligible employees can elect to contribute, through payroll
deductions, up to 10% of their base salary, with contributions up to 6% of base
salary matched on a 50% basis by the Corporation. Expense charged to operations
for the 401(k) Plan was $165, $162, and $120 in 1999, 1998, and 1997, respect-
ively.
11. Federal Reserve Requirements
The banking subsidiaries are required to maintain reserves with the Federal
Reserve Bank. During 1999, the daily average amount of these required reserves
was approximately $8,633.
12. Restrictions on Subsidiary Dividends, Loans or Advances
Banking law limits the amount of dividends which a bank can pay without ob-
taining prior approval from bank regulators. Under this law the banking subsid-
iaries could, without regulatory approval, declare additional dividends in 2000
of approximately $8,090 plus an additional amount equal to the net undistributed
profits for 2000 up to the date of any such dividend declaration.
Under Federal Reserve regulations, the banking subsidiaries are also limited
to the amount they may loan to their affiliates, including the Corporation, un-
less such loans are collateralized by specified obligations. Although no trans-
fers were made, $8,761 in funds were available for transfer from the Bank to the
Corporation in the form of loans as of December 31, 1999.
13. Parent Company Financial Information (Parent Company Only)
Condensed Statements of Financial Condition
December 31,
1999 1998
Assets
Cash $ 1,417 $ 1,286
Investment securities 4,454 5,354
Investment in bank subsidiary 69,584 46,611
Dividend receivable and other assets 1,216 436
Investment in non-bank subsidiary 5,394 5,758
Total Assets $82,065 $59,445
Liabilities and Shareholder's Equity
Dividends payable $ 969 $ 971
Other long term debt 23,000 -
Shareholders' equity 58,096 58,474
Total Liabilities and Shareholder's Equity $82,065 $59,445
Year ended December 31
Condensed Statements of Income 1999 1998 1997
Income:
Dividend income from subsidiaries $2,500 $5,380 $ 5,335
Other income 368 335 334
Total income 2,868 5,715 5,669
Expense:
Other expenses 814 5 10
Total expense 814 5 10
Income before income taxes and equity in
undistributed net income of subsidiaries 2,054 5,710 5,659
Applicable income taxes (3) (8) (8)
Equity in undistributed net income of subsidiaries:
Bank 5,537 1,412 681
Non-bank 373 313 313
Net income $7,961 $7,427 $6,645
[42]
13. Parent Company Financial Information (Parent Company Only) (continued)
Condensed Statements of Cash Flows
Year ended December 31
1999 1998 1997
Operating activities
Net income $7,961 $7,427 $ 6,645
Adjustments to reconcile net income to
net cash provided by operating activities:
Undistributed equity in subsidiaries (5,910) (1,725) (994)
Increase in other assets (780) (330) 6
(Decrease) in other liabilities - (30) (888)
(Decrease) increase in dividends payable (2) 34 35
Net cash provided by operating activities 1,269 5,376 4,804
Investing activities
Purchase of investment securities (2,871) (114) (205)
Proceeds from investment maturities 3,640 1,338 628
Net investment in subsidiaries 20,000 - -
Net cash (used in) provided by
investing activities (19,231) 1,224 423
Financing activities
Cash dividends (3,791) (3,781) (3,609)
Proceeds from issuance of common stock - 28 -
Proceeds from issuance of other long term debt 23,000 - -
Acquisition and retirement of common stock (1,116) (2,105) (3,201)
Net cash provided by (used in) financing
activities 18,093 (5,858) (6,810)
Increase (decrease) in cash and cash equivalents 131 742 (1,583)
Cash and cash equivalents at beginning of year 1,286 544 2,127
Cash and cash equivalents at end of year $1,417 $1,286 $ 544
14. Commitments and Contingent Liabilities
The Corporation and its subsidiaries are at times, and in the ordinary course
of business, subject to legal actions. Management, upon the advice of counsel,
is of the opinion that losses, if any, resulting from the settlement of current
legal actions will not have a material adverse effect on the financial condition
of the Corporation.
Oakfirst Life Insurance Corporation, a wholly owned subsidiary of the
Corporation, had $9,771 of life, accident and health insurance in force at
December 31, 1999. In accordance with state insurance laws, this subsidiary is
capitalized at $5,390.
15. Related Party Transactions
In the ordinary course of business, executive officers and directors of the
Corporation, including their families and companies in which certain directors
are principal owners, were loan customers of the Corporation and its subsid-
iaries. Pursuant to the Corporation's policy, such loans were made on the same
terms, including collateral, as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than the normal risk
of collectibility. Changes in the dollar amount of loans outstanding to officers
, directors and their associates were as follows for the years ended
December 31:
1999 1998 1997
Balance, January 1 $7,934 $8,046 $7,981
Loans or advances 3,055 3,303 5,239
Repayments (1,188) (3,415) (5,174)
Balance, December 31 $9,801 $7,934 $8,046
[43]
16. Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for
the years ended December 31, 1999 and 1998.
Three months ended
March 31 June 30 September 30 December 31
1999
Interest income $12,519 $13,007 $14,040 $15,277
Interest expense 5,892 6,027 6,906 8,321
Net interest income 6,627 6,980 7,134 6,956
Provision for possible
credit losses 425 411 560 670
Other income 1,491 1,583 1,882 2,243
Other expenses 4,944 5,178 5,391 5,226
Income before income taxes 2,749 2,974 3,065 3,303
Applicable income taxes 934 1,026 1,057 1,113
Net income $ 1,815 $ 1,948 $ 2,008 $ 2,190
Earnings per share $0.30 $0.31 $0.33 $0.36
Three months ended
March 31 June 30 September 30 December 31
1998
Interest income $11,226 $11,630 $12,002 $12,385
Interest expense 5,216 5,283 5,655 5,761
Net interest income 6,010 6,347 6,347 6,624
Provision for possible
credit losses 250 225 341 360
Other income 1,559 1,510 1,648 1,589
Other expenses 4,747 4,950 4,756 4,596
Income before income taxes 2,572 2,682 2,898 3,257
Applicable income taxes 894 936 1,012 1,140
Net income $ 1,678 $ 1,746 $ 1,886 $ 2,117
Earnings per share $0.27 $0.28 $0.30 $0.35
[44]
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to Directors of the Registrant is incorporated by
reference from the Registrant's definitive Proxy Statement for the annual share-
holders meeting to be held April 25, 2000, from pages 2 through 6.
Executive Officers of the Registrant are:
NAME POSITION AGE
William B. Grant Chairman of the Board and 46
Chief Executive Officer
Robert W. Kurtz President, 53
Chief Financial Officer and
Secretary/Treasurer
Benjamin W. Ridder Executive Vice President and 58
Director of Retail Banking
Jeannette R. Fitzwater Senior Vice President and 39
Director of Human Resources
Philip D. Frantz Senior Vice President and 39
Director of Operations & Support
Steven M. Lantz Senior Vice President and 43
Director of Lending
Eugene D. Helbig, Jr. Senior Vice President 47
Senior Trust Officer
Frederick A. Thayer IV Senior Vice President 41
Director of Sales and CRA Officer
As defined by the rules and regulations of the Securities and Exchange
Commission, family relationships exist among Directors, Nominees and
Executive Officers. Director Frederick A. Thayer III is the father of
Senior Vice President Frederick A. Thayer IV. Director I. Robert Rudy
is the brother of Senior Vice President Jeannette Rudy Fitzwater.
Director Karen F. Myers is a first cousin to Senior Vice President
Philip D. Frantz. No other family relationships exist.
All officers are elected annually by the Board of Directors and hold office
at the pleasure of the Board.
Mr. Grant has been Chairman of the Board and Chief Executive Officer since
1996. Previously, he had been Secretary of First United Corporation since
1990 and Executive Vice-President of First United Bank & Trust since 1987.
Mr. Kurtz has been President of First United Corporation since 1996 and
Chief Financial Officer, Secretary, and Treasurer since 1997. Previously,
he had been Chief Operating Officer of First United Corporation since 1996,
Treasurer of First United Corporation since 1990 and Executive Vice-President
of First United Bank & Trust since 1987.
Mr. Ridder has been Executive Vice President and Director of Retail Banking
of First United Corporation since 1997. Previously, he had been Senior
Vice President of the Corporation since 1987.
Mrs. Fitzwater was appointed Senior Vice President and Director of Human
Resources in 1997. She had been First Vice President, Director of
Marketing and Regional Sales Manager of First United Bank & Trust since 1994.
Mr. Frantz was appointed Senior Vice President in 1993 and previously had
been the Controller of the organization since 1988. He was appointed
Director of Operations & Support of the Corporation in 1997.
Mr. Lantz was appointed Senior Vice President and Director of Lending
of the Corporation in 1997. He had been First Vice President and
Commercial Services Manager of First United Bank & Trust since 1993.
[45]
Item 10. Directors and Executive Officers of the Registrant (continued)
Mr. Helbig was appointed Senior Vice President in 1997 and Senior Trust
Officer in 1993. He had been a First Vice President of First United
Bank & Trust since 1993.
Mr. Thayer was appointed Senior Vice President and Director of Sales in
1997. Previously, he had been First Vice President, Regional Executive
Officer and Regional Sales Manager of First United Bank & Trust since 1993.
Item 11. EXECUTIVE COMPENSATION
Information required by Item 11 is incorporated by reference from pages
4 and 5 of the definitive Proxy Statement of the Corporation for the annual
meeting of shareholders to be held on April 25, 2000.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information required by Item 12 is incorporated by reference from pages
2 and 3 of the definitive Proxy Statement of the Corporation for the annual
meeting of shareholders to be held on April 25, 2000.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from
page 5 of the definitive Proxy Statement of the Corporation for the annual
meeting of shareholders to be held on April 25, 2000, and from Note 15 on
page 45 of this Form 10-K. There are no other relationships required to be
disclosed in this item pursuant to the instructions for this report.
PART I V.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements.
The consolidated financial statements of the Corporation are listed on
pages 25-43 of the Annual Report on Form 10-K.
(a)(2) Financial Statement Schedules
No Financial Statement Schedules are required to be filed.
(3) Listing of Exhibits.
21.1-Subsidiaries of the Corporation, incorporated by reference on pages 3
of this Form 10-K.
23.1-Consent of Ernst & Young, LLP
27.1-Financial Data Schedule, filed electronically herewithin
(b) The Registrant filed one current report on Form 8-K for the year ended
December 31, 1999, dated May 20, 1999, regarding the Bank's acquisition of
Gonder Insurance Agency, Inc., a Maryland insurance agency.
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Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
First United Corporation
By:
William B. Grant
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated.
(David J. Beachy) Director
(Donald M. Browning) Director
(Rex W. Burton) Director
(Richard D. Dailey, Jr.) Director
(Paul Cox, Jr.) Director
(Frederick A. Thayer, III) Director
(Robert W. Kurtz) Director
(Maynard G. Grossnickle) Director
(Raymond F. Hinkle) Director
Signatures
(Dr. Andrew E. Mance) Director
(Donald E. Moran) Director
(Richard G. Stanton) Director
(I. Robert Rudy) Director
(Robert G. Stuck) Director
(James F. Scarpelli, Sr.) Director
(Karen F. Myers) Director
(Elaine L. McDonald) Director
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