FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For quarter ended June 30, 2002
Commission file number 0-14237
First United Corporation
------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-1380770
-------- ----------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification no.)
19 South Second Street, Oakland, Maryland 21550-0009
(address of principal executive offices) (zip code)
(301) 334-4715
--------------
Registrant's telephone number, including area code
Not applicable
--------------
Former name, address and former fiscal year, if changed since
last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common stock, $.01 Par value--6,080,589 shares outstanding as of June 30, 2002
Preferred stock, No par value--No shares outstanding as of June 30, 2002.
INDEX
FIRST UNITED CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2002 (unaudited) and December
31, 2001.
Consolidated Statements of Income (unaudited) - For the three and six
months ended June 30, 2002 and 2001.
Consolidated Statements of Cash Flows (unaudited) - For the six months
ended June 30, 2002 and 2001.
Notes to Unaudited Consolidated Financial Statements.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Item 2. Changes in Securities.
Item 3. Defaults upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
SIGNATURES
2
FIRST UNITED CORPORATION
Consolidated Balance Sheets
June 30, December 31
Assets 2002 2001
(unaudited)
--------------------------
(in thousands)
Cash and due from banks $20,580 $22,827
Federal funds sold - 9,875
Interest-bearing deposits in banks 468 1,167
Investment securities:
U.S. Treasury Securities and - 301
Obligations of other U.S.
Government agencies 28,580 30,358
Obligations of State and
Local government 30,933 25,915
Other investments 80,164 74,118
------------------------
Total investment securities 139,677 130,692
Federal Home Loan Bank stock, at cost 5,950 5,950
Loans and Leases 616,915 607,136
Reserve for probable credit losses (6,124) (5,752)
------------------------
Net loans 610,791 601,384
Bank premises and equipment 11,740 11,527
Accrued interest receivable and other assets 33,484 34,691
------------------------
Total Assets $822,690 $818,113
========================
3
FIRST UNITED CORPORATION
Consolidated Balance Sheets
June 30, December 31,
2002 2001
(unaudited)
Liabilities and Shareholders' Equity ------------------------
(in thousands)
Liabilities
Non-interest bearing deposits $ 65,610 $64,366
Interest bearing deposits 545,062 552,403
---------------------
Total deposits 610,672 616,769
Reserve for taxes, accrued interest, and
other liabilities 9,838 9,132
Federal Home Loan Bank borrowings
and other borrowed funds 126,145 120,104
Dividends payable 1,032 1,032
---------------------
Total Liabilities 747,687 747,037
Shareholders' Equity
Preferred stock -no par value
Authorized and unissued; 2,000 Shares
Common Stock -par value $.01 per share:
Authorized 25,000 shares; issued and
outstanding 6,081 shares at June 30,
2002, and December 31, 2001 61 61
Surplus 20,199 20,199
Retained earnings 52,882 50,254
Accumulated comprehensive income 1,861 562
---------------------
Total Shareholders' Equity 75,003 71,076
---------------------
Total Liabilities and
Shareholders' Equity $822,690 $818,113
=====================
4
FIRST UNITED CORPORATION
Consolidated Statements Of Income
(in thousands, except per share data) Six Months
Ended June 30,
2002 2001
-------------------
(unaudited)
Interest income
Interest and fees on loans and leases $ 24,065 $ 26,829
Interest on investment securities:
Taxable 3,204 4,528
Exempt from federal income tax 673 504
--------------------
3,877 5,032
Interest on federal funds sold 43 294
--------------------
Total interest income 27,985 32,155
Interest expense Interest on deposits:
Savings 130 225
Interest-bearing transaction accounts 779 2,163
Time, $100,000 or more 2,156 4,016
Other time 5,760 7,501
Interest on Federal Home Loan Bank
borrowings and other borrowed
funds 3,814 4,113
--------------------
Total interest expense 12,639 18,018
--------------------
Net interest income 15,346 14,137
Provision for probable credit losses 1,216 1,082
--------------------
Net interest income after provision
for probable credit losses 14,130 13,055
Other operating income
Trust department income 1,364 1,368
Service charges on deposit accounts 1,235 1,178
Insurance premium income 550 508
Securities gains (losses) (6) 76
Other income 1,780 1,543
--------------------
Total other operating income 4,923 4,673
5
Other operating expenses
Salaries and employees benefits 6,707 6,154
Occupancy expense of premises 624 645
Equipment expense 1,054 897
Data processing expense 566 480
Deposit assessments and related fees 86 88
Other expense 3,562 3,235
--------------------
Total other operating expenses 12,599 11,499
--------------------
Income before income taxes 6,454 6,229
Applicable income taxes 1,757 1,928
--------------------
Net income $4,697 $4,301
====================
Earnings per share $0.77 $0.71
====================
Dividends per share $0.34 $0.33
====================
6
FIRST UNITED CORPORATION
Consolidated Statements Of Income
(in thousands, except per share data) Three Months
Ended June,
2002 2001
-------------------
(unaudited)
Interest income
Interest and fees on loans and leases $ 11,962 $ 13,277
Interest on investment securities:
Taxable 1,555 2,194
Exempt from federal income tax 361 275
--------------------
1,916 2,469
Interest on federal funds sold 18 105
--------------------
Total interest income 13,896 15,851
Interest expense Interest on deposits:
Savings 66 110
Interest-bearing transaction accounts 465 865
Time, $100,000 or more 1,052 1,855
Other time 2,739 3,764
Interest on Federal Home Loan Bank
borrowings and other borrowed
funds 1,924 2,061
--------------------
Total interest expense 6,246 8,655
--------------------
Net interest income 7,650 7,196
Provision for probable credit losses 560 547
--------------------
Net interest income after provision
for probable credit losses 7,090 6,649
Other operating income
Trust department income 682 662
Service charges on deposit accounts 650 611
Insurance premium income 290 279
Securities (losses) (6) 23
Other income 856 817
--------------------
Total other operating income 2,472 2,392
7
Other operating expenses
Salaries and employees benefits 3,257 3,072
Occupancy expense of premises 313 310
Equipment expense 560 451
Data processing expense 267 239
Deposit assessments and related fees 43 47
Other expense 1,817 1,642
--------------------
Total other operating expenses 6,257 5,761
--------------------
Income before income taxes 3,305 3,280
Applicable income taxes 935 996
--------------------
Net income $2,370 $2,284
====================
Earnings per share $0.39 $0.38
====================
Dividends per share $0.17 $0.165
====================
8
FIRST UNITED CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months
Ended June 30,
2002 2001
--------------------
(unaudited)
Operating activities
Net Income $ 4,697 $ 4,301
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for probable credit losses 1,216 1,082
Provision for depreciation 882 753
Net accretion and amortization of investment
security discounts and premiums (168) 63
Realized (gain) loss on sale of investment
securities 6 (76)
Increase in accrued interest and other assets 1,208 (11,217)
Increase in reserve for taxes, accrued interest
and other liabilities 706 4,825
-------------------
Net cash (used in) provided by operating activities 8,547 (269)
Investing activities
Net decrease (increase) in interest-bearing deposits
In Banks (698) 1,645
Proceeds from maturities of available-for-
sale securities 32,426 95,689
Purchases of available-for-sale securities (38,553) (72,669)
Net increase in loans (10,623) (5,018)
Purchases of premises and equipment (1,095) (1,173)
-------------------
Net cash (used in)provided by investing activities (18,543) 18,474
Financing activities
Increase in Federal Home Loan Bank borrowings
and other borrowed funds 6,040 15,238
Net (decrease) increase in demand deposits,
NOW accounts and savings accounts 25,818 (20,485)
Net decrease in certificates of deposits (31,915) (17,485)
Cash dividends paid or declared (2,069) (2,010)
-------------------
Net cash used in financing activities (2,126) (24,742)
Cash and cash equivalents at beginning of the year 32,702 26,921
Decrease in cash and cash equivalents (12,122) (6,537)
-------------------
Cash and cash equivalents at end of period $20,580 $20,384
====================
9
FIRST UNITED CORPORATION
Note to Unaudited Consolidated Financial Statements
June 30, 2002
Note A -- Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly, they
do not include all the information and footnotes required for complete financial
statements. In the opinion of management, all adjustments considered necessary
for a fair presentation, consisting of normal recurring items have been
included. Operating results for the three and six month period ended June 30,
2002, are not necessarily indicative of the results that may be expected for the
year ending December 31, 2002. The enclosed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 2001.
Earnings per share are based on the weighted average number of shares
outstanding of 6,080 for the three and six months ended June 30, 2002 and 2001.
Note B - Accumulated Comprehensive Income
Accumulated comprehensive income represents the unrealized gains and
losses on the company's available-for-sale securities, net of income taxes.
During the first six months of 2002 and 2001, total comprehensive income, net
income plus the change in unrealized gains (losses) on available-for-sale
securities, amounted to $4,697 thousand and $4,301 thousand, net of income
taxes, respectively.
Note C - Accounting Pronouncement
In June 2001, Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("Statement No. 142"), was issued. In
accordance with Statement No. 142, goodwill and intangible assets determined to
have indefinite lives will no longer be amortized, but instead will be subject
to an annual impairment test. Other intangible assets will continue to be
amortized over their estimated useful lives. The effective date for Statement
No. 142 is for fiscal years beginning after December 15, 2001. Through a
transitional evaluation completed prior to June 30, 2002, the Corporation has
determined that none of the goodwill carried on its books as of January 1, 2002
was subject to impairment.
10
Part I. Financial Information
Item II. Management's Discussion and Analysis of Financial
Condition and Results of Operations
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
environment, competitive factors in the marketplace, and business risk
associated with credit extensions and trust activities, and a variety of other
issues, which by their nature, are subject to significant uncertainties. These
and other factors could lead to actual results that differ materially from
management's statements regarding future performance.
FINANCIAL CONDITION
The Corporation's total assets were $822.69 million at June 30, 2002,
compared to $818.11 million at December 31, 2001, increasing $4.58 million or
..56%. Earning assets increased $7.82 million or 1.04% to $756.89 million at June
30, 2002, from $749.07 million at December 31, 2001.
Growth in net loans for the first six months of 2002 was $9.41 million or
1.56% to a total of $610.79 million. Commercial loans, including mortgages,
installments, and lines of credit increased $8.89 million during the first six
months of 2002. Consumer installment loans and home equity loans which include
both open-end credit and closed-end credit increased $4.62 million and $4.23
million respectively, during the first six months of 2002. These increases were
off-set by a decrease in consumer mortgage loans of $8.33 million for the same
time period. Net loan growth during the second quarter of 2002 was $20.65
million. This growth was attributable primarily to growth in commercial loans
and indirect automobile lending which more than off-set decreases in the
residential mortgage lending portfolio.
The investment portfolio which consists of available for sale securities
increased $8.98 million during the first six months of 2002. This increase was
due to purchases of both state and municipal securities and mortgage backed
securities. On July 19, 2002, First United executed a leverage growth
transaction. The Corporation borrowed $40.00 million in structured borrowings
from the Federal Home Loan Bank of Atlanta and reinvested these funds in
mortgage backed securities. The Corporation will earn a favorable spread between
the rate earned on the securities and the cost of the borrowings. First United's
management is committed to leverage growth strategies that will limit security
purchases to those that are virtually free of credit risk and will help to meet
the objectives of the company's investment and asset/liability management
policies.
Deposits totaled $610.67 million at June 30, 2002. This is a decrease of
$6.10 million from the December 31, 2001 total of $616.77 million. Demand
deposits and regular savings accounts grew $22.84 and $3.60 million,
respectively, during the first six months 2002. This growth was off-set by
11
decreases in certificates of deposit during the same time period of 2002 of
$32.54 million as consumers chose to invest in more liquid bank products or
investments outside of the Bank. Also included within the decrease in the
category of certificates of deposit, the Corporation chose not to renew $4.50
million of brokered certificate of deposit money that matured in the first
quarter of 2002. Deposit growth during the second quarter of 2002 was $8.54
million.
MARKET RISK MANAGEMENT
The Corporation intends to effectively manage the adverse effects of
changing interest rates on earnings, long-term shareholder value, and liquidity
through the use of a simulation model. The simulation model captures optionality
factors such as call features and interest rate caps and floors imbedded in
investment and loan portfolio contractual obligations. As of June 30, 2002, the
simulation analysis shows that net interest income would decline by 6.50% or
$2.80 million over a twelve-month period given an interest rate decrease of 100
basis points. First United's policy states that a net interest income change of
5.00% or less requires no action. For a net interest income change of greater
than 5.00% but less than 10.00%, the Asset/Liability Committee must be informed
at the next regularly scheduled quarterly meeting. An increase in interest rates
impacts the Corporation's net interest income favorably. In terms of the
economic value of equity given the same shift in interest rates, the fair value
of the Corporation's capital would decrease 11.50% or $13.64 million as compared
to a policy limit of 10.00%. A change in the fair value of equity of greater
than 10.00%, but less than 20.00% requires that the Asset/Liablity Committee be
informed at the next regularly scheduled quarterly meeting. Accordingly, an
increase in interest rates would increase the fair value of the Corporation's
capital.
CAPITAL MANAGEMENT
The Corporation recorded a total risk-based capital ratio of 15.98% at
June 30, 2002 as compared to 15.54% at December 31, 2001. The Tier 1 risk-based
capital ratio was 12.62% at June 30, 2002 as compared to 11.22% at December 31,
2001. Capital adequacy was well-above regulatory requirements. The regulatory
requirements for total risk-based capital and Tier 1 capital are 8.00% and
4.00%, respectively, to maintain capital adequacy. Shareholder's equity at June
30, 2002 was $75.00 million as compared to $71.08 million at December 31, 2001.
The Corporation paid a cash dividend of $.17 on May 1, 2002. On June 20,
2002, the Corporation declared another dividend of an equal amount, to be paid
August 1, 2002, to shareholders of record at July 19, 2002.
RESULTS OF OPERATIONS
Consolidated net income for the six months ended June 30, 2002 totaled
$4.70 million, which is $.40 million more than the $4.30 million that was
recorded for the six months ended June 30, 2001. This translates into $.77 per
share for the current six month period. For the same period of 2001, each share
earned $.71. These operating results were driven primarily by an increase in the
net interest margin from 3.74% in 2001 to 4.20% in 2002. Net income for the
three months ended June 30, 2002 was $2.37 million, or $.39 per share compared
to $2.28 million or $.38 per share for the same period of 2001.
12
First United Corporation's performance ratios remain stable. Annualized
Returns on Average Equity ("ROAE") were 12.98% and 12.87% for the six-month
periods ending June 30, 2002 and June 30, 2001, respectively. The ROAE for the
year ended December 31, 2001 was 13.26%. Annualized Returns on Average Assets
("ROAA") were 1.17% and 1.04% for the first six months of 2002 and 2001,
respectively. This ratio was 1.11% for the year ended December 31, 2001. The
efficiency ratio is a key measuring tool for profitability and operating
efficiency. A lower ratio equals higher profitability and operating
efficiencies. The Corporation's efficiency ratio was 60.92% for the period ended
June 30, 2002. This represents a decline in efficiency from year-end 2001 when
the ratio was 58.58%. This decline can be attributed to an increase in other
operating expenses as noted below.
Despite decreasing rates in the market, First United's net interest income
year to date was $15.35 million, an increase of $1.21 million over the $14.14
million reported in 2001 for the same time period. Average earning assets
totaled $754.09 million and $777.98 million at June 30, 2002 and June 30,2001,
respectively. The yield on earning assets for those same time periods was 7.58%,
and 8.38%, respectively. The average cost of funds for the period ending June
30, 2002 was 3.38% as compared to 4.64% at June 30, 2001. Net interest income
for the three months ended June 30, 2002 was $7.65 million as compared to $7.20
million for the same time period in 2001.
Year to date 2002 the provision for probable credit losses was $1.22
million as compared to $1.08 million for the same period in 2001. The provision
for probable credit losses for the second quarter of 2002 was $.56 million as
compared to $.55 million for the same time period of 2001. Year to date 2002 net
charge-offs were $.84 million as compared to $.97 million for the same time
period in 2001. In comparing the three months ended June 30, 2002 with June 30,
2001, net charge offs were $.27 million and $.37 million, respectively. The over
30-day delinquency ratio was .87% at June 30, 2002 as compared to 1.38% for the
period ending June 30, 2001. This same ratio was 1.30% at December 31, 2001.
Non-performing loans were .39% of gross loans as of June 30, 2002, and our loan
loss reserve was 1.00% of gross loans representing 255.17% of non-performing
loans. Non-performing loans were .73% of gross loans as of December 31, 2001,
and our loan loss reserve was .94% of gross loans representing 129.96% of
non-performing loans. At June 30, 2001, non-performing loans were .41% of gross
loans. The loan loss reserve was .84% of gross loans equating to 206.75% of
non-performing loans at June 30, 2001. While the bank's asset quality ratios
have improved over prior periods, the provision for probable loan losses was
increased modestly to reflect continuing concern with uncertainties in the local
and national economies.
Year to date 2002 other operating income was $4.92 million, compared to
$4.67 million for the same time period in 2001. Other operating income for the
quarter ending June 30, 2002 was $2.47 million as compared to $2.39 million for
the second quarter of 2001. A portion of this increase is due to an $8.00
million Bank Owned Life Insurance ("BOLI") policy that was purchased in late
2001 in addition to the $10 million policy purchased in early 2001. Year to date
2002 other operating expense totaled $12.60 million. Other operating expense for
the first six months of 2001 was $11.50 million. Comparing the second quarter of
2002 with the same period of 2001, other operating expense was $6.26 million and
$5.76 million, respectively. This increase is attributable to increases in
salaries and benefits and equipment expenses.
13
As a result of tax planning initiatives implemented in 2001, income tax
expense has decreased $.17 million for the first six months of 2002 as compared
to the same time period in 2001. In comparing the second quarter of 2002 with
the second quarter of 2001, income tax expense decreased $.06 million.
Summary of Loan Loss Experience
ANALYSIS OF THE RESERVE FOR PROBABLE CREDIT LOSSES
Six Months Ended
June 30, 2002
----------------
Balance, January 1 $5,752
Charge-offs:
Domestic:
Commercial, financial and agricultural 197
Real estate - mortgage 56
Installment loans to individuals 859
---------------
1,112
---------------
Recoveries:
Domestics:
Commercial, financial and agricultural 33
Real estate - mortgage 5
Installment loans to individuals 230
---------------
268
---------------
Net Charge-offs 844
---------------
Provision for Probable Credit Losses 1,216
---------------
Balance at end of period $6,124
===============
Ratio of net charge-offs during the period to average
loans outstanding during the period, annualized .28%
===============
14
Risk Elements of Loan Portfolio
The following table provides a comparison of the Risk Elements of the Loan
Portfolio in the format prescribed by Item III-C of Industry Guide 3. The Bank
has no foreign loans. The Bank has a single commercial loan defined as a
troubled debt restructuring with an outstanding balance of $.57 million. The
status of the restructured debt at June 30, 2002 is current. Management believes
that because the restructured debt is fully collateralized, there will be no
loss on the loan. Further, the Bank has no knowledge of any potential problem
loans other than those in the table below. As of June 30, 2002, First United's
non-accrual loans decreased $1.52 million from the year end total of $3.20
million. This decrease is due to the resolution of a single commercial loan that
resulted in no loss to the Bank, and the restructured debt as listed above.
June 30 December 31
2002 2001
---------------------
Non-accrual loans $1,679 $3,196
Accruing loans past due 90 days or more 721 1,230
Information with respect to non-accrual loans at June 30, 2002 and December 31,
2001, are as follows:
Non-accrual Loans $1,679 $3,196
Interest income that would have been
recorded under original terms 25 48
Interest income recorded during the period 1 6
15
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
First United Corporation's annual meeting of Shareholders
was held on April 23, 2002. At this meeting, the shareholders
elected five individuals to serve as directors until the 2005 annual
meeting of shareholders, and until their successors are duly elected
and qualify. First United Corporation submitted the matter to a vote
through the solicitation of proxies. The results of the election are
as follows:
CLASS I (Term expires 2005) FOR AGAINST ABSTAIN
--- ------- -------
David J. Beachy 4,772,056 51,575 0
Donald M. Browning 4,772,056 51,575 0
Rex W. Burton 4,772,056 51,575 0
Paul Cox, Jr. 4,772,056 51,575 0
William B. Grant 4,772,056 51,575 0
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST UNITED CORPORATION
Date 8/13/02 /s/ WILLIAM B. GRANT
---------- ----------------------------------------
William B. Grant, Chairman of the Board
and Chief Executive Officer
Date 8/13/02 /s/ Robert W. Kurtz
---------- ----------------------------------------
Robert W. Kurtz, President and Chief
Financial Officer
16