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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(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, 2002
OR
- -- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 0-14237
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FIRST UNITED CORPORATION
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(Exact name of registrant as specified in its charter)
Maryland 52-1380770
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(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
19 South Second Street, Oakland, Maryland 21550-0009
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (301) 334-9471
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par
Value $.01 per share
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
--
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No
--
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of June 28, 2002: $109,146,572.55.
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The number of shares of the registrant's common stock outstanding as of
February 28, 2003: 6,087,433
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Documents Incorporated by Reference
Portions of the registrant's definitive proxy statement for the annual
shareholders meeting to be held April 29, 2003, are incorporated by reference
into Part III.
First United Corporation
Table of Contents
PART I
Item 1. Business ...................................................3-12
Item 1A Executive Officers ...........................................12
Item 2 Properties ...................................................13
Item 3 Legal Proceedings ............................................13
Item 4 Submission of Matters to a Vote of Security Holders ..........13
PART II
Item 5 Market for the Registrant's Common Stock and Related Shareholder
Matters ...................................................14
Item 6 Selected Financial Data ......................................15
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations ..................................15-28
Item 7A Quantitative and Qualitative Disclosure About Market Risk.... 29
Item 8 Financial Statements and Supplementary Data ...............29-51
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ......................................51
PART III
Item 10 Directors and Executive Officers of the Registrant ...........51
Item 11 Executive Compensation .......................................51
Item 12 Security Ownership of Certain Beneficial Owners and Management
and Related Shareholder Matters ...........................51
Item 13 Certain Relationships and Related Transactions ...............51
Item 14 Controls and Procedures ...................................51-52
PART IV
Item 15 Exhibits, Financial Statement Schedules and Reports on
Form 8-K ...............................................52-53
Signatures............................................................53-54
Certifications........................................................55-56
Exhibits ................................................................57
Forward-Looking Statements
This Annual Report of First United Corporation (the "Corporation") filed on
Form 10-K may contain forward-looking statements within the meaning of The
Private Securities Litigation Reform Act of 1995. Readers of this report should
be aware of the speculative nature of "forward-looking statements." Statements
that are not historical in nature, including those that include the words
"anticipate," "estimate," "should," "expect," "believe," "intend," and similar
expressions, are based on current expectations, estimates and projections about,
among other things, the industry and the markets in which the Corporation
operates, and they are not guarantees of future performance. Whether actual
results will conform to expectations and predictions is subject to known and
unknown risks and uncertainties, including risks and uncertainties discussed in
this report; general economic, market, or business conditions; changes in
interest rates, deposit flow, the cost of funds, and demand for loan products
and financial services; changes in the Corporation's competitive position or
competitive actions by other companies; changes in the quality or composition of
loan and investment portfolios; the ability to manage growth; changes in laws or
regulations or policies of federal and state regulators and agencies; and other
circumstances beyond the Corporation's control. Consequently, all of the
forward-looking statements made in this document are qualified by these
cautionary statements, and there can be no assurance that the actual results
anticipated will be realized, or if substantially realized, will have the
expected consequences on the Corporation's business or operations. For a more
complete discussion of these risk factors, see "Risk Factors" beginning on Page
6. Except as required by applicable laws, the Corporation does not intend to
publish updates or revisions of forward-looking statements it makes to reflect
new information, future events or otherwise.
PART I
Item 1. BUSINESS
First United Corporation
The Corporation, headquartered in Oakland, Maryland, is a one-bank
financial holding company with four non-bank subsidiaries. The Corporation was
organized under the laws of the State of Maryland in 1985.
The direct subsidiaries of the Corporation include First United Bank &
Trust, a Maryland chartered trust company (the "Bank"), Oakfirst Life Insurance
Corporation, an Arizona reinsurance company, OakFirst Loan Center, Inc., a West
Virginia finance company, OakFirst Loan Center, LLC, a Maryland finance company,
and First United Capital Trust, a Delaware statutory business trust (the
"Trust").
The Corporation maintains an Internet site at www.mybankfirstunited.com on
which it makes available, free of charge, its Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments
to the foregoing on its Internet site as soon as reasonably practicable after
these reports are electronically filed with, or furnished to, the Securities and
Exchange Commission (the "SEC").
First United Bank & Trust
The deposits of the Bank are insured by the Federal Deposit Insurance
Corporation (the "FDIC"). The Bank operates twenty banking offices and one
financial center, five facilities in Garrett County, Maryland, six in Allegany
County, Maryland, two 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. The Bank also operates a total of thirty Automated Teller Machines
("ATM's"), thirteen of which are located in Garrett County, Maryland, seven in
Allegany County, Maryland, two in Washington County, Maryland, four in Frederick
County, Maryland, and one each in Mineral, Hampshire, Berkeley and Hardy
Counties in West Virginia. The Bank 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 Bank is an independent community bank providing service to businesses
and individuals in its market area. Services offered are essentially the same as
those offered by larger regional institutions that compete with the Bank. The
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services provided by the Bank include checking, savings, 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, the Bank provides full brokerage services through a
networking arrangement with PrimeVest Financial Services, Inc., a full service
broker-dealer. The Bank also provides safe deposit and night depository
facilities and a complete line of trust services. As of December 31, 2002, the
Bank had total deposits of $649.86 million and total loans and leases of $665.83
million. The total market value of assets under the supervision of the Bank's
trust department was approximately $300.25 million.
The Bank has three wholly owned subsidiaries. First United Auto Finance,
LLC is a Maryland limited liability company that engages in the business of
indirect automobile leasing and was formed by the Bank in October, 1998. As of
December 31, 2001, First United Auto Finance, LLC ceased all efforts to actively
market automobile leasing. Gonder Insurance Agency, Inc. is a full line
insurance agency located in Oakland, Maryland, which the Bank acquired in May,
1999. First United Capital Investments, Inc. is a Delaware corporation located
in Wilmington, Delaware, formed in May, 2001. This entity has a subsidiary,
First United Investment Trust, which is a Maryland business trust established in
May 2001 as a real estate investment trust.
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 the Bank. Oakfirst Life Insurance
Corporation, which was chartered in 1989, is a wholly owned subsidiary of the
Corporation and is subject to periodic review and examination by the Arizona
Department of Insurance.
OakFirst Loan Centers
The Corporation meets the lending needs of under-served customer groups
within its market areas in part through its finance company subsidiaries.
OakFirst Loan Center, Inc., located in Martinsburg, West Virginia, opened for
business in the spring of 2000 and is subject to periodic review and examination
by the West Virginia Division of Banking. OakFirst Loan Center, LLC, located in
Hagerstown, Maryland, opened in 2001 and is subject to periodic review and
examination by the Maryland Commissioner of Financial Regulation.
First United Capital Trust
The Trust is a Delaware business trust organized by the Corporation on July
19, 1999. The Trust issued $23.00 million of aggregate liquidation amount of
9.375% Preferred Securities in August 1999. See note 8 of the consolidated
financial statements for additional disclosure.
COMPETITION
The Corporation and the Bank operate in a competitive environment,
competing for deposits and loans with commercial banks, thrifts and other
financial entities. Principal competitors include other community commercial
banks and larger financial institutions with branches in the Bank's market area.
Numerous mergers and consolidations involving banks in the Bank's market area
have occurred recently, requiring the Bank to compete with banks with greater
resources.
The primary factors in competing for deposits are interest rates,
personalized services, the quality and range of financial services, convenience
of office locations and office hours. Competition for deposits comes primarily
from other commercial banks, savings associations, credit unions, money market
funds and other investment alternatives. The primary factors in competing for
loans are interest rates, loan origination fees, the quality and range of
lending services and personalized services. Competition for loans comes
primarily from other commercial banks, savings associations, mortgage banking
firms, credit unions and other financial intermediaries. Many of the financial
institutions operating in the Bank's market area offer certain services that the
Bank does not offer and have greater financial resources or have substantially
higher lending limits than does the Bank.
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To compete with other financial services providers, the Bank principally
relies upon local promotional activities, personal relationships established by
officers, directors and employees with its customers and specialized services
tailored to meet its customers' needs. In those instances where the Bank is
unable to accommodate a customers' needs, the Bank will arrange for those
services to be provided by other banks with which it has a relationship. Current
banking laws facilitate interstate branching and merger activity among banks.
Since September, 1995, certain bank holding companies are authorized to acquire
banks throughout the United States. In addition, on and after June 1, 1997,
certain banks are permitted to merge with banks organized under the laws of
different states. These changes have resulted in an even greater degree of
competition in the banking industry and the Corporation and the Bank may be
brought into competition with institutions with which it does not presently
compete. As a result, intense competition in the Bank's market area may be
expected to continue for the foreseeable future.
CAPITAL REQUIREMENTS
See "Management's Discussion and Analysis of Financial Condition and
Results of Operation--Capital Resources".
SUPERVISION AND REGULATION
The following is a summary of the material regulations and policies
applicable to the Corporation and its subsidiaries and is not intended to be a
comprehensive discussion. Changes in applicable laws and regulations may have a
material effect on the business of the Corporation and Banks.
General
The Corporation is a financial holding company registered with the Board of
Governors of the Federal Reserve System (the "FRB") under the BHC Act and as
such is subject to the supervision, examination and reporting requirements of
the BHC Act and the regulations of the FRB.
The Bank is a state chartered trust company and is a member of the FDIC.
The Bank is subject to the regulation, supervision, and reporting requirements
of the FDIC, as well as the Maryland Commissioner of Financial Regulation. The
Bank is also subject to numerous state and federal statutes and regulations that
affect the business of banking, including the provision of trust services.
Regulation of Financial Holding Companies
Pursuant to the Gramm-Leach-Bliley Act (the "GLBA"), the Corporation
elected to become a "financial holding company" as of April 26, 2001 and, as
such, may engage in activities that are in addition to the business of banking.
A financial holding company may engage in a full range of financial activities,
including, insurance and securities sales and underwriting activities, and real
estate development, with new expedited notice procedures. The Gramm-Leach-Bliley
Act is described in more detail below.
Subsidiary banks of financial holding companies are subject to certain
statutory limits of the transfer of funds to the holding company or any of its
nonbank subsidiaries, whether in the form of loans or other extensions of
credit, investments in their securities and on the use of their securities as
collateral for loans to any borrower. Such transfers of a subsidiary bank to a
holding company or one of its nonbanking subsidiaries is limited in amount, and
such loans and extensions of credit are required to be collateralized in
specified amounts.
Under FRB policy, the Corporation is expected to act as a source of
strength to its subsidiary banks, and the FRB may charge the Corporation with
engaging in unsafe and unsound practices for failure to commit resources to a
subsidiary bank when required. In addition, under the Financial Institutions
Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), depository institutions
insured by the FDIC can be held liable for any losses incurred by, or reasonably
anticipated to be incurred by, the FDIC in connection with (i) the default of a
commonly controlled FDIC-insured depository institution or (ii) any assistance
provided by the FDIC to a commonly controlled FDIC-insured depository
institution in danger of default. Accordingly, in the event that any insured
subsidiary of the
5
Corporation causes a loss to the FDIC, other insured subsidiaries of the
Corporation could be required to compensate the FDIC by reimbursing it for the
estimated amount of such loss. Such cross guaranty liabilities generally are
superior in priority to obligations of a financial institution to its
shareholders and obligations to other affiliates.
Federal Banking Regulation
Federal banking regulators, such as the FRB and the FDIC, may prohibit the
institutions over which they have supervisory authority from engaging in
activities or investments that the agencies believes are unsafe or unsound
banking practices. Federal banking regulators have extensive enforcement
authority over the institutions they regulate to prohibit or correct activities
that violate law, regulation or a regulatory agreement or which are deemed to be
unsafe or unsound practices. Enforcement actions may include the appointment of
a conservator or receiver, the issuance of a cease and desist order, the
termination of deposit insurance, the imposition of civil money penalties on the
institution, its directors, officers, employees and institution-affiliated
parties, the issuance of directives to increase capital, the issuance of formal
and informal agreements, the removal of or restrictions on directors, officers,
employees and institution-affiliated parties, and the enforcement of any such
mechanisms through restraining orders or other court actions.
The Bank is subject to certain restrictions on extensions of credit to
executive officers, directors, and principal shareholders or any related
interest of such persons, which generally require that such credit extensions be
made on substantially the same terms as are available to third parties dealing
with the Bank and not involve more than the normal risk of repayment. Other laws
tie the maximum amount that may be loaned to any one customer and its related
interests to capital levels.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), each federal banking agency is required to prescribe, by regulation,
non-capital safety and soundness standards for institutions under its authority.
The federal banking agencies have adopted standards covering internal controls,
information systems and internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, and compensation, fees and
benefits. An institution that fails to meet those standards may be required by
the agency to develop a plan acceptable to meet the standards. Failure to submit
or implement such a plan may subject the institution to regulatory sanctions.
The Corporation, on behalf of the Bank, believes that the Bank meets
substantially all standards that have been adopted. FDICIA also imposes new
capital standards on insured depository institutions. See "Capital
Requirements."
The Community Reinvestment Act ("CRA") requires that, in connection with
the examination of financial institutions within their jurisdictions, the FDIC
evaluate the record of the financial institution in meeting the credit needs of
their communities including low and moderate income neighborhoods, consistent
with the safe and sound operation of those banks. These factors are also
considered by all regulatory agencies in evaluating mergers, acquisitions and
applications to open a branch or facility. As of the date of its most recent
examination report, the Bank has a CRA rating of "Satisfactory."
Deposit Insurance
As an FDIC member institution, the Bank's deposits are insured to a maximum
of $100,000 per depositor through the Bank Insurance Fund ("BIF"), administered
by the FDIC, and the Bank is required to pay semi-annual deposit insurance
premium assessments to the FDIC. The BIF assessment rates have a range of 0 to
27 cents for every $100 in assessable deposits. In 1999, deposits insured by BIF
were assessed by the Financing Corporation ("FICO") at one-fifth the rate
applicable to deposits insured by the Savings Association Insurance Fund
("SAIF"). When Congress imposed this rate differential in 1996, it also provided
that the differential would terminate at the end of the 1999 calendar year.
Therefore, beginning with assessments paid for the period starting January 1,
2000, insured institutions were assessed at the same FICO rate for both BIF and
SAIF-insured deposits. As a result, the Bank paid $.17 million of FDIC premiums
in 2002 and $.11 million in 2001.
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Federal Deposit Insurance Corporation Improvement Act of 1991
In December 1991, Congress enacted FDICIA, which substantially revised the
bank regulatory and funding provisions of the Federal Deposit Insurance Act and
made significant revisions to several other federal banking statutes. FDICIA
provides for, among other things, (i) a recapitalization of the BIF by
increasing the FDIC's borrowing authority and providing for adjustments in its
assessment rates; (ii) annual on-site examinations of federally-insured
depository institutions by banking regulators; (iii) publicly available annual
financial condition and management reports for financial institutions, including
audits by independent accountants; (iv) the establishment of uniform accounting
standards by federal banking agencies; and (v) the establishment of a "prompt
corrective action" system of regulatory supervision and intervention, based on
capitalization levels, with more scrutiny and restrictions placed on
institutions with lower levels of capital.
FDICIA establishes a system of prompt corrective action to resolve the
problems of undercapitalized institutions. Under this system the federal banking
regulators are required to rate supervised institutions on the basis of five
capital categories: "well -capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized;" and to take certain mandatory actions, and are authorized to
take other discretionary actions, with respect to institutions in the three
undercapitalized categories. The severity of the actions will depend upon the
category in which the institution is placed. A depository institution is "well
capitalized" if it has a total risk based capital ratio of 10% or greater, a
Tier 1 risk based capital ratio of 6% or greater, and a leverage ratio of 5% or
greater and is not subject to any order, regulatory agreement, or written
directive to meet and maintain a specific capital level for any capital measure.
An "adequately capitalized" institution is defined as one that has a total risk
based capital ratio of 8% or greater, a Tier 1 risk based capital ratio of 4% or
greater and a leverage ratio of 4% or greater (or 3% or greater in the case of a
bank with a composite CAMEL rating of 1).
FDICIA generally prohibits a depository institution from making any capital
distribution, including the payment of cash dividends, or paying a management
fee to its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to growth
limitations and are required to submit capital restoration plans. For a capital
restoration plan to be acceptable, the depository institution's parent holding
company must guarantee (subject to certain limitations) that the institution
will comply with such capital restoration plan.
Significantly undercapitalized depository institutions may be subject to a
number of other requirements and restrictions, including orders to sell
sufficient voting stock to become adequately capitalized and requirements to
reduce total assets and stop accepting deposits from correspondent banks.
Critically undercapitalized depository institutions are subject to the
appointment of a receiver or conservator, generally within 90 days of the date
such institution is determined to be critically undercapitalized.
Interstate Banking Legislation
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 was
enacted into law on September 29, 1994. The law provides that, among other
things, substantially all state law barriers to the acquisition of banks by out
of state bank holding companies are eliminated effective September 29, 1995. The
law also permitted interstate branching by banks effective June 1, 1997, subject
to the ability of states to opt-out completely or to set an earlier effective
date. Maryland and West Virginia generally established earlier effective dates
of September 29, 1995 and May 31, 1997, respectively.
Gramm-Leach-Bliley Act
In November 1999, the GLBA was signed into law. Effective in pertinent part
on March 11, 2000, GLBA revises the Bank Holding Corporation Act of 1956 and
repeals the affiliation provisions of the Glass-Steagall Act of 1933, which,
taken together, limited the securities, insurance and other non-banking
activities of any company that controls an FDIC insured financial institution.
Under GLBA, a bank holding company can elect, subject to certain qualifications,
to become a "financial holding company." GLBA provides that a financial holding
company may engage in a full range of financial activities, including insurance
and securities sales and underwriting activities, and
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real estate development, with new expedited notice procedures.
Maryland law generally permits Maryland State chartered banks, including
the Bank, to engage in the same activities, directly or through an affiliate, as
national banking associations. GLBA permits certain qualified national banking
associations to form financial subsidiaries, which have broad authority to
engage in all financial activities except insurance underwriting, insurance
investments, real estate investment or development, or merchant banking. Thus,
GLBA has the effect of broadening the permitted activities of the Bank.
Federal Securities Law
The Corporation's common stock is registered with the SEC under Section
12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Corporation is subject to information reporting, proxy solicitation, insider
trading restrictions and other requirements under the Exchange Act.
Governmental Monetary and Credit Policies and Economic Controls
The earnings and growth of the banking industry and ultimately of the Bank
are affected by the monetary and credit policies of governmental authorities,
including the FRB. An important function of the FRB 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 FRB to implement
these objectives are open market operations in U.S. Government securities,
changes in the federal funds rate, 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 FRB 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 FRB,
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
Corporation and its subsidiaries.
Employees
At December 31, 2002, the Corporation and its subsidiaries employed
approximately 403 individuals, of whom 86 were officers, 198 were full-time
employees, and 119 part-time employees.
RISK FACTORS
The following factors should be considered carefully in evaluating an
investment in shares of common stock of the Corporation, and the preferred
securities of the Trust.
The Corporation's Future Depends on the Successful Growth of its Subsidiaries
The Corporation's primary business activity for the foreseeable future will
be to act as the holding company of the Bank and its other direct and indirect
subsidiaries. Therefore, the Corporation's future profitability will depend on
the success and growth of these subsidiaries. In the future, part of the
Corporation's growth may come from buying other banks and buying or establishing
other companies. Such entities may not be profitable after they are purchased or
established, and they may lose money, particularly at first. A new bank or
company may bring with it unexpected liabilities, bad loans, or bad employee
relations, or the new bank or company may lose customers.
The Majority of the Corporation's Business is Concentrated in Maryland and
West Virginia; A Significant Amount of the Corporation's Business is
Concentrated in Real Estate Lending
Because most of the Bank's loans are made to Maryland and West Virginia
borrowers, a decline in local economic conditions may have a greater effect on
the Corporation's earnings and capital than on the earnings and capital of
larger financial institutions whose loan portfolios are geographically diverse.
Further, the Bank makes many real
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estate secured loans, which are in greater demand when interest rates are
low and economic conditions are good. Even when economic conditions are good and
interest rates are low, these conditions may not continue. Additionally, the
market values of the real estate securing these loans may deteriorate, and the
Corporation may lose money if a borrower fails to repay a real estate loan.
The Bank may Experience Loan Losses in Excess of its Allowance
The risk of credit losses on loans varies with, among other things, general
economic conditions, the type of loan being made, the creditworthiness of the
borrower over the term of the loan and, in the case of a collateralized loan,
the value and marketability of the collateral for the loan. Management of the
Bank maintains an allowance for credit losses based upon, among other things,
historical experience, an evaluation of economic conditions and regular reviews
of delinquencies and loan portfolio quality. Based upon such factors, management
makes various assumptions and judgments about the ultimate collectability of the
loan portfolio and provides an allowance for loan losses based upon a percentage
of the outstanding balances and for specific loans when their ultimate
collectability is considered questionable. If management's assumptions and
judgments prove to be incorrect and the allowance for loan losses is inadequate
to absorb future losses, or if the bank regulatory authorities require the Bank
to increase its allowance for loan losses as a part of its examination process,
the Bank's earnings and capital could be significantly and adversely affected.
Although management uses the best information available to make determinations
with respect to the allowance for loan losses, future adjustments may be
necessary if economic conditions differ substantially from the assumptions used
or adverse developments arise with respect to the Bank's non-performing or
performing loans. Material additions to the allowance for loan losses of one of
the Bank would result in a decrease in the Bank's net income and capital, and
could have a material adverse effect on the Corporation.
Interest Rates and Other Economic Conditions will Impact Results of Operations
Results of operations for financial institutions, including the Corporation
and its subsidiaries, may be materially and adversely affected by changes in
prevailing economic conditions, including declines in real estate values, rapid
changes in interest rates and the monetary and fiscal policies of the federal
government. The Corporation's profitability is in part a function of the spread
between the interest rates earned on assets and the interest rates paid on
deposits and other interest-bearing liabilities (i.e., net interest income),
including advances from the Federal Home Loan Bank of Atlanta (the "FHLB").
Interest rate risk arises from mismatches (i.e., the interest sensitivity gap)
between the dollar amount of repricing or maturing assets and liabilities and is
measured in terms of the ratio of the interest rate sensitivity gap to total
assets. More assets repricing or maturing than liabilities over a given time
period is considered asset-sensitive and is reflected as a positive gap, and
more liabilities repricing or maturing than assets over a given time period is
considered liability-sensitive and is reflected as negative gap. An
asset-sensitive position (i.e., a positive gap) could enhance earnings in a
rising interest rate environment and could negatively impact earnings in a
falling interest rate environment, while a liability-sensitive position (i.e., a
negative gap) could enhance earnings in a falling interest rate environment and
negatively impact earnings in a rising interest rate environment. Fluctuations
in interest rates are not predictable or controllable. The Corporation has
attempted to structure its asset and liability management strategies to mitigate
the impact on net interest income of changes in market interest rates.
The Market Value of the Corporation's Investments could Decline
As of December 31, 2001, the Corporation had classified 100.00% of its
investment securities as available-for-sale pursuant to Statement of Financial
Accounting Standards No. 115 ("SFAS 115") relating to accounting for
investments. SFAS 115 requires that unrealized gains and losses in the estimated
value of the available-for-sale portfolio be "marked to market" and reflected as
a separate item in shareholders' equity (net of tax) as accumulated other
comprehensive income. The remaining investment securities are classified as
held-to-maturity in accordance with SFAS 115, and are stated at amortized cost.
In the past, gains on sales of investment securities have not been a significant
source of income for the Corporation. There can be no assurance that future
market performance of the Corporation's investment portfolio will enable the
Corporation to realize income from sales of securities. Stockholders' equity
will continue to reflect the unrealized gains and losses (net of tax) of these
investments. There can be no assurance that the market value of the
Corporation's investment portfolio will not decline, causing a corresponding
decline in shareholders' equity.
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Management believes that several factors will affect the market values of
the Corporation's investment portfolio. These include, but are not limited to,
changes in interest rates or expectations of changes, the degree of volatility
in the securities markets, inflation rates or expectations of inflation and the
slope of the interest rate yield curve (the yield curve refers to the
differences between shorter-term and longer-term interest rates; a positively
sloped yield curve means shorter-term rates are lower than longer-term rates).
Also, the passage of time will affect the market values of our investment
securities, in that the closer they are to maturing, the closer the market price
should be to par value. These and other factors may impact specific categories
of the portfolio differently, and management cannot predict the effect these
factors may have on any specific category.
The Corporation's Ability to Pay Dividends is Limited
The Corporation's current ability to pay dividends is largely dependent
upon the receipt of dividends from the Bank. Both federal and state laws impose
restrictions on the ability of the Bank to pay dividends. Federal law prohibits
the payment of a dividend by an uninsured depository institution like the Bank
if the depository institution is considered "undercapitalized" or if the payment
of the dividend would make the institution "undercapitalized". See "Federal
Deposit Insurance Corporation Improvement Act of 1991" above. The Corporation
does not anticipate that such provisions will be applied to the Bank. The FRB
has issued a policy statement which provides that, as a general matter, insured
banks and bank holding companies may pay dividends only out of prior operating
earnings. For a Maryland state-chartered bank or trust company, dividends may be
paid out of undivided profits or, with the prior approval of the Commissioner,
from surplus in excess of 100% of required capital stock. If however, the
surplus of a Maryland bank is less than 100% of its required capital stock, cash
dividends may not be paid in excess of 90% of net earnings. In addition to these
specific restrictions, bank regulatory agencies also have the ability to
prohibit proposed dividends by a financial institution which would otherwise be
permitted under applicable regulations if the regulatory body determines that
such distribution would constitute an unsafe or unsound practice.
The Corporation's Stock is not Heavily Traded
The Corporation's common stock is traded on The Nasdaq National Market and
is thinly traded. Thinly traded stock can be more volatile than stock trading in
an active public market. Factors such as the Corporation's financial results,
the introduction of new products and services by the Corporation or its
competitors, and various factors affecting the banking industry generally may
have a significant impact on the market price of the Corporation's common stock.
Management cannot predict the extent to which an active public market for the
Corporation's common stock will develop or be sustained in the future. In recent
years, the stock market has experienced a high level of price and volume
volatility, and market prices for the stock of many companies have experienced
wide price fluctuations that have not necessarily been related to their
operating performance. Therefore, the Corporation's shareholders may not be able
to sell their shares at the volumes, prices, or times that they desire.
The Corporation's Stock is not Insured
Investments in the shares of the Corporation's common stock are not
deposits and are not insured against loss by the government.
The Corporation Operates in a Competitive Market
The Corporation and its subsidiaries operate in a competitive environment,
competing for loans, deposits, and customers with commercial banks, savings
associations and other financial entities. Competition for deposits comes
primarily from other commercial banks, savings associations, credit unions,
money market and mutual funds and other investment alternatives. Competition for
loans comes primarily from other commercial banks, savings associations,
mortgage banking firms, credit unions and other financial intermediaries.
Competition for other products, such as insurance and securities products, comes
from other banks, securities and brokerage companies, insurance companies,
insurance agents and brokers, and other nonbank financial service providers in
the Corporation's market area. Many of these competitors are much larger in
terms of total assets and capitalization, have greater access to capital
markets, and/or offer a broader range of financial services than those offered
by the Corporation and its subsidiaries. In
10
addition, banks with a larger capitalization and financial intermediaries
not subject to bank regulatory restrictions have larger lending limits and are
thereby able to serve the needs of larger customers. Finally, the Corporation's
growth and profitability will depend upon its ability to attract and retain
skilled managerial, marketing and technical personnel. Competition for qualified
personnel in the financial services industry is intense, and there can be no
assurance that the Corporation will be successful in attracting and retaining
such personnel.
The Banking Industry is Heavily Regulated; Significant Regulatory Changes
could Adversely Affect the Corporation's Operations
The Corporation's operations and those of the Bank are and will be affected
by current and future legislation and by the policies established from time to
time by various federal and state regulatory authorities. The Corporation is
subject to supervision by the FRB. The Bank is subject to supervision and
periodic examination by the Maryland Commissioner and the FDIC. Banking
regulations, designed primarily for the safety of depositors, may limit a
financial institution's growth and the return to its investors by restricting
such activities as the payment of dividends, mergers with or acquisitions by
other institutions, investments, loans and interest rates, interest rates paid
on deposits, expansion of branch offices, and the offering of securities or
trust services. The Bank is also subject to capitalization guidelines
established by federal law and could be subject to enforcement actions to the
extent that the Bank is found by regulatory examiners to be undercapitalized. It
is not possible to predict what changes, if any, will be made to existing
federal and state legislation and regulations or the effect that such changes
may have on the Corporation's future business and earnings prospects, as well as
those of the Bank. Management also cannot predict the nature or the extent of
the effect on the Corporation's business and earnings of future fiscal or
monetary policies, economic controls, or new federal or state legislation.
Further, the cost of compliance with regulatory requirements may adversely
affect the Corporation's ability to operate profitably.
The Corporation may be Adversely Affected by Recent Legislation
The GLBA was signed into law on November 12, 1999. Among other things, GLBA
repeals restrictions on banks affiliating with securities firms. It also permits
bank holding companies that become financial holding companies to engage in
additional financial activities, including insurance and securities underwriting
and agency activities, merchant banking, and insurance company portfolio
investment activities that are currently not permitted for bank holding
companies. GLBA may have the result of increasing the competition the
Corporation faces from larger banks and other companies. It is not possible to
predict the full effect that GLBA will have on the Corporation.
In addition, recent changes in other federal banking laws facilitate
interstate branching and merger activity among banks. Such changes may result in
an even greater degree of competition in the banking industry, and the
Corporation may be brought into competition with institutions with which it does
not presently compete. From time to time other changes are proposed to laws
affecting the banking industry, and these changes could have a material effect
on the Corporation's business and prospects. The Corporation's future
profitability may be adversely affected by increased competition resulting from
this legislation.
The Corporation may be Subject to Claims
Customers may sue the Corporation and its subsidiaries for losses due to
alleged breaches of fiduciary duties, errors and omissions of employees,
officers and agents, incomplete documentation, the failure of the Corporation
and/or its subsidiaries to comply with applicable laws and regulations, or many
other reasons. Also, the employees of the Corporation and/or its subsidiaries
may knowingly or unknowingly violate laws and regulations. Corporation
management may not be aware of any violations until after their occurrence. This
lack of knowledge may not insulate the Corporation and its subsidiaries from
liability. Claims and legal actions may result in legal expenses and liabilities
that may reduce the Corporation's profitability and hurt its financial
condition.
The Corporation may not be Able to Keep Pace with Developments in Technology
The Corporation and its subsidiaries use various technologies in their
respective businesses, including telecommunication, data processing, computers,
automation, internet-based banking, and debit cards. Technology
11
changes rapidly. The Corporation's ability to compete successfully with
other banks and non-banks may depend on whether it can exploit technological
changes. The Corporation may not be able to exploit technological changes, and
any investment it does make may not make it more profitable.
The Corporation's Articles of Incorporation and By-Laws may Discourage a
Corporate Takeover
The Corporation's Amended and Restated Articles of Incorporation
("Articles") and By-Laws contain certain provisions designed to enhance the
ability of the Board of Directors to deal with attempts to acquire control of
the Corporation. These provisions provide for the classification of the
Corporation's Board of Directors into three classes; directors of each class
generally serve for staggered three-year periods. 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. Although these provisions do not
preclude a takeover, they may have the effect of discouraging a future takeover
attempt which would not be approved by the Corporation's Board of Directors, but
pursuant to which shareholders might receive a substantial premium for their
shares over then-current market prices. As a result, shareholders who might
desire to participate in such a transaction might not have the opportunity to do
so. Such provisions will also render the removal of the Corporation's Board of
Directors and of management more difficult and, therefore, may serve to
perpetuate current management. As a result of the foregoing, such provisions
could potentially adversely affect the market price of the common stock.
Item 1A. Executive Officers
Information about the Corporation's executive officers is set forth below
William B. Grant, age 49, Chairman of the Board and Chief Executive
Officer. Mr. Grant has been Chairman of the Board and Chief Executive Officer
since 1996. Previously, he had been Secretary of the Corporation since 1990 and
Executive Vice-President of the Bank since 1987.
Robert W. Kurtz age 56, President, Chief Financial Officer,
Secretary/Treasurer. Mr. Kurtz has been President of the Corporation since 1996
and Chief Financial Officer, Secretary, and Treasurer since 1997. Previously, he
had been Chief Operating Officer of the Corporation since 1996, Treasurer of the
Corporation since 1990 and Executive Vice-President of the Bank since 1987.
Jeannette R. Fitzwater, age 42, Senior Vice President and Director of Human
Resources. 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 the Bank since 1994.
Philip D. Frantz, age 42, Senior Vice President and Director of Operations
& Support. 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.
Steven M. Lantz, age 46, Senior Vice President and Director of Lending. 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 the Bank since 1993.
Eugene D. Helbig, Jr., age 50, Senior Vice President and Senior Trust
Officer. Mr. Helbig was appointed Senior Vice President in 1997 and Senior Trust
Officer in 1993. He had been a First Vice President of the Bank since 1993.
Frederick A. Thayer, IV, age 44, Senior Vice President, Director of Sales
and CRA Officer. 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 the Bank since 1993.
All officers are elected annually by the Board of Directors and hold office
at the pleasure of the Board.
12
Item 2. PROPERTIES
The main office of the Corporation and the Bank occupies approximately
29,000 square feet at 19 South Second Street, Oakland, Maryland, and is owned by
the Corporation. The Bank operates a network of twenty banking offices and one
financial center throughout Garrett, Allegany, Washington and Frederick
Counties, Maryland and Mineral, Hampshire, Berkeley and Hardy Counties, West
Virginia. Except for seven leased offices, all of the Bank's banking offices are
owned by the Bank.
The properties of the Corporation which are not owned are held under
long-term leases. Total rent expense for 2002, 2001, and 2000 was $.33, $.32,
and $.29 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
No matters were submitted to a vote of shareholders during the fourth
quarter of 2002.
13
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Shares of the Corporation's common stock are traded on the Nasdaq Stock
Market under the symbol "FUNC". There are 25,000,000 shares of the Corporation's
common stock authorized for issuance, and the total number of shares outstanding
as of December 31, 2002, was 6,080,589. As of December 31, 2002, the Corporation
had approximately 2,296 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, 2002. The following tables reflect the high and low sales prices
during the period stated, as well as the closing price for the years ended
December 31, 2002 and 2001.
2002 High Low Close
- ---------------------------------------------------------------------------------------------------------------
1st Quarter................................................. $16.60 $15.39 $15.58
2nd Quarter................................................. 19.00 15.57 17.95
3rd Quarter................................................. 18.70 15.80 16.53
4th Quarter................................................. 16.99 15.13 16.41
2001 High Low Close
- ---------------------------------------------------------------------------------------------------------------
1st Quarter ................................................. $13.63 $10.38 $13.13
2nd Quarter ................................................. 13.65 12.75 13.50
3rd Quarter ................................................. 17.70 13.08 16.50
4th Quarter ................................................. 16.99 13.20 16.00
Cash dividends on shares of the Corporation's common stock were paid on the
dates indicated as follows:
2002 2001
- -------------------------------------------------------------------------------------------------------------
February....................................................................... $.170 $.165
May............................................................................ $.170 $.165
August......................................................................... $.170 $.165
November....................................................................... $.170 $.165
For information about restrictions on the Corporation's ability to pay
dividends, see "Risk Factors--The Corporation's Ability to Pay Dividends is
Limited."
Market Makers for the Corporation's common stock are:
Ferris Baker Watts Advest, Inc. Scott and Stringfellow, Inc.
12 North Liberty St. 90 State House Square 909 East Main Street
Cumberland, MD 21502 Hartford, CT 06103 Richmond, VA 23219
(301) 724-7161 (860) 509-1000 (804) 643-1811
(800) 776-0629 (800) 797-9642 (800) 552-7757
113 S. Potomac St.
Hagerstown, MD 21740
(301) 733-7111 (800) 344-4413
Equity Compensation Plan Information
The Corporation has not adopted any equity compensation plan or arrangement
under which shares of common stock may be issued.
14
Item 6. SELECTED FINANCIAL DATA
(In thousands, except per share data)
2002 2001 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------
Balance Sheet Data
Total Assets............................. $953,677 $818,113 $847,589 $793,280 $641,114
Total Deposits........................... 649,860 616,769 649,977 598,572 511,500
Total Net Loans and Leases 659,758 603,801 611,975 566,072 506,718
Total Borrowings......................... 214,261 120,104 122,000 127,000 64,575
Total Shareholders' Equity 79,283 71,076 65,511 58,096 58,474
Operating Data
Interest Income.......................... $ 57,590 $ 63,229 $ 63,516 $ 55,106 $ 47,467
Interest Expense......................... 25,702 33,378 35,039 27,146 21,915
-------- -------- -------- -------- --------
Net Interest Income...................... 31,888 29,850 28,477 27,960 25,552
Provision for loan and lease Losses 1,506 2,926 2,198 2,066 1,176
Other Operating Income................... 9,007 9,315 7,789 6,936 6,091
Other Operating Expense.................. 26,039 23,381 21,995 20,739 19,058
-------- -------- -------- -------- --------
Income Before Tax...................... 13,350 12,858 12,073 12,091 11,409
Income Tax............................... 3,695 3,689 3,762 4,130 3,982
-------- -------- -------- -------- --------
Net Income............................... $ 9,655 $ 9,169 $ 8,311 $ 7,961 $ 7,427
======== ======== ======== ======== ========
Per Share Data
Net Income............................... $ 1.59 $ 1.51 $ 1.37 $1.30 $ 1.20
Dividends Paid........................... .68 .66 .64 .62 .60
Book Value............................... $ 13.04 $ 11.69 $ 10.77 $9.55 $ 9.50
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion and analysis should be read in conjunction with the
financial statements which appear elsewhere in this report.
15
EARNINGS ANALYSIS
Overview
The Corporation posted record net earnings for 2002 of $9.66 million. This
is a 5.34% increase over the $9.17 million reported for 2001. Returns on average
assets were 1.13%, 1.11%, and 1.03% in 2002, 2001, and 2000, respectively. The
return on average shareholders' equity for 2002 was 12.75%. This ratio was
13.26% in 2001 and 13.40% in 2000. Earnings per share increased to $1.59 in
2002, from $1.51 in 2001, and $1.37 in 2000.
Comparing December 31, 2002 balances to balances at December 31, 2001,
total assets were $953.68 million versus $818.11 million, respectively, a 16.57%
increase. Total deposits increased $33.09 million or 5.37%, while gross loans
and leases grew $56.27 million to $665.83 million or 9.23%. During the same time
period, shareholders' equity increased $8.21 million to $79.28 million, which
was 8.31% of assets.
The Corporation's performance in 2002, as compared to 2001, reflects an
increase in average earning assets as well as an increase in the net interest
margin. Average earning assets were $801.60 million in 2002 as compared to
$776.54 million in 2001. This is an increase of 3.23%. Average earning assets
increased 1.87 % from 2000 to 2001. The Corporation's net interest margin in
2002 was 4.09%, as compared to 3.93% in 2001.
Asset quality continued to be favorable as compared to peers.
Non-performing assets represented 0.35% of total assets at December 31, 2002.
This same ratio was 0.54% for the year ending December 31, 2001. The ratio of
net charge-offs to average loans and leases was 0.19% in 2002 as compared to
0.37% for the prior year. The allowance for probable loan and lease losses as a
percentage of non-performing loans was 180% as of December 31, 2002.
On February 13, 2003, the Corporation and the Bank entered into a Purchase
and Assumption Agreement with The Huntington National Bank to purchase four
branch offices located in Berkeley County, West Virginia. The acquisition will
involve the assumption of approximately $140 million in deposit liabilities and
the purchase of $54 million in outstanding loans as well as three buildings and
fixed assets at these locations. The fourth building is leased, which lease will
be assumed by the Bank.
Net Interest Income
Net interest income is the largest source of operating revenue. Net
interest income is the difference between the interest earned on earning assets
and the interest expense paid on interest-bearing liabilities.
As interest rates declined in 2002, total interest income decreased in 2002
by 8.91%, from $63.23 million in 2001 to $57.59 million in 2002. Interest income
was $63.15 million in 2000. Similarly, decreasing interest rates caused total
interest expense to decrease 23.00%, from $33.38 million in 2001 to $25.70
million in 2002. Total interest expense was $35.04 million in 2000. Interest
expense on savings deposits and interest-bearing transaction accounts decreased
$1.48 million in 2002 to $2.18 million from $3.66 million in 2001, reflecting
the immediate effects of declining interest rates. Interest expense on time
deposits decreased $6.7 million in 2002 to $14.89 million from $21.59 million in
2001. Through effective management of deposit and loan rates, net interest
income increased to $31.89 million in 2002 from $29.85 million in 2001, an
increase of 6.83%.
Table 2 analyzes the changes in net interest income attributable to volume
and rate components. For analytical purposes, net interest income is adjusted to
a taxable equivalent 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 that would have been paid if this
income were taxable at the statutorily applicable rate. In 2002, declining rates
caused net interest income to increase $.43 million over 2001, while volume
caused net interest income to increase $1.77 million. The taxable equivalent net
interest margin increased to 4.09% in 2002 from 3.93% in 2001 and 3.84% in 2000.
Table 1 compares the components of the net interest margin and the changes
occurring between 2002, 2001, and 2000.
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,
2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------
Average Annual Average Annual Average Annual
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------
Federal funds sold ......... $ 3,782 $ 63 1.67% $ 7,615 $ 391 5.13% $ 1,339 $ 157 11.73%
Investments:
Taxable................... 138,102 6,776 4.91% 118,461 7,474 6.31% 123,785 8,537 6.90%
Non taxable............... 29,428 2,124 7.22% 23,531 1,687 7.17% 23,927 1,788 7.47%
------- ------- ------- ------- ------- ----- ------- ------- -------
Total investment securities 167,530 8,900 5.31% 141,992 9,161 6.45% 147,712 10,325 6.99%
Other interest earning assets 7,081 371 5.24% 5,950 401 6.74% 5,962 471 7.90%
Interest-bearing deposits
with other banks 3,155 77 2.43% 4,314 199 4.61% 4,641 68 1.47%
Loans and leases 620,049 49,095 7.92% 619,088 53,826 8.69% 604,995 53,286 8.81%
------- ------- ------- ------- ------- ----- ------- ------- -------
Total earning assets 801,597 58,507 7.30% 776,542 63,978 8.21% 764,649 64,307 8.42%
Reserve for probable loan and lease
losses..................... (5,984) (5,217) (4,857)
Cash and due from banks 16,061 15,850 20,102
Premises and equipment, net 12,033 11,123 10,045
Other assets................ 32,913 28,144 17,393
------- ------- -------
Total non-earning assets 55,024 49,900 42,683
------- ------- -------
Total Assets ............... $856,620 $828,859 $807,332
======= ======= =======
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing
deposits.............. 65,284 0.00% 57,003 -- 0.00% 55,570 -- 0.00%
Interest-bearing
demand deposits....... 178,572 1,907 1.07% 147,745 3,238 2.19% 142,491 5,413 3.80%
Savings deposits........ 43,655 269 0.62% 41,150 421 1.02% 43,592 633 1.45%
Time deposits
$100,00 or more....... 102,201 4,001 3.91% 122,454 7,128 5.82% 114,104 6,812 5.97%
Time deposits less
than $100,000......... 229,114 10,893 4.75% 250,912 14,457 5.76% 248,238 13,863 5.58%
Short-term borrowings... 129,290 6,475 5.01% 107,045 5,978 5.58% 108,948 6,178 5.67%
Long-term borrowings.... 23,000 2,156 9.38% 23,000 2,156 9.37% 23,000 2,140 9.30%
------- ------- ------- ------- ------ ----- ------- ------- -------
Total deposits and
short term borrowings. 771,116 25,703 3.33% 749,310 33,378 4.45% 735,943 35,039 4.76%
Net interest income
and spread............. 32,385 3.91% 29,995 3.71% 28,900 3.64%
Other liabilities 9,759 10,382 9,353
Shareholders' equity 75,745 69,168 62,036
------- ------- -------
Total Liabilities and
Shareholders' Equity....... 856,620 $828,859 $807,332
======= ======= =======
Interest income/earning assets 7.30% 8.21% 8.42%
Interest expense/earning assets 3.21% 4.28% 4.58%
Net interest margin.......... 4.09% 3.93% 3.84%
**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-
17
accrual loans for the years ended December 31, 2002, 2001, and 2000, which were
reported in the average loan balances for these years, were $1,906, $1,719, and
$667, respectively. The fully taxable equivalent adjustments for the years ended
December 31, 2002, 2001, and 2000 were $917, $749, and $791, respectively.
Interest Variance Analysis (1)
( In thousands )
Table 2
2002 Compared To 2001 2001 Compared To 2000
Increase Increase
(Decrease) Due To (Decrease) Due To
Volume Rate Net Volume Rate Net
- ------------------------------------------------------------------------------------------------------------------
Interest income:
Federal Funds Sold................. $ (64) $(264) $ (328) $ 322 $ (88) $ 234
Taxable Investments................. 964 (1,662) (698) (336) (727) (1,063)
Non-Taxable Investments 426 11 437 (28) (73) (101)
Loans............................... 76 (4,807) (4,731) 1,225 (827) 540
Other Interest Earning Assets....... (2) (150) (152) (20) 81 61
------- -------- -------- ------- -------- -------
Total Interest Income............. $1,400 ($6,872) ($5,472) $1,163 $ 1,634 $ (329)
------- -------- -------- ------- -------- -------
Interest expense:
Interest-bearing ................... $329 ($1,660) ($1,331) $ 115 $(2,290) $(2,175)
Savings............................. 15 (167) (152) (25) (187) (212)
Time Deposits....................... (1,036) (2,527) (3,564) 154 440 594
Time Deposits $100,000 or more...... (793) (2,334) (3,127) 486 (170) 316
Short Term Borrowings............... 1,114 (616) 498 (106) (94) (200)
Long Term Borrowings................ (0) 0 0 (0) 16 16
-------- -------- -------- ------- -------- -------
Total Interest Expense............ (371) (7,304) (7,676) $ 624 $(2,285) $(1,661)
-------- -------- --------- ------- -------- -------
Net Interest Income............... $ 1,029 $ 432 $ 2,204 $ 539 $3,919 $ 1,332
======== ======== ========= ======= ======== =======
(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, 2002 and 2001 were $917
and $749, respectively.
Operating Income
Non-interest income declined in 2002 to a total of $9.01 or 3.33% from the
2001 total of $9.32 million. Non-interest income was $8.16 million in 2000.
Non-operating items affecting this comparison include security losses of $.37
million that were recognized in 2002 compared to a gain of $.58 million in 2001.
Secondly, a capital gain of $.06 million was recognized in 2001 due to the sale
of a bank property. No bank properties were sold in 2002.
Income from trust and fiduciary activities in 2002 was $2.15 million. This
is a decrease of $.36 million from the $2.51 million earned in 2001and the $2.28
million in 2000. Trust and fiduciary activity income is directly affected by the
performance of the equity and bond markets because the majority of trust account
fees are calculated based on the market value of the assets under management.
The Bank's Trust Department managed accounts whose average market values were
$300.25 million at December 31, 2002 as compared to $298.13 million at December
31, 2001.
Service charges on deposit accounts increased $.28 million due primarily to
increases in return check charges. Insurance premium income increased $.17
million or 15.8% in 2002 over 2001 levels.
18
Other income increased $.55 million or 20.09% to $3.29 million in 2002 over
2001. Within this category, income from bank-owned life insurance investments
increased $.36 million in 2002 over 2001. Debit card income increased $.06
million in 2002 over 2001, and secondary market fees increased $.06 million in
2002. Business Manager fee income decreased $.24 million in 2002 as compared to
2001.
Operating Expense
Operating expense increased $2.66 million or 11.37% in 2002 to a level of
$26.04 million. Operating expense in 2001 totaled $23.38 million. The major
categories of operating expense include salaries and employee benefits,
occupancy and equipment expenses, data processing expense, and other
non-interest expenses associated with the daily operations of the Company.
Salaries and employee benefits, the largest component of non-interest
expenses, increased $1.42 million or 11.38% in 2002. Within this category,
employee salaries increased $.72 million in 2002 over 2001, due primarily to
salary increases and new employees. Employee incentives increased $.32 million
in 2002 over 2001, due to an expanded incentive program. Pension costs and the
costs of a supplemental executive retirement plan (SERP) increased $.17 million
and $.16 million, respectively, in 2002 over 2001.
Occupancy expense increased $.04 million in 2002. Equipment expense
increased $.24 million in 2002 over 2001, due largely to software and equipment
maintenance agreement costs, and the depreciation costs of software and
equipment purchased in 2002. Data processing expense increased $.11 million in
2002 over 2001.
Other expense increased $.85 million in 2002 over 2001, resulting from
increased legal and professional fees, increased consulting fees, vendor
commission expense, and other miscellaneous cost increases.
Operating Expense Management
Management believes that the efficiency ratio is an important measure of
operating expense performance and cost management. The ratio is calculated by
analyzing non-interest expenses as a percentage of net interest income plus
total non-interest income. During 2002, the Corporation's efficiency ratio was
62.39%. The ratio in 2001 was 58.58%. The ratio in 2000 was 59.36%. Lower ratios
indicate improved productivity.
Applicable Income Taxes
Applicable income taxes are detailed in Note 9 of the Corporation's audited
consolidated financial statements. Income tax expense amounted to $3.70 million
in 2002 compared with $3.69 million in 2001 and $3.76 million in 2000. These
amounts represented effective tax rates of 27.68%, 28.69%, and 31.16%, for 2002,
2001, and 2000, respectively. In 2001, the Corporation established First United
Investment Trust, a Maryland real estate investment trust, and its parent
company First United Capital Investments, a Delaware corporation. The
establishment of these entities eliminated most of the income taxes due to the
state of Maryland and income taxes due to the state of West Virginia, thereby
reducing the Corporation's effective tax rate.
Balance Sheet Overview
The Corporation's total assets reached $953.68 million at December 31,
2002. This is an increase of $135.57 million or 16.57% over the December 31,
2001 total of $818.11 million. Earning assets increased 20.06% or $148.75
million to a total of $890.36 million at December 31, 2002. Earning assets
totaled $741.61 million at December 31, 2001.
Investment Securities
The Corporation's entire security portfolio is categorized as
available-for-sale. Investment securities classified as available-for-sale are
held for an indefinite period of time and may be sold in response to changing
market and interest 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 shareholders' equity, net of
income taxes. The Corporation does not currently
19
follow a strategy of making security purchases with a view of near-term resales
and therefore, does not own trading securities. For additional information, see
Notes 1 and 3 to the Corporation's audited consolidated financial statements.
Total investment securities increased $84.55 million or 64.70% in 2002 from
$130.69 million in 2001 to a total of $215.24 million. The asset mix within the
security portfolio shifted slightly with increases in the purchase of
mortgage-backed securities. The mortgage-backed securities were purchased as
part of the leverage growth strategy program and policy that was adopted and
implemented by the Corporation during the third quarter of 2002. This program
and policy was adopted with the goal of achieving increased returns on equity
and earnings per share for the Corporation's shareholders. In July of 2002, 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. In September of 2002, a second leverage strategy was executed in the
amount of $40.00 million. It is anticipated that the Corporation will earn a
favorable spread between the rate earned on the securities and the cost of the
borrowings. Because interest rate risk is inherent in leveraging, the
Corporation mitigated its risk through the matching of the maturities of the
investments with the borrowings. Management is committed to leverage growth
strategies that will limit security purchases to those that it believes will
minimize credit risk and will help to meet the objectives of the Corporation's
investment and asset/liability management policies.
The Corporation manages its investment portfolios utilizing policies which
seek to achieve desired levels of liquidity, manage interest rate sensitivity,
meet earnings objectives, and provide required collateral support for deposit
activities. Excluding the U.S. Government sponsored agencies, the Corporation
had no concentration of investment securities from any single issues that
exceeded 10% of shareholders' equity. Table 3 exhibits the distribution, by
type, of the investment portfolio for the three years ended December 31, 2002,
2001, and 2000, respectively.
Investment Security Maturities, Yields, and Market Values
( In thousands )
Table 3
December 31, 2002
U.S. Federal State &
- ------------------------------------------------------------------------------------------------------------------
Treasury Yield Agencies Yield Municipal Yield Other Yield Total Yield
- ------------------------------------------------------------------------------------------------------------------
Maturity Amortized Cost
Available-for-Sale
Due in one year or less $ -- -- $1,151 4.22% $234 6.70% $ -- -- $1,385 4.64%
Due after one year within
Five years....... 300 2.94% $9,249 5.57% $708 6.38% $ 6,666 5.37% $16,923 5.48%
Due after five years
Through ten years -- $ 7,243 6.43% 10,174 5.29% $ 17,417 5.77%
Due after ten years..... -- $19,536 0.63% $22,176 7.13% $132,568 5.97% $174,280 5.52%
------ ------- ------- -------- --------
Total Amortized Cost....... $ 300 $29,936 $30,361 $149,408 210,005 5.49%
====== ======= ======= ======== =======
Taxable Equivalent Yield 2.94% 2.29% 6.94% 5.90% 5.53%
Market Value............... $ 305 $30,390 $31,354 $153,187 $215,236
====== ======= ======= ======== ========
December 31, 2001
Amortized Cost.......... $ 300 $31,155 $26,131 $72,190 $129,776
====== ======= ======= ======== ========
December 31, 2000
Amortized Cost.......... $ 598 $74,023 $19,660 $58,382 $152,663
====== ======= ======= ======== ========
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 an addition to
securities maturing over ten years.
20
Loan and Lease Portfolio
The Corporation, through the Bank and the OakFirst Loan Centers, is
actively engaged in originating loans to customers primarily in Garrett,
Allegany, Washington, and Frederick Counties in Maryland; Mineral, Hardy,
Berkeley, 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 probable loan and lease losses. These policies,
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 lending
officer. Table 4 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. The Corporation
had no foreign loans in its portfolio as of December 31, 2002.
During 2002, gross loans and leases increased $56.27 million or 9.23% over
2001 to $665.83 million. Loans and leases decreased $5.09 million in 2001. The
Company allocates significant resources to seeking and serving its loan
customers. The commercial portfolio was the primary driver of growth in the
overall loan portfolio in 2002. Commercial loan growth totaled $53.13 million in
2002. Loans included in this category are commercial real estate loans,
commercial installment loans, and commercial lines of credit.
Residential mortgages decreased $1.63 million in 2002 over 2001. The
Company experienced record refinancings in 2002 as customers took advantage of
historically low interest rates through alternative vendors. The Company chose
to not grow its balance sheet with fixed rate mortgages at these low levels.
Home equity loans increased $6.84 million in 2002 over 2001. This growth is
attributed to a variety of special promotions held during the year.
Total consumer installment loans grew $9.28 million in 2002. Within this
category, the consumer indirect auto installment portfolio grew $3.16 million in
2002. This portfolio decreased $30.29 million in 2001. Direct auto installment
loans grew $2.48 million in 2002 over 2001. Table 5 details the maturities of
the loan and lease portfolio.
It is the policy of the Corporation to place a loan in non-accrual status
whenever there is substantial doubt about the ability of a borrower to pay
principal or interest on the outstanding credit. Management considers such
factors as payment history, the nature of the collateral securing the loan, and
the overall economic situation of the borrower when making a non-accrual
decision. Management closely monitors non-accrual loans. A non-accruing loan is
restored 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. At December
31, 2002, the Corporation had $1.85 million of non-accrual loans. Table 6
details the historical activity of non-accrual loans.
21
Summary of Loan and Lease Portfolio
( In thousands )
Table 4
Loans Outstanding as of December 31,
2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------
Commercial......................................... $242,470 $189,343 $ 92,914 $ 80,853 $ 81,537
Residential--Construction.......................... 11,072 8,578 12,667 7,873 11,315
Residential--Mortgage.............................. 233,887 238,016 307,577 278,564 286,514
Installment........................................ 173,578 164,297 191,937 196,758 130,527
Lease Financing.................................... 4,819 9,319 11,974 6,433 129
-------- -------- -------- -------- --------
Total Loans and Leases........................... $665,826 $609,553 $617,069 $570,481 $510,022
======== ======== ======== ======== ========
Percentage of Portfolio as of December 31,
2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------
Commercial......................................... 36.42% 31.06% 15.06% 14.17% 15.99%
Residential--Construction.......................... 1.66% 1.41% 2.05% 1.38% 2.22%
Residential--Mortgage.............................. 35.13% 39.05% 49.85% 48.83% 56.18%
Installment........................................ 26.07% 26.95% 31.10% 34.49% 25.59%
Lease Financing.................................... 0.72% 1.53% 1.94% 1.13% .03%
-------- -------- --------- -------- --------
Total Loans and Leases........................... 100.00% 100.00% 100.00% 100.00% 100.00%
======== ======== ========= ======== ========
Maturities of Loan and Lease Portfolio
(In thousands)
Table 5
December 31, 2002
Maturing
Maturing After One Maturing
Within But Within After Five
One Year Five Years Years Total
- -------------------------------------------------------------------------------------------------------------------
Commercial.............................. $ 28,139 $ 60,923 $ 153,408 $242,470
Residential--Construction .............. 0 11,072 0 11,072
Residential--Mortgage................... 9,357 40,978 183,552 233,887
Installment............................. 27,163 104,685 41,730 173,578
Lease Financing......................... 819 4,000 0 4,819
-------- -------- --------- --------
Total Loans and Leases................ $ 65,478 $221,658 $ 378,690 $665,826
======== ======== ========= ========
Classified by Sensitivity to Change in Interest Rates
Fixed-Interest Rate Loans............... $ 56,240 $146,662 $173,539 $376,441
Adjustable-Interest Rate Loans.......... 9,238 74,996 205,151 289,385
-------- -------- -------- --------
Total Loans and Leases................ $65,4786 $221,658 $378,690 $665,826
======== ======== ======== ========
22
Risk Elements of Loan and Lease Portfolio
( In thousands )
Table 6
For the Years Ended December 31
2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------
Non-accrual Loans and Leases....................... $1,847 $3,196 $1,066 $379 $460
Accruing Loans and Leases
Past Due 90 Days or More......................... 1,458 1,230 1,448 763 544
Information with respect to non-accrual loans and leases at December 31, 2002 and 2001 is as follows:
2002 2001
- --------------------------------------------------------------------------------------------------------------------
Interest income that would have been recorded under original terms...................... $25 $48
Interest income recorded during the period.............................................. 1 6
Allowance for Probable Loan and Lease Losses
The reserve for probable loan and lease 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
nonperforming 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 probable 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, regulatory, and governmental sources. Specific allocations are
made for those loans on the Watchlist in which the collateral value is less than
the outstanding loan balance with the allocation being the dollar difference
between the two. Allocations are made for loan commitments using the methodology
outlined above. The Watchlist represents loans, identified and closely monitored
by management, which possess certain qualities or characteristics that may lead
to collection and loss issues. Allocations are not made for loans that are cash
secured or for the Small Business Administration guaranteed portion of loans.
During 2002, 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 probable loan and lease losses in 2002
decreased over 2001 to $1.51 million or 0.23% of the gross loan total of $665.83
million. The provision for probable loan and lease losses was $2.93 million and
$2.20 million for the years ended December 31, 2001 and 2000, respectively.
Gross charge-offs for the years ended December 31, 2002, 2001, and 2000 totaled
$1.83, $2.63, and $1.83 million, respectively.
Table 7 presents the activity in the allowance for loan and lease losses by
major loan category for the past five years. Table 8 presents management's
allocation of the allowance for loan and lease losses by major loan category.
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.
23
Activity in the Reserve for Loan and Lease Losses
Table 7 ( In thousands )
Summary of Loan and Lease Loss Experience
For the Years Ended December 31
2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
Balance at Beginning of Period..................... $ 5,752 $ 5,094 $ 4,409 $ 3,304 $ 2,654
Loans and Leases Charged Off:
Commercial, Financial, and Agricultural........ 197 347 49 229 163
Real Estate--Mortgage.......................... 97 64 95 78 205
Installment.................................... 1,535 2,223 1,688 1,089 340
------- ------- ------- ------- -------
Total Charged Off............................ 1,829 2,634 1,832 1,396 708
Recoveries of Loans and Leases:
Commercial, Financial, and Agricultural........ 229 21 10 223 43
Real Estate--Mortgage.......................... 9 7 21 39 28
Installment.................................... 401 338 288 173 111
------- ------- ------- ------- -------
Total Recoveries............................. 639 366 319 435 182
Net Loans and Leases Charged Off................... 1,190 2,268 1,513 961 526
Provision Charged to Operations.................... 1,506 2,926 2,198 2,066 1,176
------- ------- ------- ------- -------
Balance at the End of Period....................... 6,068 5,752 5,094 4,409 3,304
------- ------- -------- ------- -------
Loans and Leases at End of Period.................. $665,826 $609,553 $617,069 $570,481 $510,022
======= ======= ======= ======= =======
Daily Average Balance of Loans and Leases.......... $620,049 $616,088 $604,995 $547,599 $473,057
======= ======= ======= ======= =======
Allowance for Loan and Lease Losses
to Loans Outstanding............................. 0.91% 0.94% 0.83% 0.77% 0.65%
======= ======= ======= ======= =======
Net Charge Offs to Average
Loans and Leases Outstanding..................... 0.19% 0.37% 0.25% 0.18% 0.11%
======= ======= ======= ======= =======
Allocation of the Reserve for Loan and Lease Losses
( In thousands )
Table 8 December 31
- ------- -----------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Commercial................................. $2,149 $1,540 $1,062 $1,017 $ 957
Residential--Mortgage....................... 897 958 896 800 966
Home Equity................................ 135 108 111 134 136
Consumer................................... 2,675 2,688 2,579 2.145 942
Commitments................................ 33 29 287 272 279
Lease Financing............................ 105 91 95 30 --
Unallocated................................ 74 338 64 11 24
------ ------ ------ ------ ------
Total.................................... 6,068 $5,752 $5,094 $4,409 $3,304
====== ====== ====== ====== ======
Deposits and Other Funding
Deposit liabilities increased to $649.86 million at December 31, 2002 from
$616.77 million at December 31, 2001. This is an increase of $33.09 million or
5.37%. The increase in deposit liabilities includes a net decrease of $4.5
million in brokered deposits. Growth in non-interest bearing deposits was $8.42
million or 13.09%. This growth was in both personal and business accounts.
Interest bearing deposits increased $24.67 million or 4.47% in 2002 over 2002.
This growth can be attributed to a new product, My Easy Access CD that was
introduced in the spring of 2002. This account offers customers liquidity as
well as a competitive interest rate on their deposits. Table 9 exhibits the
average deposit balances for years ended December 31, 2002, 2001, and 2000,
respectively. The maturities of time deposits are shown in Table 10.
24
Total borrowings from the Federal Home Loan Bank of Atlanta increased
$94.16 million in 2002 over 2001 to a level of $191.26 million. This increase is
reflective of the leverage strategies executed during the third quarter of 2002
that totaled $80.00 million. The funds were borrowed for the purpose of
investing in securities under the Company's leverage program and policy. Note 8
to the consolidated financial statements provides more detail on the line of
credit.
The Trust issued $23.00 million of aggregate liquidation amount of 9.375%
Preferred Securities (the "Capital Securities"). The payment terms require the
Trust to distribute 9.375% annually per $10 liquidation amount of Capital
Securities, with equal payments on March 31, June 30, September 30, and December
31 of each year, beginning September 30, 1999. Under the FRB'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 to the
consolidated financial statements for additional detail.
Average Deposit Balances
Table 9 ( In thousands )
Deposits by Major Classification for the Years Ended December 31,
2002 2001 2000
-------------------------------------------------------
Average Average Average
Balance Yield Balance Yield Balance Yield
------- ----- ------- ----- ------- -----
Noninterest-bearing
demand deposits..................... $ 65,284 $ 57,003 $ 55,570
Interest-bearing demand deposits...... 178,572 1.07% 147,745 2.19% 142,491 3.80%
Savings deposits...................... 43,655 0.62% 41,150 1.02% 43,592 1.45%
Time deposits $100,000 or more........ 102,201 3.91% 122,454 5.82% 114,104 5.97%
Time deposits less than $100,000...... 229,114 4.75% 250,912 5.76% 248,238 5.58%
-------- -------- --------
Total............................... $618,826 $619,264 $603,995
======== ======== ========
Maturity of Time Deposits
( In thousands )
Table 10 December 31, 2002
Greater than Less Than
$100,000 $100,000
-------- --------
Maturities
3 Months or Less........................... $ 23,118 $ 51,067
3 - 6 Months............................... 14,452 43,247
6-12 Months................................ 40,591 60,584
Over 1 Year................................ 22,459 55,064
- --------- --------
Total...................................... $ 100,620 $209,962
========= ========
Maturities of time deposits greater than $100,000 are as follows: 2004--$12.75
million, 2005--$8.56 million, 2006--$1.09 million.
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 I capital, consisting of common shareholders' equity, trust
issued
25
preferred securities, and perpetual preferred stock, less goodwill and certain
other deductions. The remaining capital, or Tier II capital, consists of
elements such as subordinated debt, mandatory convertible debt, trust issued
preferred securities, and grandfathered senior debt, plus the reserve for
probable loan and lease 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 capital ratio (total qualifying capital divided by risk-weighted
assets), including a Tier I ratio of 4%. The risk-based capital rules have been
further supplemented by a leverage ratio, defined as Tier I capital divided by
average assets, after certain adjustments. The minimum leverage ratio is 3% for
banking organizations that do not anticipate significant growth and have
well-diversified risk (including no undue interest rate risk exposure),
excellent asset quality, 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
organizations must stay well capitalized in order to receive favorable
regulatory treatment on acquisition and other expansion activities and favorable
risk-based deposit insurance assessments. The Corporation's capital policy
establishes guidelines meeting these regulatory requirements, and takes into
account current or anticipated risks and future growth opportunities.
On December 31, 2002, the Corporation's total risk-based capital ratio was
14.31%, well above the regulatory minimum of 8%. The Corporation's total
risk-based capital ratios for year-end 2001 and 2000 were 15.54% and 14.55%,
respectively.
Total shareholders' equity increased $8.20 million to $79.28 million at
December 31, 2002, from $71.08 million at year-end 2001. The equity to assets
ratio at December 31, 2002, was 8.31%, compared with 8.69% at year-end 2001.
Cash dividends of $.68 per share were paid during 2002, compared with $.66
and $.64 paid in 2001 and 2000, respectively. This represents a dividend payout
rate (dividends per share divided by net income per share) of 42.76%, 43.71%,
and 46.72% for 2002, 2001, and 2000, respectively.
Summary of Significant Ratios
Table 11
2002 2001 2000
---- ---- ----
Return on Average Assets...................................... 1.13% 1.11% 1.03%
Return on Average Equity...................................... 12.75% 13.26% 13.40%
Dividend Payout Ratio......................................... 42.76% 43.71% 46.72%
Total Equity to Total Assets at Year End...................... 8.31% 8.69% 7.73%
Total Risk-based Capital Ratio................................ 14.31% 15.54% 14.55%
Tier I Capital to Risk Weighted Assets........................ 13.76% 14.67% 13.52%
Tier I Capital to Average Assets.............................. 11.72% 11.22% 10.66%
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
implementing 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
delineated 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 $104.37 million, or 10.95% of total assets at December 31, 2002.
This compares with $99.71 million or 12.19% of 2001 total assets, and $116.79
million or 13.78% of 2000 total assets.
26
Additional liquidity of $10.88 million is available from unused lines of
credit at various upstream correspondent banks and the FHLB of Atlanta.
Interest Rate Sensitivity
The Corporation's primary market risk is interest rate fluctuation.
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
interest rates. The Corporation uses interest sensitivity gap analysis and
simulation 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 does not use derivative financial
instruments to manage its interest rate sensitivity. At December 31, 2002, the
static gap analysis prepared by management indicated that the Corporation was
asset sensitive over the next year. In computing the effect on pre-tax income of
changes in interest rates, management has assumed that any changes would
immediately affect earnings. Normally, when an organization is asset sensitive
there is a positive impact to income when interest rates increase. The
simulation analysis shown below shows a positive impact when interest rates
increase 100 or 200 basis points in 2002 and in 2001. Based on the simulation
analysis performed at year-end, the Corporation estimates the following changes
in income before taxes, assuming the indicated rate changes:
December 31, 2002
+200 basis point increase........................$ 2.300 million
+100 basis point increase........................$1.150 million
-100 basis point decrease........................($1.614 million)
-200 basis point decrease........................($3.229 million)
December 31, 2001
+200 basis point increase........................$.531 million
+100 basis point increase........................$.266 million
-100 basis point decrease........................($.697 million)
-200 basis point decrease........................($1.394 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
purchased 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 12 presents the Corporation's interest rate gap position at December
31, 2002. 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.
27
Summary of Interest Sensitivity Analysis
Table 12 (In thousands)
As of December 31, 2002
0-90 91-365 1-5 Over 5
Days Days Years Years TOTAL
Assets
Rate Sensitive
Interest Bearing Deposits in Banks............. $ 6,207 $ -- $ -- $ -- $ 6,207
Federal Funds Sold.............................
Securities
(Available-for-Sale) (1)..................... 44,298 21,674 144,323 4,941 215,236
Federal Home Loan Bank Stock................... 9,158 -- -- -- 9,158
Loans (2)...................................... 265,135 149,147 247,804 3,740 665,826
-- -------- -------- -------- -------- --------
Total Rate Sensitive ...................... $324,798 $170,821 $392,127 $ 8,681 $896,427
========
Liabilities
Rate Sensitive Deposits
Savings........................................ $ 2,266 $ 2,266 $ 40,784 $ -- $ 45,316
Time Deposits Less Than $100,000............... 51,067 103,830 55,064 -- 209,961
Time Deposits $100,000 or More................. 23,118 55,043 22,459 -- 100,620
IMMA, PMA & Trust DDA.......................... 67,717 -- 15,480 -- 83,197
ONE Accounts & Overnight Investments........... 46,466 -- 86,295 -- 132,761
Federal Home Loan Bank borrowings
and Other Borrowed Funds..................... 24,204 4,666 185,391 -- 214,261
-------- -------- -------- -------- --------
Total Rate Sensitive (3)....................... $214,838 $165,805 $405,473 $ -- $786,116
GAP ( Rate Sensitive Assets less Rate
Sensitive Liabilities) ..................... $109,960 $ 5,016 ($ 13,346) $ 8,681 $110,311
Cumulative GAP ............................... $109,960 $114,976 $101,630 $110,311 $110,311
GAP to Total Assets ............................. 13.44% 0.61% -1.63% 1.06% 13.48%
Cumulative GAP to Total Assets................... 13.44% 14.05% 12.42% 13.48%
(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 and ONE are generally assumed to be
subject to repricing within five years. This is based on the Corporation's
historical experience with respect to such accounts.
28
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding the Company's exposure to market risk see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Interest Rate Sensitivity."
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...........................................31
Consolidated Statements of Financial Condition.........................32
Consolidated Statements of Income......................................33
Consolidated Statements of Changes in Shareholders' Equity.............34
Consolidated Statements of Cash Flows..................................35
Notes to Consolidated Financial Statements..........................36-50
(b) The following supplementary data is set forth in this Annual Report on Form
10-K on the following pages:
Quarterly Results of Operations.......................................50
29
Report of Management
The accompanying consolidated financial statements were prepared by
management, which is responsible for the integrity and objectivity of the
information presented, including amounts that must necessarily be based on
judgments and estimates. The consolidated financial statements were prepared in
conformity with generally accepted accounting principles, and in situations
where acceptable alternative accounting principles exist, management selected
the method that was appropriate in the circumstances. Financial information
appearing throughout this Annual Report to Stockholders is consistent with the
consolidated financial statements.
Management depends upon the Corporation's systems of internal control in
meeting its responsibilities for reliable consolidated financial statements. In
management's opinion, these systems provide reasonable assurance that assets are
safeguarded and transactions are properly recorded and executed in accordance
with management's authorizations. Judgments are required to assess and balance
the relative cost and expected benefits of these controls. As an integral part
of the systems of internal control, the Corporation maintains a professional
staff of internal auditors who conduct operational and special audits and
coordinate audit coverage with the independent auditors.
The Corporation's independent auditors, Ernst & Young LLP, whose
independent professional opinion appears separately, have audited the
consolidated financial statements.
The Audit Committee of the Board of Directors, composed solely of
independent directors, meets periodically with the internal auditors, the
independent auditors, and management to review the work of each and evaluate
whether each is properly discharging its responsibilities. The independent
auditors have open and unimpaired access to the Audit Committee to discuss the
results of their audit work, their evaluations of the adequacy of internal
controls, and the quality of financial reporting.
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
30
Report of Independent Auditors
We have audited the accompanying consolidated statements of financial
condition of First United Corporation and subsidiaries as of December 31, 2002
and 2001, 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, 2002. 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 statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
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, 2002 and 2001, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States.
Baltimore, Maryland
February 14, 2003
31
First United Corporation and Subsidiaries
Consolidated Statements of Financial Condition
(In thousands, except per share amounts)
December 31
2002 2001
----------------------
Assets
Cash and due from banks.............................................................. $ 18,242 $ 22,827
Federal funds sold................................................................... 0 9,875
Interest-bearing deposits in banks................................................... 6,207 1,167
Investment securities available for sale at market value (amortized cost--
$210,005 and $129,776 at December 31, 2002 and 2001, respectively)............... 215,236 130,692
Federal Home Loan Bank stock, at cost................................................ 9,158 5,950
Loans and leases..................................................................... 665,826 609,553
Reserve for probable loan and lease losses........................................... (6,068) (5,752)
-------- --------
Net loans and leases................................................................. 659,758 603,801
Bank premises and equipment.......................................................... 13,163 11,527
Accrued interest receivable and other assets......................................... 31,913 32,274
-------- --------
Total Assets......................................................................... $953,677 $818,113
======== ========
Liabilities and Shareholders' Equity
Liabilities:
Noninterest-bearing deposits....................................................... $ 72,789 $ 64,366
Interest-bearing deposits.......................................................... 577,071 552,403
-------- --------
Total deposits....................................................................... 649,860 616,769
Federal Home Loan Bank borrowings and other borrowed funds........................... 214,261 120,104
Reserve for taxes, interest and other liabilities.................................... 9,211 9,132
Dividends payable.................................................................... 1,062 1,032
-------- --------
Total Liabilities.................................................................... 874,394 747,037
-------- --------
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 6,081
shares at December 31, 2002 and 2001........................................... 61 61
Surplus............................................................................ 20,199 20,199
Retained earnings.................................................................. 55,743 50,254
Accumulated other comprehensive income............................................. 3,280 562
-------- --------
Total Shareholders' Equity........................................................... 79,283 71,076
-------- --------
Total Liabilities and Shareholders' Equity........................................... $953,677 $818,113
======== ========
See notes to consolidated financial statements.
32
First United Corporation and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share amounts)
Year ended December 31
2002 2001 2000
----------------------------------------
Interest income
Interest and fees on loans and leases............................ $ 48,982 $ 53,654 $ 53,108
Interest on investment securities:
Taxable........................................................ 7,147 8,074 9,074
Exempt from federal income taxes............................... 1,397 1,110 1,177
-------- -------- --------
8,544 9,184 10,251
Interest on federal funds sold................................... 63 391 157
-------- -------- --------
Total interest income............................................ 57,589 63,229 63,516
Interest expense
Interest on deposits:
Savings........................................................ 269 421 633
Interest-bearing transaction accounts.......................... 1,907 3,238 5,413
Time, $100,000 or more......................................... 4,001 7,128 6,812
Other time..................................................... 10,893 14,457 13,863
Interest on Federal Home Loan Bank borrowings
and other borrowed funds....................................... 8,632 8,134 8,318
-------- -------- --------
Total interest expense........................................... 25,702 33,378 35,039
-------- -------- --------
Net interest income.............................................. 31,889 29,851 28,477
Provision for probable loan and lease losses..................... 1,506 2,926 2,198
-------- -------- --------
Net interest income after provision for
probable loan and lease losses................................ 30,381 26,925 26,279
Other operating income
Trust Department income.......................................... 2,146 2,511 2,275
Service charges on deposit accounts.............................. 2,718 2,434 2,063
Insurance premium income......................................... 1,215 1,049 1,008
Security (losses) gains ......................................... (366) 578 (123)
Other income..................................................... 3,294 2,742 2,566
-------- -------- --------
Total other operating income..................................... 9,007 9,314 7,789
Other operating expense
Salaries and employee benefits................................... 13,922 12,500 11,359
Occupancy expense of premises.................................... 1,293 1,251 1,100
Equipment expense................................................ 2,090 1,853 1,811
Data processing expense.......................................... 1,160 1,049 1,070
Deposit assessment and related fees.............................. 169 177 188
Other expense.................................................... 7,404 6,551 6,467
-------- -------- --------
Total other operating expense.................................... 26,038 23,381 21,995
-------- -------- --------
Income before income taxes....................................... 13,350 12,858 12,073
Applicable income taxes.......................................... 3,695 3,689 3,762
-------- -------- --------
Net income....................................................... $9,655 $ 9,169 $ 8,311
======== ======== ========
Earnings per share............................................... $1.59 $1.51 $1.37
======== ======== ========
See notes to consolidated financial statements.
33
First United Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
(In thousands, except per share amounts)
Accumulated
Other Total
Capital Retained Comprehensive Shareholders'
Stock Surplus Earnings Income Equity
--------------------------------------------------------
Balance at January 1, 2000........................ $ 61 $20,269 $40,729 $(2,963) $ 58,096
Net unrealized gains on investment securities,
net of income tax benefit of $1,939............. 3,082 3,082
Net income for the year........................... 8,311 8,311
--------
Comprehensive income.............................. 11,393
Acquisition and retirement of common stock........ (70) (70)
Cash dividends--$.64 per share.................... (3,908) (3,908)
------ ------- ------- ------- --------
Balance at December 31, 2000...................... 61 20,199 45,132 119 65,511
Net unrealized gains on investment securities,
net of income tax benefit of $278............... 443 443
--------
Net income for the year........................... 9,169 9,169
Comprehensive income.............................. 9,612
Cash dividends--$.66 per share.................... (4,047) (4,047)
------ ------- ------- ------- --------
Balance at December 31, 2001...................... 61 20,199 50,254 562 71,076
Net unrealized gains on investment securities,
net of income tax benefit of $1,597............. 2,718 2,718
Net income for the year........................... 9,655 9,655
--------
Comprehensive income.............................. 12,373
Cash dividends--$.68 per share.................... (4,166) (4,166)
------ ------- ------- ------- --------
Balance at December 31, 2002...................... $ 61 $20,199 $55,743 $ 3,280 $ 79,283
====== ======= ======= ======= ========
See notes to consolidated financial statements.
34
First United Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Year ended December 31
2002 2001 2000
-------------------------------------------
Operating activities
Net income.................................................... $9,655 $ 9,169 $ 8,311
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for probable loan and lease losses.............. 1,506 2,926 2,198
Provision for depreciation................................ 1,748 1,597 1,546
Net accretion and amortization of investment
security discounts and premiums......................... (995) (28) (13)
Loss (gain) on sale of investment securities.............. 366 (578) 123
Decrease (Increase) in accrued interest receivable
and other assets........................................ 361 (11,332) 2,218
Increase in reserve for taxes, interest
and other liabilities................................... 79 27 462
-------- -------- --------
Net cash provided by (used in) operating activities....... 12,720 1,781 14,845
Investing activities
Net decrease in interest-bearing deposits in banks........... 5,041 19,367 216
Proceeds from maturities and sales of investment
securities available for sale............................... 69,529 259,050 210,927
Purchases of available for sale investment securities......... (160,806) (235,835) (210,983)
Purchase of Federal Home Loan Bank Stock......................
Net (increase) decrease in loans and leases................... (57,463) 2,826 (49,400)
Purchase of premises and equipment............................ (3,384) (2,293) (2,617)
-------- -------- --------
Net cash (used in) provided by investing activities........... (150,292) 43,115 (51,857)
Financing activities
Net increase (decrease) in demand deposits, NOW accounts
and savings accounts........................................ 70,125 (3,297) 24,550
Net (decrease) increase in certificates of deposit............ (37,034) (29,911) 26,855
Increase (decrease) in Federal Home Loan Bank borrowings
and other borrowed funds.................................... 94,157 (1,896) (5,000)
Cash dividends paid........................................... (4,136) (4,011) (3,896)
Acquisition and retirement of common stock.................... -- -- (70)
-------- -------- --------
Net cash provided by (used in) financing activities........... 123,112 (39,115) 42,439
(Decrease) increase in cash and cash equivalents.............. (14,460) 5,781 5,427
Cash and cash equivalents at beginning of year................ 32,702 26,921 21,494
-------- -------- --------
Cash and cash equivalents at end of year...................... $18,242 $32,702 $26,921
======== ======== ========
See notes to consolidated financial statements.
35
First United Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying financial statements of First United Corporation
(Corporation) include the accounts of its wholly owned subsidiaries, First
United Bank & Trust (Bank), Oakfirst Life Insurance Corporation, OakFirst Loan
Center, Inc., OakFirst Loan Center, LLC, and First United Capital Trust. All
significant intercompany accounts and transactions have been eliminated.
Business
First United Corporation is a registered financial holding company,
incorporated under the laws of Maryland. It is the parent company of First
United Bank & Trust, OakFirst Life Insurance Corporation, OakFirst Loan Center,
Inc., OakFirst Loan Center, LLC, and First United Capital Trust. First United
Bank & Trust provides a complete range of retail and commercial banking services
to a customer base serviced by a network of twenty offices and thirty automated
teller machines. This customer base includes individuals, businesses and various
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. OakFirst Loan Center, Inc., and OakFirst Loan Center, LLC are finance
companies. First United Capital Trust is a Delaware Business 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. For purposes of
comparability, certain prior period amounts have been reclassified to conform
with the 2002 presentation.
Investments
Securities available-for-sale: All security purchases have been 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 shareholders' equity.
The amortized cost of debt securities classified as 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.
Loans
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay off generally are reported at their
outstanding loan balance.
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 indicate that
collection of principal or interest is doubtful. After a loan is placed on
non-accrual, interest is not recognized. Cash payments received are applied to
the principal balances.
Trust Assets and Income
Assets held in an agency or fiduciary capacity are not assets of the
Corporation and, accordingly, are not included in the accompanying consolidated
statements of financial condition. Income from the Bank's Trust Department
represents fees charged to customers and is recorded on an accrual basis.
36
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
3 to 20 years for equipment. The provision for depreciation for general tax
purposes 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.
Pursuant to the terms of noncancelable lease agreements in effect at
December 31, 2002, pertaining to banking premises, future minimum rent
commitments under various operating leases are as follows: 2003--$.33 million,
2004--$.33 million, 2005--$.33 million. The leases contain options to extend for
periods from 1 to 5 years. The cost of such rentals is not included in the
aforementioned amounts. Total rent expense for the years ended December 31,
2002, 2001, and 2000 amounted to $.33 million, $.32 million, and $.29 million,
respectively.
Reserve for Probable Loan and Lease Losses
The reserve for probable loan and lease losses is maintained at a level
believed adequate by management to absorb losses inherent in the portfolio.
Management's determination of the adequacy of the loan loss reserve is based
upon the impact of economic conditions 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. 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 probable 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, regulatory,
and governmental sources. Specific allocations are made for those loans on the
Watchlist in which the collateral value is less than the outstanding loan
balance with the allocation being the dollar difference between the two. The
Watchlist represents loans, identified and closely monitored by management,
which possess certain qualities or characteristics that may lead to collection
and loss issues. Allocations are not made for loans that are cash secured or for
the SBA guaranteed portion of loans.
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
liabilities (temporary differences) and is measured at the enacted tax rates
that will be in effect when these differences reverse. Deferred tax expense is
determined by the change in the liability or asset for deferred taxes adjusted
for changes in any deferred tax asset allowance. In 2001, the Corporation
established First United Investment Trust, a Maryland real estate investment
trust, and its parent company, First United Capital Investments, a Delaware
Corporation, as subsidiaries of First United Bank & Trust. The establishment of
these entities eliminated most of the income taxes due to the state of Maryland
and income taxes due to the state of West Virginia.
Statement of Cash Flows
The Corporation has defined cash and cash equivalents as those amounts
included in the balance sheet captions "Cash and due from banks" and "Federal
funds sold." The Corporation paid $26.38, $34.08, and $34.57 million in interest
on deposits and other borrowed funds for the years ending December 31, 2002,
2001, and 2000, respectively.
Earnings Per Share
Earnings per share ("basic") was computed based on the weighted average
number of common shares outstanding of 6,081 million for 2002, 2001, and 2000,
respectively. The Corporation does not have any common stock equivalents.
Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("Statement No. 130") establishes standards for the
reporting and disclosure of comprehensive income and its components in the
financial
37
statements. Accumulated other comprehensive income represents the unrealized
gains and losses on the Corporation's available-for-sale investment securities,
net of income taxes. For the years ended December 31, 2002, 2001 and 2000 total
comprehensive income, net income plus the change in unrealized gains on
investment securities, net of income taxes, amounted to $12.37, $9.61, and
$11.39 million, respectively.
Business Segments
As defined by Statement of Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information," the
Corporation has two operating segments, community banking and insurance. Since
the operating activities of the insurance segment are immaterial to the
consolidated financial statements, no separate segment disclosures for insurance
operations have been made.
New Accounting Pronouncements
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 be subject to an
annual impairment test. Other intangible assets will continue to be amortized
over their estimated useful lives. Statement No. 142 became effective for fiscal
years beginning after December 15, 2001. Through a transitional evaluation
completed by an independent third party prior to September 30, 2002, the
Corporation determined that none of the goodwill carried on its books as of
January 1, 2002 was subject to impairment. This evaluation is completed on an
annual basis, and in a subsequent evaluation dated December 31, 2002, the
Corporation determined none of the $0.79 million goodwill carried on its books
as of December 31, 2002 was subject to impairment.
In October 2002, Statement of Financial Accounting Standards No. 147,
"Acquisitions of Certain Financial Institutions, an amendment of SFAS No. 72 and
SFAS No. 144 and FASB Interpretation No. 9", was issued. This statement
addresses the financial accounting and reporting for the acquisition of all or
part of a financial institution that does not qualify as a business combination.
The acquisition of all or part of a financial institution that meets the
definition of a business combination shall be accounted for by the purchase
method in accordance with SFAS No. 141, "Business Combinations." As discussed in
Note 17, on February 13, 2003, the Corporation entered into a Purchase and
Assumption Agreement to purchase four branches of Huntington National Bank. The
Corporation is currently assessing the impact this statement will have on its
accounting for these branch acquisitions.
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
additional 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
Corporation and the Bank must meet specific capital guidelines that involve
quantitative 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, 2002, that
the Corporation and the Bank meet all capital adequacy requirements to which it
is subject.
As of December 31, 2002, the Corporation and the Bank were well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, total risk-based, Tier I risk-based, and Tier I leverage
ratios must not fall below the percentage shown in the following table.
Management is not aware of any condition or event which has caused the well
capitalized position to change.
38
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
(in thousands) Amount Ratio Amount Ratio Amount Ratio
December 31, 2002
Total Capital (to Risk Weighted Assets)
Consolidated................................. $104,283 14.31% $58,306 8.00% $72,882 10.00%
First United Bank............................ 93,285 12.87% 57,978 8.00% 72,472 10.00%
Tier I Capital (to Risk Weighted Assets)
Consolidated................................. 100,287 13.76% 29,153 4.00% 43,729 6.00%
First United Bank............................ 87,338 12.05% 28,989 4.00% 43,483 6.00%
Tier I Capital (to Average Assets)
Consolidated................................. 100,287 11.72% 25,679 3.00% 42,798 5.00%
First United Bank............................ 87,338 10.31% 25,403 3.00% 42,339 5.00%
December 31, 2001
Total Capital (to Risk Weighted Assets)
Consolidated................................. $ 98,477 15.54% $50,586 8.00% $63,233 10.00%
First United Bank............................ 88,771 14.22% 50,290 8.00% 62,862 10.00%
Tier I Capital (to Risk Weighted Assets)
Consolidated................................. 92,967 14.67% 25,293 4.00% 37,940 6.00%
First United Bank............................ 83,096 13.31% 25,145 4.00% 37,717 6.00%
Tier I Capital (to Average Assets)
Consolidated................................. 92,967 11.22% 24,866 3.00% 41,443 5.00%
First United Bank............................ 83,096 10.19% 24,663 3.00% 41,104 5.00%
3. Investment Securities
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
Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
- -------------- ---- ----- ------ -----
December 31, 2002
U. S. Treasury securities and obligations of
U. S. government agencies................................... $ 30,236 $ 459 $ -- $ 30,695
Obligations of states and political subdivisions.............. 30,361 996 2 31,354
Mortgage-backed securities.................................... 120,647 2,704 -- 123,351
U.S. corporate securities..................................... 22,123 1,109 79 23,153
--------- ------- ------- -------
Total debt securities......................................... 203,367 5,268 82 208,553
Equity securities............................................. 6,638 45 -- 6,683
--------- ------- ------- -------
Totals........................................................ $ 210,005 $ 5,313 $ 82 $215,236
========= ======= ======= =======
39
3. Investment Securities (continued)
Available-for-Sale Securities
Gross Gross
Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------
December 31, 2001
U. S. Treasury securities and obligations of
U. S. government agencies................................. $ 31,454 $ 412 $ 1 $ 31,865
Obligations of states and political subdivisions............ 26,131 194 410 25,915
Mortgage-backed securities.................................. 47,918 775 213 48,480
U.S. corporate securities................................... 17,182 255 101 17,336
-------- ------ ------- --------
Total debt securities....................................... 122,685 1,636 725 123,596
Equity securities........................................... 7,091 5 -- 7,096
-------- ------ ------- --------
Totals...................................................... $129,776 $1,641 $ 1,725 $130,692
======== ====== ======= ========
During the years ended December 31, 2002, 2001 and 2000, available-for-sale
securities with a fair market value at the date of sale of $1.16, $29.67, and
$34.99 million, respectively, were sold. The gross realized gains on such sales
totaled $.0, $.51, and $.27 million, respectively. The gross realized losses on
the sales were $.01, $.01, and $.39 million, respectively. Additionally,
available-for-sale securities totaling $17.35 million were called in 2002.
At December 31, 2002, the Corporation recognized a $.36 million realized
loss on investment securities related to an other-than-temporary impairment
write-down of its investment in Federal Home Loan Mortgage Corporation preferred
stock. The loss was recognized because the fair value of the investments had
been below cost for several months, a key determinant of when a security is
considered other-than-temporarily impaired under generally accepted accounting
principles.
The amortized cost and estimated fair value of debt and marketable equity
securities at December 31, 2002, 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 prepayment
penalties. Equity securities consist of various money market accounts and FHLMC
Preferred Stock. These securities have no maturity and therefore are classified
in the "Due after ten years" maturity line.
(in thousands) Available-for-Sale Securities
Amortized Market
Cost Value
Due in one year or less................... $ 1,385 $ 1,402
Due after one year through five years..... 16,923 17,777
Due after five years through ten years.... 17,417 17,932
Due after ten years....................... 174,280 178,125
--------- ---------
$210,005 $ 215,236
========= =========
At December 31, 2002, investment securities with a market value of $119.43
million were pledged to secure public and trust deposits as required or
permitted by law.
40
4. Reserve for Probable Loan and Lease Losses
Activity in the reserve for probable loan and lease losses is summarized as
follows:
(in thousands) 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
Balance at January 1.................................................... $5,752 $5,094 $4,409
Provision charged to operating expense.................................. 1,506 2,926 2,198
7,258 8,020 6,607
Gross credit losses..................................................... (1,829) (2,634) (1,832)
Recoveries.............................................................. 639 366 319
-- -- --
Net credit losses....................................................... (1,190) (2,268) (1,513)
------ ------ ------
Balance at December 31.................................................. $6,068 $5,752 $5,094
=== ====== ====== ======
Non-accruing loans were $1.85, $3.20, and $1.07 million at December 31,
2002, 2001 and 2000, respectively. Interest income not recognized as a result of
non-accruing loans was $.03, $.05, and $.01 million during the years ended
December 31, 2002, 2001, and 2000, 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, 2002
-----------------
Loans Loan
(in thousands) & Leases Commitments Total
- -------------- -------- ----------- -----
Commercial....................... $242,470 $34,741 $277,211
Residential--construction........ 11,072 7,413 18,485
Residential--mortgage............ 233,886 23,871 257,757
Installment...................... 173,579 1,856 175,435
Lease financing.................. 4,819 -- 4,819
Letters of credit................ -- 1,873 1,873
-------- -------- --------
$665,826 $69,754 $735,580
======== ======== ========
December 31, 2001
-----------------
Loans Loan
(in thousands) & Leases Commitments Total
- -------------- -------- ----------- -----
Commercial........................ $189,343 $20,172 $209,515
Real estate--construction......... 8,578 5,413 13,991
Real estate--mortgage............. 238,016 21,504 259,520
Installment....................... 164,297 3,825 168,122
Lease financing................... 9,319 -- 9,319
Letters of credit................. -- 2,274 2,274
-------- ------- --------
$609,553 $53,188 $662,741
======== ======= ========
Loan commitments are made to accommodate the financial needs of the
Corporation'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
41
management's credit assessment of the customer.
Commercial 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 89 percent. Any consumer real estate mortgage loan
exceeding a loan-to-value ratio of 89 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:
(in thousands) 2002 2001
- ------------------------------------------------------------------------------
Bank premises............................................ $12,131 $11,045
Equipment................................................ 20,359 18,112
------- -------
32,490 29,157
Less accumulated depreciation............................ (19,327) (17,630)
------- -------
Total.................................................... $13,163 $11,527
======= =======
The Corporation recorded depreciation expense of $1.77, $1.60, and $1.55
million in 2002, 2001 and 2000, respectively.
7. Fair Value of Financial Instruments
As required by 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
Corporation'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.
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:
2002 2001
--------------------------------------
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
- --------------------------------------------------------------------------------------------------------------
Cash and due from banks........................ $ 18,242 $18,242 $ 22,827 $ 22,827
Federal funds sold............................. 0 0 9,875 9,875
Interest-bearing deposits in banks 6,207 6,207 1,167 1,167
Investment securities.......................... 215,236 215,236 130,692 130,692
Federal Home Loan Bank stock 9,158 9,158 5,950 5,950
Loans and leases............................... 665,826 672,031 609,553 619,078
Deposits ...................................... 649,860 654,008 616,769 623,007
Federal Home Loan Bank borrowings and
other borrowed funds......................... 214,260 231,574 120,104 134,261
42
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments:
Cash and due from banks: The carrying amounts as reported in the statement
of financial condition for cash and due from banks approximate 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 of 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 and Leases: For variable rate loans and leases that reprice
frequently or "in one year or less," and with no significant change in credit
risk, fair values are based on carrying values. Fair values for fixed rate loans
and leases and loans and leases that do not reprice frequently are estimated
using a discounted cash flow calculation that applies current interest rates
being offered on the various loan products.
Deposits: The fair values disclosed for demand deposits (e.g., interest and
non-interest checking, savings, and certain types of money market accounts) 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 reporting 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
subordinated deferrable interest debentures, is based upon its quoted market
price. The carrying amounts of federal funds purchased approximate their fair
values.
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 be impracticable.
The Corporation does not have any derivative financial instruments at December
31, 2002 or 2001.
43
8. Federal Home Loan Bank (FHLB) Advances and Other Borrowings Borrowings
consist of the following:
December 31, 2002 (in thousands)
Federal funds purchased, weighted average interest rate of 1.51% at December 31, 2002.............. $ 16,200
FHLB advances payable to FHLB of Atlanta,
secured by all FHLB stock and certain first mortgage loans:
Due August 25, 2004 @ 5.84%.................................................................... 11,500
Due February 1, 2005 @ 6.42%, convertible on February 01, 2003................................. 15,000
Due July 19, 2007@ 3.70%, convertible on July 19, 2004......................................... 10,000
Due July 19, 2007 @ 3.89%, amortizing advance.................................................. 18,333
Due September 20, 2007 @ 3.18%, amortizing advance............................................. 9,500
Due September 26, 2007 @ 4.83%................................................................. 5,000
Due February 4, 2008 @ 5.49%, convertible on February 04, 2003................................. 10,000
Due September 8, 2009 @ 6.27%, convertible on September 08, 2004............................... 11,500
Due September 13, 2010 @ 5.57%, convertible on March 13, 2003.................................. 25,000
Due January 5, 2011 @ 4.93%, convertible on January 05, 2003................................... 10,000
Due October 24, 2011 @ 4.31%, convertible on October 24, 2006.................................. 13,000
Due July 19, 2012 @ 4.17%, convertible on July 19, 2003........................................ 10,000
Due September 19, 2012 @ 3.48%, convertible on September 19, 2003.............................. 15.000
Due September 19, 2012 @ 4.19%, amortizing advance............................................. 9,750
Due May 2, 2016 @ 2.75%, amortizing advance.................................................... 1,088
Due March 31, 2017 @ 2.75%, amortizing advance................................................. 390
Trust issued guaranteed preferred beneficial interests in the Corporation's
junior subordinated deferrable interest debentures @ 9.375%, maturing in August 2029............. 23,000
--------
Total................................................................................ $214,261
========
December 31, 2001 (in thousands)
Federal funds purchased, weighted average interest rate of 2.75% at December 31, 2001.............. $ 1,104
FHLB advances payable to FHLB of Atlanta,
secured by all FHLB stock and certain first mortgage loans:
Due August 25, 2004 @ 5.84%.................................................................... 11,500
Due February 1, 2005 @ 6.42%, convertible on February 1, 2002.................................. 15,000
Due February 4, 2008 @ 5.49%, convertible on February 4, 2003.................................. 10,000
Due September 8, 2009 @ 6.27%, convertible on September 8, 2004................................ 11,500
Due September 13, 2010 @ 5.57%, convertible on March 13, 2001.................................. 25,000
Due January 5, 2011 @ 4.93%, convertible on January 5, 2002.................................... 10,000
Due October 24, 2011 @ 4.31%, convertible on October 24, 2006.................................. 13,000
Trust issued guaranteed preferred beneficial interests in the Corporation's
junior subordinated deferrable interest debentures @ 9.375%, maturing in August 2029............. 23,000
--------
Total................................................................................ $120,104
========
The Corporation, through its banking subsidiary, First United Bank & Trust,
has a borrowing capacity agreement with the FHLB of Atlanta in an amount equal
to 29% of the Bank's assets. At December 31, 2002, the line of credit equaled
$274.52 million. This line of credit can only be utilized to the extent of
available collateral. It is secured with a blanket lien on the 1-4 family
mortgage portfolio, a blanket lien on the commercial real estate loan portfolio,
and certain investment securities. The collateralized line of credit totaled
$224.88 million at December 31, 2002.
First United Capital Trust (the "Trust"), a Delaware Business trust
organized by the Corporation on July 19, 1999, issued $23.00 million of
aggregate liquidation amount of 9.375% Preferred Securities (the "Capital
Securities"). The payment terms require the Trust to distribute 9.375% annually
per $10 liquidation amount of Capital Securities in equal payments on March 31,
June 30, September 30 and December 31 of each year, beginning September 30,
1999. Under the Federal Reserve'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
44
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
distributions on the securities included in interest expense.
The proceeds from the issuance of the Capital Securities were used by the
Trust to purchase $23.00 million 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
Debentures 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 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 $5.0 million at various
upstream correspondent banks. The Bank has also established $7.00 million
reverse repurchase lines of credit with correspondent banks. As of December 31,
2002, the Corporation had $5 million in borrowings with these correspondent
banks. The Corporation utilizes the lines to meet daily liquidity requirements
and does not rely on lines of credit as a source of long term liquidity.
Maturities of FHLB advances are as follows: 2003, $7.04 million; 2004,
$18.54 million; 2005, $22.04 million; 2006, $7.04 million; 2007, $4.55 million.
45
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:
2002 2001 2000
Income before income taxes.............................................. $13,350 $12,858 $12,073
Statutory income tax rate............................................... 35% 34% 34%
------- ------- -------
Income tax.............................................................. 4,673 4,372 4,105
State income tax, net of federal tax benefit............................ (103) 15 318
------- ------- -------
Effect of nontaxable interest and loan income........................... (563) (484) (499)
Effect of nontaxable premium income..................................... (57) (80) (127)
Effect of nontaxable dividend income.................................... (83) (74) (28)
Effect of nontaxable increase in value of contracts..................... (336) (203) --
Effect of TEFRA interest limitation..................................... 52 67 75
Other................................................................... 112 76 (82)
------- ------- -------
Income tax expense for the year......................................... $ 3,695 $ 3,689 $ 3,762
======= ======= =======
Taxes currently payable................................................. 3,233 552 3,108
Deferred taxes (benefit)................................................ 462 3,137 654
------- ------- -------
Income tax expense for the year......................................... $ 3,695 $ 3,689 $ 3,762
======= ======= =======
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:
2002 2001
- -----------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Reserve for probable loan and lease losses....................................... $ 2,413 $ 2,235
Deferred loan origination fees................................................... 60 59
State tax loss carry forwards.................................................... 483 258
Deferred compensation............................................................ 329 246
Employee compensation............................................................ 142 --
Alternative minimum tax credit................................................... -- 67
Other............................................................................ 53 113
------- -------
Total deferred tax assets...................................................... 3,480 2,978
Valuation allowance.............................................................. (321) (305)
------- -------
Total deferred tax assets less valuation allowance............................. 3,159 2,673
Deferred tax liabilities:
Dividend from real estate investment trust....................................... (2,478) (2,369)
Auto Leasing..................................................................... (1,697) (1,536)
Pension.......................................................................... (733) (554)
Depreciation..................................................................... (1,114) (667)
Employee compensation............................................................ (28) (40)
Unrealized gain on investment securities......................................... (1,951) (354)
Prepaid expenses................................................................. (129) (90)
Other............................................................................ (56) (31)
------- --------
Total deferred tax liability................................................... (8,186) (5,641)
------- --------
Net deferred tax liability......................................................... $(5,027) $(2,698)
======= ========
During 2002, the Corporation increased its valuation allowance for certain
state loss carry forwards generated during the year. The state loss carry
forwards will expire commencing in 2019.
The Corporation made income tax payments of $3.30 million, $.04 million,
and $4.51 million for the years ending December 31, 2002, 2001, and 2000,
respectively.
46
10. Employee Benefit Plans
The Corporation sponsors a noncontributory defined benefit pension plan
covering substantially all full-time employees who qualify as to age and length
of service. The benefits are based on years of service and the employees'
compensation during the last five years of employment. The Corporation's funding
policy is to make annual contributions in amounts sufficient to meet the current
year's funding requirements.
The following table summarizes benefit obligation and plan asset activity
for the Corporation's pension plan:
(in thousands) 2002 2001
------------------------------------------------------------------------------------------------------------
Change in Benefit Obligation
Obligation at the beginning of the year ........................................ $10,724 $ 9,651
Service cost.................................................................... 494 434
Interest cost................................................................... 809 711
Amendments...................................................................... 204 0
Assumptions..................................................................... 825 289
Actual loss..................................................................... 461 24
Benefits paid................................................................... (393) (385)
------- -------
Obligation at the end of the year............................................... 13,124 $10,724
======= =======
Change in Plan Assets
Fair value at the beginning of the year ........................................ 11,673 $11,407
Actual return on plan assets.................................................... (928) 350
Employer contribution........................................................... 799 301
Benefits paid................................................................... (393) (385)
------- -------
Fair value at the end of the year............................................... 11,151 $11,673
======= =======
Funded Status...................................................................... (1,973) 949
Unrecognized actuarial gain....................................................... 4,193 1,034
Unrecognized prior service cost.................................................... 172 (22)
Unrecognized transition asset...................................................... (488) (527)
------- -------
Prepaid benefit cost............................................................... 1,905 $ 1,434
======= =======
Discount rate...................................................................... 6.75% 7.25%
Expected return on assets.......................................................... 8.25% 8.25%
Rate of pay increase............................................................... 4.00% 4.00%
2002 2001 2000
-------------------------------
Net Pension cost included the following:
Service costs--benefits earned during the year........................ $ 494 $ 434 $ 368
Interest cost on projected benefit obligation......................... 809 711 651
Actual return on plan assets.......................................... 928 (350) (246)
Net amortization and deferral......................................... (1,903) (637) (729)
------ ----- -----
Net pension expense included in employee benefits..................... $ 328 $ 159 $ 44
====== ===== =====
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 to the
plan through payroll deductions. Contributions up to 6% of an employee's base
salary are matched on a 50% basis by the Corporation. Expense charged to
operations for the 401(k) Plan was $.20, $.30, and $.16 million in 2002, 2001
and 2000, respectively.
Supplemental Executive Retirement Plan
During 2001, the Corporation established an unfunded supplemental executive
retirement plan (SERP) to provide
47
senior management personnel with supplemental retirement benefits in excess of
limits imposed on qualified plans by federal tax law. Concurrent with the
establishment of the SERP, the Corporation acquired bank owned life insurance
(BOLI) policies on the senior management personnel and officers of the
Corporation. The benefits resulting from the favorable tax treatment accorded
the earnings on the BOLI are intended to provide a source of funds for the
payment of the SERP benefits and other employee benefit costs. The cash
surrender value of the BOLI is $19.56 million and is reported in other assets in
the statement of financial condition. The SERP expense for 2002 was
approximately $.21 million, and the SERP liability outstanding at December 31,
2002 was approximately $0.23 million.
11. Federal Reserve Requirements
The Bank is required to maintain cash reserves with the Federal Reserve
Bank of Richmond based principally on the type and amount of its deposits.
During 2002, the daily average amount of these required reserves was
approximately $8.20 million.
12. Restrictions on Subsidiary Dividends, Loans or Advances
Federal and state banking regulations place certain restrictions on
dividends paid and loans or advances made by the Bank to the Corporation. The
total amount of dividends, which may be paid at any date, is generally limited
to the retained earnings of the Bank, and loans or advances are limited to 10
percent of the Bank's capital stock and surplus on a secured basis. In addition,
dividends paid by the Bank to the Corporation would be prohibited if the effect
thereof would cause the Bank's capital to be reduced below applicable minimum
capital requirements. Although no transfers were made, $10.42 million in funds
were available for transfer from the Bank to the Corporation in the form of
loans as of December 31, 2002.
13. Parent Company Financial Information (Parent Company Only)
Condensed Statements of Financial Condition December 31,
2002 2001
---- ----
Assets
Cash..................................................... $ 1,155 $ 1,157
Investment securities.................................... 1,520 1,451
Investment in bank subsidiary............................ 91,274 84,390
Dividend receivable and other assets..................... 2,427 1,749
Investment in non-bank subsidiary........................ 6,997 6,405
-------- -------
Total Assets............................................. 103,373 $95,152
======== =======
Liabilities and Shareholder's Equity
Reserve for taxes, interest, and other liabilities....... $ 28 $ 44
Dividends payable........................................ 1,062 1,032
Other long term debt..................................... 23,000 23,000
Shareholders' equity..................................... 79,283 71,076
-------- -------
Total Liabilities and Shareholder's Equity............... $103,373 $95,152
======== =======
48
Year ended December 31
Condensed Statements of Income 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
Income:
Dividend income from subsidiaries....................................... $6,670 $7,110 $2,566
Other income............................................................ 86 103 147
------ ------ ------
Total income............................................................ 6,756 7,213 2,713
====== ====== ======
Expense:
Other expenses.......................................................... 2,196 2,205 2,188
------ ------ ------
Total expense........................................................... 2,196 2,205 2,188
------ ------ ------
Income before income taxes and equity in undistributed
net income of subsidiaries............................................ 4,560 5,008 525
Applicable income taxes................................................. -- -- --
Equity in undistributed net income (loss) of subsidiaries:
Bank.................................................................. 4,984 4,455 8,113
Non-bank.............................................................. 111 (294) (327)
------ ------ ------
Net income ............................................................. $9,655 $9,169 $8,311
====== ====== ======
Condensed Statements of Cash Flows
Year ended December 31
(in thousands) 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
Operating activities
Net income.............................................................. $9,655 $9,169 $8,311
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed net income of subsidiaries.................. (5,095) (4,161) (7,786)
(Increase) decrease in other assets................................. (678) (660) 127
(Decrease) increase in other liabilities............................ (16) -- 44
Increase (decrease) in dividends payable............................ 30 36 27
------ ------ ------
Net cash provided by operating activities............................... 3,923 4,384 723
Investing activities
Purchase of investment securities....................................... -- -- (41)
Proceeds from investment maturities..................................... 246 175 2,912
Net investment (from) in subsidiaries................................... -- (436) --
------ ------ ------
Net cash (used in) provided by investing activities 246 (261) 2,871
Financing activities
Cash dividends.......................................................... (4,136) (4,011) (3,896)
Proceeds from issuance of common stock.................................. -- -- --
Proceeds from issuance of other long term debt.......................... -- -- --
Acquisition and retirement of common stock.............................. -- -- (70)
------ ------ ------
Net cash used in by financing activities................................ (4,136) (4,011) (3,966)
------ ------ ------
(Decrease) increase in cash and cash equivalents........................ (2) 112 (372)
Cash and cash equivalents at beginning of year.......................... 1,157 1,045 1,417
------ ------ ------
Cash and cash equivalents at end of year................................ $1,155 $1,157 $1,045
====== ====== ======
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 $7.69 million of life, accident and health insurance in force
at December 31, 2002. In accordance with state insurance laws, this subsidiary
is capitalized at $4.13 million.
49
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
subsidiaries. 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 collectability. Changes in the dollar amount of loans outstanding to
officers, directors and their associates were as follows for the years ended
December 31:
(in thousands) 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
Balance, January 1...................................................... 17,601 $11,254 $ 9,801
Loans or advances....................................................... 9,167 7,526 6,027
Repayments.............................................................. (7,972) (1,179) (4,574)
------- ------- -------
Balance, December 31.................................................... $18,796 $17,601 $11,254
=== ======= ======= =======
16. Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the
years ended December 31, 2002 and 2001.
Three months ended
(in thousands) March 31 June 30 September 30 December 31
- -----------------------------------------------------------------------------------------------------------------
2002
Interest income........................................ $14,206 $13,981 $14,503 $14,900
Interest expense....................................... 6,392 6,246 6,414 6,650
------- ------- ------- -------
Net interest income.................................... 7,814 7,735 8,089 8,250
Provision for possible loan and lease losses........... 656 560 45 245
Other income........................................... 2,334 2,386 2,415 1,872
Other expenses......................................... 6,342 6,256 6,894 6,547
------- ------- ------- -------
Income before income taxes............................. 3,150 3,305 3,565 3,330
Applicable income taxes................................ 822 935 1,021 918
------- ------- ------- -------
Net income............................................. $ 2,328 $ 2,370 $ 2,544 $ 2,413
======= ======= ======= =======
Earnings per share..................................... $ 0.38 $ 0.39 $ 0.42 $ 0.40
======= ======= ======= =======
Three months ended
March 31 June 30 September 30 December 31
-----------------------------------------------------
2001
Interest income........................................ $16,451 $16,016 $15,765 $14,998
Interest expense....................................... 9,363 8,655 8,120 7,240
------- ------- ------- -------
Net interest income.................................... 7,088 7,361 7,645 7,728
Provision for possible loan and lease losses........... 535 547 774 1,070
Other income........................................... 2,134 2,227 2,520 2,432
Other expenses......................................... 5,738 5,761 5,845 6,037
------- ------- ------- -------
Income before income taxes............................. 2,949 3,280 3,546 3,083
Applicable income taxes................................ 932 996 942 819
------- ------- ------- -------
Net income............................................. $ 2,017 $ 2,284 $ 2,604 $ 2,264
======= ======= ======= =======
Earnings per share..................................... $0.33 $0.38 $0.43 $0.37
======= ======= ======= =======
17. Subsequent Event
On February 13, 2003, First United Corporation and its bank subsidiary,
First United Bank & Trust, a Maryland trust company, entered into a Purchase and
Assumption Agreement with Huntington Bancshares Incorporated and its bank
50
subsidiary, Huntington National Bank, a national banking association, to
purchase four Huntington National Bank offices located in Berkeley County, West
Virginia. The acquisition will involve the assumption of approximately $140
million in deposit liabilities and the purchase of $54 million in outstanding
loans, as well as the acquisition of certain real estate interests associated
with the banking offices. The acquisition is subject to, among other things, the
receipt of various bank regulatory approvals.
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
shareholders meeting to be held April 29, 2003, from pages 2 through 6. For a
listing of the Corporation's executive officers, see Item 1A of Part I of this
Annual Report on Form 10-K.
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 29, 2003.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED SHAREHOLDER MATTERS
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 29, 2002.
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 29, 2002, and from Note 15 on page 45 of this
Annual Report on Form 10-K.
Item 14. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Within the 90 days
prior to the date of this report, the Corporation carried out an evaluation
("Evaluation"), under the supervision and with the participation of the
Corporation's management, including the Corporation's Chief Executive Officer
("CEO") and its President/Chief Financial Officer ("CFO"), of the effectiveness
of the design and operation of the Company's disclosure controls and procedures
("Disclosure Controls") and its internal controls and procedures for financial
reporting ("Internal Controls").
Disclosure Controls are procedures that are designed with the objective of
ensuring that information required to be disclosed in our reports filed under
the Securities Exchange Act of 1934 ("Exchange Act"), such as this Annual
Report, is recorded, processed, summarized and reported within the time periods
specified in the rules and forms issued by the SEC. Disclosure Controls are also
designed with the objective of ensuring that such information is accumulated and
communicated to our management, including the CEO and CFO, as appropriate to
allow timely decisions regarding required disclosure. Internal Controls are
procedures that are designed with the objective of providing reasonable
assurance that (i) our transactions are properly authorized; (ii) our assets are
safeguarded against unauthorized or improper use; and (iii) our transactions are
properly recorded and reported, all to permit the preparation of our financial
statements in conformity with generally accepted accounting principles.
51
CEO and CFO Certifications
Appearing immediately following the Signatures section of this Annual
Report there are "Certifications" of the CEO and the CFO. The Certifications are
required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. The
section of the Annual Report that you are currently reading is the information
concerning the Evaluation, and this information should be read in conjunction
with the Certifications for a more complete understanding of the topics
presented.
Limitations on the effectiveness of controls
The Corporation's management, including the CEO and CFO, does not expect
that our Disclosure Controls or our Internal Controls will prevent all error and
all fraud. A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Corporation have
been detected. These inherent limitations include the realities that judgments
in decision-making can be faulty, and that breakdowns can occur because of
simple error or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management override of the control. The design of any system of controls also is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions; over time, control may
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
Conclusions
Based upon the Evaluation, the Corporation's CEO and the CFO have concluded
that the Corporation's Disclosure Controls are effective in timely alerting them
to material information relating to the Corporation (including its consolidated
subsidiaries) required to be included in the Corporation's periodic SEC filings,
and that our Internal Controls are effective to provide reasonable assurance
that our financial statements are fairly presented in conformity with generally
accepted accounting principles.
(b) Changes in Internal Controls. There were no significant changes in the
Corporation's Internal Controls or in other factors that could significantly
affect those Internal Controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART IV
Item 15. 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.
(a)(3) Listing of Exhibits.
Exhibit 3.1--Amended and Restated (incorporated by reference to Exhibit 3.1
of the Corporation's Quarterly Report on Form 10-Q filed with the SEC on June 3,
1998)
Exhibit 3.2--Amended and Restated By-Laws (incorporated by reference to
Exhibit 3.ii of the Corporation's Annual Report on Form 10-K filed with the SEC
on June 3, 1998)
Exhibit 21.1--Subsidiaries of the Corporation, incorporated by reference on
pages 3 of this Form 10-K.
52
Exhibit 23.1--Consent of Ernst & Young, LLP
Exhibit 27.1--Financial Data Schedule, filed electronically herewith
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed by the Corporation during the
last quarter covered by this report.
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: /s/ William B. Grant
------------------------
William B. Grant
Chairman of the Board
and Chief Executive Officer
March 19, 2003
--------------
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.
/s/ William B. Grant
(William B. Grant) Director, Chief Executive Officer - March 19, 2003
- ---------------------------------------------------------------------
/s/ David J. Beachy
(David J. Beachy) Director- March 19, 2003
- ---------------------------------------------------------------------
/s/ Donald M. Browning
(Donald M. Browning) Director - March 19, 2003
- ---------------------------------------------------------------------
/s/ Rex W. Burton
(Rex W. Burton) Director - March 19, 2003
- ---------------------------------------------------------------------
/s/ Paul Cox, Jr.
(Paul Cox, Jr.) Director - March 19, 2003
- ---------------------------------------------------------------------
53
/s/ Frederick A. Thayer, III
(Frederick A. Thayer, III) Director - March 19, 2003
- ---------------------------------------------------------------------
/s/ Robert W. Kurtz
(Robert W. Kurtz) Director, President
and Chief Financial Officer - March 19, 2003
- ---------------------------------------------------------------------
/s/ Maynard G. Grossnickle
(Maynard G. Grossnickle) Director - March 19, 2003
- ---------------------------------------------------------------------
/s/ Raymond F. Hinkle
(Raymond F. Hinkle) Director - March 19, 2003
- ---------------------------------------------------------------------
/s/ Donald E. Moran
(Donald E. Moran) Director - March 19, 2003
- ---------------------------------------------------------------------
/s/ Richard G. Stanton
(Richard G. Stanton) Director - March 19, 2003
- ---------------------------------------------------------------------
/s/ I. Robert Rudy
(I. Robert Rudy) Director - March 19, 2003
- ---------------------------------------------------------------------
/s/ Robert G. Stuck
(Robert G. Stuck) Director - March 19, 2003
- ---------------------------------------------------------------------
/s/ James F. Scarpelli, Sr.
(James F. Scarpelli, Sr.) Director - March 19, 2003
- ---------------------------------------------------------------------
/s/ Karen F. Myers
(Karen F. Myers) Director - March 19, 2003
- ---------------------------------------------------------------------
/s/ Elaine L. McDonald
(Elaine L. McDonald) Director - March 19, 2003
- ---------------------------------------------------------------------
54
CERTIFICATIONS
I, William B. Grant, certify that:
1. I have reviewed this Annual Report on Form 10-K (this "Report") of First
United Corporation (the "Corporation");
2. Based on my knowledge, this Report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Corporation as
of, and for, the periods presented in this Report;
4. The Corporation's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Corporation and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Corporation, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) evaluated the effectiveness of the Corporation's disclosure controls and
procedures as of the date within 90 days prior to the filing date of this report
(the "Evaluation Date"); and
c) presented in this Report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
5. The Corporation's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Corporation's auditors and the audit
committee of the Corporation's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls that could adversely affect the Corporation's ability to record,
process, summarize and report financial data and have identified for the
Corporation's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Corporation's internal controls;
and
6. The Corporation's other certifying officers and I have indicated in this
Report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weakness.
Date: March 19, 2003
/s/ William B. Grant
--------------------
By: William B. Grant
Title: Chairman of the Board/CEO
55
I, Robert W. Kurtz, certify that:
1. I have reviewed this Annual Report on Form 10-K (this "Report") of First
United Corporation (the "Corporation");
2. Based on my knowledge, this Report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Corporation as
of, and for, the periods presented in this Report;
4. The Corporation's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Corporation and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Corporation, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) evaluated the effectiveness of the Corporation's disclosure controls and
procedures as of the date within 90 days prior to the filing date of this report
(the "Evaluation Date"); and
c) presented in this Report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
5. The Corporation's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Corporation's auditors and the audit
committee of the Corporation's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls that could adversely affect the Corporation's ability to record,
process, summarize and report financial data and have identified for the
Corporation's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Corporation's internal controls;
and
6. The Corporation's other certifying officers and I have indicated in this
Report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weakness.
Date: March 19, 2003
/s/ Robert W. Kurtz
-------------------
By: Robert W. Kurtz
Title: President and CFO
56
Exhibit Index
Exhibit 3.1 Amended and Restated Articles of Incorporation (incorporated by
reference to Exhibit 3.1 of the Company's Quarterly Report on
Form 10-Q for the period ended June 30, 1998)
Exhibit 3.2 Amended and Restated By-Laws (incorporated by reference to
Exhibit 3(ii) of the Company's Annual Report on Form 10-K for the
year ended December 31, 1997)
Exhibit 21.1 Subsidiaries of the Corporation, incorporated by reference on
pages 3 of this Form 10-K.
Exhibit 23.1 Consent of Ernst & Young, LLP
Exhibit 27.1 Financial Data Schedule, filed electronically herewith
57