UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended June 30, 2004
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
- -------- ----------
(State or other jurisdiction of (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)
(301) 334-4715
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Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by check mark whether the registrant is an accelerated filer (As
defined in Rule 12b-2 of the Exchange Act). Yes X No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 6,087,287 shares of common
stock, par value $.01 per share, as of June 30, 2004.
18
INDEX TO REPORT
FIRST UNITED CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2004 (unaudited) and December
31, 2003
Consolidated Statements of Income (unaudited) - for the three months
and six months ended June 30, 2004 and 2003
Consolidated Statements of Cash Flows (unaudited) - for the six months
ended June 30, 2004 and 2003
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
PART I. FINANCIAL INFORMATION
FIRST UNITED CORPORATION
Consolidated Balance Sheets
(In thousands, except per share amounts)
June 30, December 31,
2004 2003
(unaudited)
--------------- --------------
Assets
Cash and due from banks $19,922 $20,272
Federal funds sold - -
Interest-bearing deposits in banks 1,977 1,474
Investment securities available-for-sale (at market value) 203,562 223,615
Federal Home Loan Bank stock, at cost 8,425 8,660
Loans 863,170 792,025
Allowance for loan losses
(6,270) (5,974)
--------------- --------------
Net loans 856,900 786,051
Premises and equipment, net 20,492 16,598
Goodwill and other intangible assets 15,428 15,462
Accrued interest receivable and other assets 38,198 36,109
--------------- --------------
Total Assets $1,164,904 $1,108,241
=============== ==============
Liabilities and Shareholders' Equity
Liabilities:
Non-interest bearing deposits $106,807 $ 99,181
Interest-bearing deposits 662,913 650,980
--------------- --------------
Total deposits 769,720 750,161
Short-term borrowings 83,361 71,840
Long-term borrowings 219,145 191,735
Accrued interest and other liabilities 7,321 9,220
Dividends payable 1,095 1,094
--------------- --------------
--------------- --------------
Total Liabilities 1,080,642 1,024,050
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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 6,087 shares at June
30, 2004 and December 31, 2003
61 61
Surplus 20,324 20,324
Retained earnings 64,715 62,201
Accumulated other comprehensive (loss) income (838) 1,605
--------------- --------------
--------------- --------------
Total Shareholders' Equity 84,262 84,191
--------------- --------------
--------------- --------------
Total Liabilities and Shareholders' Equity $1,164,904 $1,108,241
=============== ==============
3
FIRST UNITED CORPORATION
Consolidated Statement of Income
(in thousands, except per share data)
Six Months Ended June 30,
2004 2003
-------------- --------------
(unaudited)
Interest income
Loans, including fees $ 25,795 $ 24,404
Investment securities:
Taxable 3,016 3,568
Exempt from federal income tax 642 727
-------------- --------------
3,658 4,295
Federal funds sold 1 12
-------------- --------------
Total interest income 29,454 28,711
Interest expense
Deposits 5,432 6,632
Short-term borrowings 393 162
Long-term borrowings 5,524 5,202
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Total interest expense 11,349 11,996
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Net interest income 18,105 16,715
Provision for loan losses 784 339
-------------- --------------
Net interest income after provision for
loan losses 17,321 16,376
Other operating income
Service charges on deposit accounts 1,903 1,446
Trust department income 1,400 1,270
Security gains 701 337
Insurance premium income 702 603
Other income 1,739 1,923
-------------- --------------
Total other operating income 6,445 5,579
Other operating expenses
Salaries and employees benefits 8,547 7,838
Occupancy, equipment and data processing 2,874 2,383
Other expense 5,208 3,689
-------------- --------------
Total other operating expenses 16,629 13,910
-------------- --------------
Income before income taxes 7,137 8,045
Applicable income taxes 2,428 2,274
-------------- --------------
Net income $4,709 $5,771
============== ==============
Earnings per share $ .77 $ .94
============== ==============
Dividends per share $ .36 $ .35
============== ==============
4
FIRST UNITED CORPORATION
Consolidated Statement of Income
(in thousands, except per share data)
Three Months Ended June 30,
2004 2003
-------------- --------------
(unaudited)
Interest income
Loans, including fees $ 13,067 $ 12,271
Investment securities:
Taxable 1,485 1,830
Exempt from federal income tax 301 363
------------- --------------
1,786 2,193
Federal funds sold - 7
------------- --------------
Total interest income 14,853 14,471
Interest expense
Deposits 2,694 3,165
Short-term borrowings 193 76
Long-term borrowings 2,969 2,609
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Total interest expense 5,856 5,850
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Net interest income 8,997 8,621
Provision for loan losses 739 (317)
-------------- --------------
Net interest income after provision
for loan losses 8,258 8,938
Other operating income
Service charges on deposit accounts 983 732
Trust department income 700 635
Security gains (losses) 27 (192)
Insurance premium income 394 289
Other income 900 1,045
-------------- --------------
Total other operating income 3,004 2,509
Other operating expenses
Salaries and employees benefits 4,294 3,792
Occupancy, equipment and data processing 1,404 1,191
Other expense 2,535 1,818
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Total other operating expenses 8,233 6,801
-------------- --------------
Income before income taxes 3,029 4,646
Applicable income taxes 1,032 1,325
-------------- --------------
Net income $1,997 $3,321
============== ==============
Earnings per share $ .33 $ .54
============== ==============
Dividends per share $ .18 $ .18
============== ==============
5
FIRST UNITED CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended
June 30,
2004 2003
----------- ---------
(unaudited)
Operating activities
Net Income $ 4,709 $ 5,771
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 784 339
Depreciation 1,130 1,014
Amortization of intangible assets 279 -
Net amortization (accretion) of 734 (998)
investment security discounts and
premiums
Gain on sale of investment securities (337)
(701)
(Increase) decrease in accrued interest
receivable and other assets (566) 778
(Decrease) increase in accrued interest
and other liabilities (1,897) 5,539
Increase in bank owned life insurance value (317) (465)
-------------------- -----------------
Net cash provided by operating activities 4,155 11,641
Investing activities
Net increase in interest-bearing deposits in banks (503) (2,016)
Proceeds from maturities and sales of
investment securities available-for-sale 64,279 208,110
Purchases of investment securities available-for-sale (47,921) (199,440)
Net increase in loans (71,634) (47,223)
Purchases of premises and equipment (5,024) (1,782)
-------------------- -----------------
Net cash used in investing activities (60,803) (42,351)
Financing activities
Net increase (decrease) in short-term borrowings 11,521 (11,834)
Proceeds from issuance of junior subordinated debentures 30,929 --
Net decrease in other long-term borrowings (3,519) (3,518)
Net increase in deposits 19,559 56,340
Cash dividends paid (2,192) (2,115)
Proceeds from issuance of common stock -- 125
-------------------- -----------------
Net cash provided by financing activities 56,298 38,998
-------------------- -----------------
Cash and cash equivalents at beginning of the year 20,272 18,242
Increase/(decrease) in cash and cash equivalents (350) 8,288
-------------------- -----------------
Cash and cash equivalents at end of period $ 19,922 $ 26,530
==================== =================
6
FIRST UNITED CORPORATION
Notes to Unaudited Consolidated Financial Statements
June 30, 2004
Note A -- Basis of Presentation
The accompanying unaudited consolidated financial statements of First
United Corporation (the "Corporation") and its consolidated subsidiaries have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all
the information and footnotes required for complete financial statements. In the
opinion of management, all adjustments considered necessary for a fair
presentation, consisting of normal recurring items, have been included.
Operating results for the three and six month periods ended June 30, 2004 are
not necessarily indicative of the results that may be expected for a full year
or for any other interim period. These consolidated financial statements should
be read in conjunction with the audited consolidated financial statements and
footnotes thereto included in the Corporation's Annual Report on Form 10-K for
the year ended December 31, 2003. For purposes of comparability, certain prior
period amounts have been reclassified to conform to the current period
presentation.
Note B - Earnings per Share
Earnings per share are based on the weighted average number of shares
of common stock outstanding of 6,087,287 for the three- and six-month periods
ended June 30, 2004 and 6,085,890 for the three- and six-month periods ended
June 30, 2003. The Corporation does not have any common stock equivalents.
Note C - Comprehensive Income
Unrealized gains and losses on investment securities available-for-sale
are the only items included in accumulated other comprehensive income. Total
comprehensive income (which consists of net income plus the change in unrealized
gains (losses) on investment securities available-for-sale, net of taxes and
reclassification adjustments) was $2.3 and $6.4 million for the six months ended
June 30, 2004 and 2003, respectively.
Note D - Junior Subordinated Debentures
The Corporation has issued approximately $54.6 million of junior
subordinated debentures. Approximately $23.7 million of this amount was issued
to First United Capital Trust, a Delaware business trust ("Capital Trust"), in
1999, $20.6 million was issued in March 2004 to First United Statutory Trust I,
a Connecticut statutory trust ("FUST I"), and $10.3 million was issued in March
2004 to First United Statutory Trust II, also a Connecticut statutory trust
("FUST II") (all trusts collectively, the "Trusts"). These borrowed funds
represent the proceeds from the issuance of a like amount of trust preferred
securities by the Trusts.
In accordance with the provisions of FIN 46, the Trusts are not
consolidated with the Corporation for financial reporting purposes, and their
financial positions and results of operations are not included in our
consolidated financial position and results of operations. Despite this
deconsolidation, the Federal Reserve Board continues to permit up to 25% of the
Corporation's Tier I capital to be comprised of, together with other cumulative
preferred stock, trust preferred securities issued by the Corporation's
deconsolidated subsidiaries.
On August 4, 2004, the Corporation elected to redeem all of the 9.375%
Junior Subordinated Deferrable Interest Debentures that it issued to Capital
Trust. The date of redemption will be September 30, 2004. Management anticipates
that this redemption, which will require Capital Trust to redeem an equal amount
of its trust preferred securities, will reduce our total capital by
approximately $23.0 million.
7
Note E - Internal Restructurings
On May 14, 2004, First United Bank & Trust, a Maryland trust company
and the Corporation's wholly-owned subsidiary (the "Bank"), completed its
publicly-announced restructuring by liquidating First United Securities, Inc., a
Delaware corporation and subsidiary of the Bank that held and managed a portion
of our investment portfolio. This liquidation follows the Bank's liquidation on
February 28, 2004 of another subsidiary, First United Capital Investments, Inc.
("FUCI").
Primarily as of result of these restructurings, the Corporation's
effective tax rate increased to 34% for the first six months of 2004, as
compared to 28% for the first six months of 2003 and 30% for the year ended
December 31, 2003.
Note F - Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
Loan commitments are made to accommodate the financial needs of our
customers. Letters of credit commit us to make payments on behalf of customers
when certain specified future events occur. These obligations are not recorded
in the Corporation's financial statements. The credit risks inherent in loan
commitments and letters of credit are essentially the same as those involved in
extending loans to customers, and these arrangements are subject to our normal
credit policies. The Corporation's exposure to credit loss in the event the
customer does not satisfy the terms of these arrangements equals the notional
amount of the obligation less the value of any collateral. Loan commitments and
letters of credit totaled $89 million and $.7 million, respectively, at June 30,
2004. The Corporation is not party to any other off-balance sheet arrangements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
INTRODUCTION
The following discussion and analysis is intended as a review of
significant factors affecting the financial condition and results of operations
of First United Corporation and its consolidated subsidiaries for the periods
indicated. This discussion and analysis should be read in conjunction with the
unaudited consolidated financial statements and the notes thereto presented
herein. Unless the context clearly suggests otherwise, references to "us", "we",
"our", or "the Corporation" in this report are to First United Corporation and
its consolidated subsidiaries.
FORWARD-LOOKING STATEMENTS
This report may contain forward-looking statements within the meaning
of The Private Securities Litigation Reform Act of 1995. Readers of this report
should be aware of the speculative nature of "forward-looking statements."
Statements that are not historical in nature, including those that include the
words "anticipate," "estimate," "should," "expect," "believe," "intend," and
similar expressions, are based on current expectations, estimates and
projections about, among other things, the industry and the markets in which we
operate, and they are not guarantees of future performance. Whether actual
results will conform to expectations and predictions is subject to known and
unknown risks and uncertainties, including risks and uncertainties discussed in
this report; general economic, market, or business conditions; changes in
interest rates, deposit flow, the cost of funds, and demand for loan products
and financial services; changes in our competitive position or competitive
actions by other companies; changes in the quality or composition of our loan
and investment portfolios; our ability to manage growth; changes in laws or
regulations or policies of federal and state regulators and agencies; and other
circumstances beyond our control. Consequently, all of the forward-looking
statements made in this 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
our business or operations. These and other risk factors are discussed in detail
in Exhibit 99.1 to our Annual Report on Form 10-K for the year ended December
31, 2003. Except as required by applicable laws, we do not intend to publish
updates or revisions of any forward-looking statements we make to reflect new
information, future events or otherwise.
8
THE COMPANY
We are a Maryland corporation that was incorporated in 1985. We are
registered as both a financial holding company and a bank holding company under
the federal Bank Holding Company Act of 1956, as amended. Our primary business
activity is acting as the parent company of the Bank, Oakfirst Life Insurance
Company, an Arizona reinsurance company, OakFirst Loan Center, Inc., a West
Virginia finance company, OakFirst Loan Center, LLC, a Maryland finance company,
and the Trusts. OakFirst Loan Center, Inc. has one subsidiary, First United
Insurance Agency, Inc., which is a Maryland insurance agency. The Bank has three
direct subsidiaries: Gonder Insurance Agency, Inc., a Maryland full service
insurance agency; First United Investment Trust, a Maryland real estate
investment trust that invests in mortgage loans (the "Investment Trust"); and
First United Auto Finance, LLC, an inactive indirect automobile leasing limited
liability company.
We maintain an Internet site at www.mybankfirstunited.com on which we
make available, free of charge, our Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, and Current Reports on Form 8-K, beneficial ownership
reports filed by insiders, and all amendments to the foregoing on our Internet
site as soon as reasonably practicable after these reports are electronically
filed with, or furnished to, the SEC.
RECENT DEVELOPMENTS
On May 14, 2004, the Bank completed its previously announced
restructuring initiative by liquidating First United Securities, Inc. For
additional information, see Note E to the consolidated financial statements
above.
On August 4, 2004, the Corporation elected to redeem all of the
outstanding 9.375% Junior Subordinated Deferrable Interest Debentures that it
issued to Capital Trust in 1999. The date set for redemption is September 30,
2004. For additional information, see Note D to the consolidated financial
statements above.
SELECTED FINANCIAL DATA
Selected financial data relating to the Corporation's results of
operations and financial condition is listed below. This data should be read in
conjunction with the unaudited consolidated financial statements and
management's discussion and analysis that follows.
At or For the Six Months
Ended June 30,
------------------------
2004 2003
Per Share Data
Net Income $ .77 $ .94
Dividends Paid .36 .35
Book Value 13.84 13.74
Significant Ratios
Return on Average Assets (a) .83% 1.19%
Return on Average Equity (a) 11.10% 14.36%
Dividend Payout Ratio 46.54 36.91
Average Equity to Average Assets 7.49 8.02
Note: (a) Annualized
9
RESULTS OF OPERATIONS
Overview
Net income for the first six months of 2004 totaled $4.7 million or
$.77 per share, compared to $5.8 million or $.94 per share for the same period
of 2003. This is a net income and earnings per share decrease of 19%. Net income
for the second quarter of 2004 was $2.0 million, or $.33 per share, compared to
$3.3 million, or $.54 per share, for the second quarter of 2003. The three- and
six-month comparison decrease, primarily resulted from a combination of the tax
effect of our recent internal restructurings, including the May 14, 2004
previously announced liquidation of First United Securities, Inc., and the March
2004 issuance of approximately $31 million of junior subordinated debentures.
Our performance ratios for the first six months of 2004 have decreased
when compared to the same period of last year. This decrease is a result of
lower earnings. Annualized Returns on Average Equity ("ROAE") were 11.10% and
14.36% for the six-month periods ended June 30, 2004 and 2003, respectively.
Annualized Returns on Average Assets ("ROAA") were .83% and 1.19% for the first
six months of 2004 and 2003, respectively.
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 incurred on interest-bearing liabilities. For
analytical and discussion purposes, net interest income is adjusted to a taxable
equivalent basis to facilitate 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. The following table sets forth the average
balances, net interest income and expense, and average yields and rates of our
interest-earning assets and interest-bearing liabilities for the six months
ended June 30, 2004 and 2003.
Six Months Ended June 30,
2004 2003
Average Average Average Average
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
- -------------------------------------------- ------------- ----------- ---------- -- ------------- ---------- ---------
Interest-Earning Assets:
Loans $ 818,318 $ 25,829 6.31% $675,813 $ 24,452 7.24%
Investment securities 214,650 3,840 3.58 223,881 4,426 3.95
Other interest earning assets 15,173 165 2.17 20,659 264 2.56
------------------------------------ ----------------------------------
Total earning assets $ 1,048,141 29,834 5.69% $920,353 29,142 6.33%
============= ==========
Interest-bearing liabilities
Interest-bearing deposits $ 680,330 5,432 1.60 575,594 6,632 2.30
Short-term borrowings 74,948 393 1.05 41,220 162 . 79
Long-term borrowings 205,371 5,524 5.38 197,946 5,202 5.26
------------------------------------ ----------------------------------
Total interest-bearing liabilities $ 960,649 11,349 2.36 814,760 11,996 2.94
Net interest income and spread $18,485 3.33% $ 17,146 3.39%
Net interest margin 3.53% 3.73%
Note: Interest income and yields are presented on a fully tax equivalent basis using a 35% tax rate.
10
Net interest income, on a fully tax-equivalent basis, increased $1.3
million (8%) during the first six months of 2004 when compared to the same
period in 2003. The increase in interest income resulted from an increase in
average interest-earning assets of $128 million (14%) during the first six
months of 2004, which was partially offset by a 64 basis point decline in yield
on such earning assets. The greater part of the growth in average loans and
average earning assets is attributable to strong demand in our core markets, and
the remaining one-third is attributable to the acquisition of certain branches
from The Huntington National Bank in July 2003. Although average
interest-bearing liabilities increased $146 million (18%) during the first six
months of 2004, a 20% decrease in the effective rate of these interest-bearing
liabilities of 58 basis points resulted in a net decrease in interest expense of
$.6 million. Almost all of the growth in average interest-bearing deposits is
attributable to the Huntington branch acquisition.
For the Quarter Ended June 30,
2004 2003
Average Average Average Average
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------- ---------
Interest-Earning Assets:
Loans $ 832,293 $ 13,084 6.29% $ 687,846 $ 12,297 7.15%
Investment securities 199,627 1,863 3.73 221,166 2,262 4.09
Other interest earning assets 19,255 84 1.75 21,375 134 2.51
------------------------------------ ----------------------------------
Total earning assets $ 1,051,175 15,031 5.72% 930,387 14,693 6.32%
============= =============
Interest-bearing liabilities
Interest-bearing deposits $ 701,403 2,694 1.54 588,438 3,165 2.15
Short-term borrowings 72,784 193 1.06 40,324 76 .75
Long-term borrowings 219,697 2,969 5.41 196,941 2,609 5.30
------------------------------------ -------------------------------
Total interest-bearing liabilities $ 993,884 5,856 2.36 $ 825,703 5,850 2.83
============= ----------- ============= ----------
$ 9,175 3.36% 8,843 3.48
=========== ==========
Net interest margin 3.49% 3.80%
Note: Interest income and yields are presented on a fully tax equivalent basis
using a 35% tax rate.
Net interest income, on a fully tax-equivalent basis, increased $.3
million in the second quarter of 2004 when compared to the second quarter of
2003. This increase resulted from a $.3 million increase in interest income
during the period, coupled with no change in interest expense. The increase in
interest income resulted from an increase in average interest-earning assets of
$121 million (13%) during the second quarter of 2004 when compared to second
quarter of 2003, which was partially offset by a 60 basis point decline in yield
on such earning assets. The greater part of the growth in average loans and
average earning assets is attributable to strong demand in our core markets and
is also attributable to the loans attained in the Huntington branch acquisition.
Average interest-bearing liabilities increased $168 million (20%) during the
second quarter of 2004 when compared to the second quarter of 2003. However, a
17% decrease in the effective rate of these interest-bearing liabilities of 47
basis points resulted in interest expense remaining unchanged. As stated
previously, almost all of the growth in average interest-bearing deposits is
attributable to the Huntington branch acquisition. Our ability to realize
substantial net interest income during the second quarter of 2004 was hindered
by the decline in the net-interest margin of 31 basis points.
11
Other Operating Income
Other operating income increased $.9 million (16%) during the first six
months of 2004 when compared to the same period for 2003. Service charges on
deposit accounts, which primarily are fees associated with renewed concentration
on an overdraft protection product, accounted for approximately half of this
increase. Also, trust income increased a little over $.1 million (10%) during
the first six months of 2004 when compared to the same time period of last year.
During the first six months of 2004, net securities gains increased $.4 million
when compared to the same period in 2003. During the first six months of 2003,
net securities gains included a write down and an ultimate sale in Freddie Mac
Preferred equity securities exhibiting other-than-temporary impairment,
contributing a combined $.6 million loss to net securities gains of $.3 million.
For the second quarter of 2004, other operating income increased $.5
million when compared to the second quarter of 2003. Service charges on deposit
accounts, attributable to our overdraft protection program, also accounted for
half of this increase. Trust income increased $.06 million (10%), during the
second quarter of 2004 when compared to the same time period of last year. Also,
insurance premium income increased $.1 million during the second quarter of
2004, which was attributable primarily to strong insurance sales. Management
intends to continue its focus on the growth of our insurance operations for the
foreseeable future.
Other Operating Expense
Other operating expense for the first six months of 2004 increased $2.7
million (20%) when compared to the same period of 2003. For the second quarter
of 2004, other operating expenses increased $1.4 million when compared to the
second quarter of 2003. Salaries and employee benefits represent slightly more
than half of total other operating expenses. Compared to the same periods of
2003, salaries and employee benefits increased $.7 million (9%) and $.5 million
(13%) during the first six months and second quarter of 2004, respectively. This
increase is attributable to the addition of employees that are necessary to
support our growth objectives, including additional personnel added as a result
of the Huntington branch acquisition.
Occupancy and equipment expense for the first six months and second
quarter of 2004 increased $.5 million (21%) and $.2 million (18%), respectively,
when compared to the same time periods of 2003. These increases are principally
due to branch expansion associated with the Huntington branch acquisition and
the opening of our new Edwin Miller branch. Also, maintenance contracts
associated with our new bank-wide security system contributed to the increase.
Other expenses for the first six months and second quarter of 2004
increased $1.5 million (41%) and $.7 million (39%), respectively, when compared
to the same periods of 2003. These increases resulted from increased
professional fees associated with compliance with the Sarbanes-Oxley Act,
conversion of network lines associated with branch expansion and modernization,
and amortization of core deposit intangible assets resulting from the Huntington
branch acquisition.
Applicable Income Taxes
Income tax expense for the three and six months ended June 30, 2004 was
$ 1.0 million and $2.4 million, respectively, compared to $ 1.3 million and $2.3
million for the same periods in 2003. The effective tax rate for the three- and
six-month periods ended June 30, 2004 increased to 34%, as compared to 28% for
the same periods in 2003 and 30% for the year ended December 31, 2003. These
increases are primarily attributable to our internal restructurings discussed in
Note D. The resulting increase in our effective tax rate has increased tax
expense by approximately $.4 million and $.2 million for the six and three
months ended June 30, 2004, respectively.
FINANCIAL CONDITION
Balance Sheet Overview
Our total assets reached $1.2 billion at June 30, 2004, representing an
increase of $57 million (5%) from December 31, 2003. The main source of this
increase was a $71 million increase in our loan portfolio, offset by a $20
million decrease in our investment portfolio, which was primarily to fund the
aforementioned loan growth. Net premises and equipment increased $4 million. The
majority of this increase is attributable
12
to the acquisition of real estate that management intends to use for expansion
of the Bank's branch network over the next three years.
Our total liabilities reached $1.1 billion at June 30, 2004,
representing an increase of $56 million (5.5%) from December 31, 2003. Total
deposits increased $20 million when compared to 2003 year-end. This increase is
a result of the purchase of brokered certificates of deposit during the first
six months of the 2004 to fund loan growth. Short-term borrowings increased $11
million when compared to 2003 year-end, predominantly from the increase in our
"Cash Management" program. For the six-month period ended June 30, 2004,
long-term borrowings increased $27 million, primarily from the issuance of
approximately $31 million of junior subordinated debentures in March 2004, as
discussed above in Note D to the consolidated financial statements.
Loan Portfolio
The following table presents the composition of our loan portfolio at
the dates indicated:
(Dollars in millions) June 30, 2004 December 31, 2003
- -------------------------------------------------------------------------
Commercial $ 344.6 40% $ 307.5 39%
Residential-Mortgage 290.5 34 264.7 33
Installment 212.1 25 201.4 26
Residential-Construction 14.8 1 16.1 2
Lease Financing 1.2 - 2.3 --
------- ---- -------- ---
Total Loans $ 863.2 100% $ 792.0 100%
======= ===== ======== =====
During the first six months of 2004, our loan portfolio grew $71
million (9%). The key contributors to this growth were $37 million in commercial
loans and $26 million in residential mortgage loans. Existing customer
relationships in our core markets are responsible for much of the commercial
loan growth during the period, and management intends to continue its focus on
commercial lending operations for the foreseeable future. Installment loans,
specifically indirect loans, increased $11 million during the first six months
of 2004 when compared to December 31, 2003.
Our residential-mortgage portfolio grew 10% during the first six months
of 2004. This growth is attributable primarily to our competitively priced
adjustable rate mortgage products, which are marketed as an alternative to the
fixed rates offered in the secondary market. This strategy should aid us in a
rising rate environment.
Risk Elements of Loan Portfolio
The following table presents the risk elements of our loan
portfolio at the dates indicated. We have no knowledge of any potential problem
loans other than those listed in this table.
June 30, December 31,
(Dollars in thousands) 2004 2003
- ------------------------------------------------------------------------------
Non-accrual loans $ 5,347 2,774
Accruing loans past due 90 days or more 1,354 1,236
------- ------
Total $ 6,701 $4,010
======= ======
Total as a percentage of total loans .78% .51%
======= ======
Allowance and Provision for Loan Losses
The allowance for loan losses is based on our continuing evaluation of
the quality of the loan portfolio, assessment of current economic conditions,
diversification and size of the portfolio, adequacy of collateral, past and
anticipated loss experience, and the amount of non-performing loans. We utilize
the methodology outlined in the FDIC Statement of Policy on Allowance of Loan
and Lease Losses. To
13
determine an appropriate allowance, we first segregate the loan portfolio into
two pools, non-homogeneous (i.e. commercial) and homogeneous (i.e. consumer)
loans. Each loan pool is then analyzed with general allowances and specific
allocations being made as appropriate. For general allowances, historical loss
activity, modified by current qualitative factors, are used in the estimate of
losses in the current portfolio. Specific allocations are considered for
individual loans that are identified in our internal grading system as those
which possess certain qualities or characteristics that may lead to collection
and loss issues.
The following table presents a summary of the activity in the allowance
for loan losses for the six months ended June 30 (dollars in thousands):
2004 2003
-------- --------
Balance, January 1 $ 5,974 $ 6,068
Gross credit losses (770) (855)
Recoveries 282 233
-------- --------
Net credit losses (489) (622)
-------- --------
Provision for loan losses 784 339
-------- --------
Balance at end of period $ 6,270 $ 5,785
======== ========
Allowance for Loan Losses to loans outstanding .73% .81%
======== ========
Net charge-offs to average loans outstanding
during the period, annualized .12% .18%
======== ========
Although the balance of our total loans increased $71 million during
the first six months of 2004, our annualized net charge off experience relative
to total average loans outstanding declined to .12% for this period, as compared
to .18% for the first six months of 2003 and .17% for the year ended December
31, 2003.
Net charge offs relating to the installment loan portfolio represent
the majority of total net charge-offs for the first six months of 2004.
Generally, installment loans are charged off after they are 120 days
contractually past due. The quality of the installment loan portfolio has
improved, as loans past due 30 days or more were $2.3 million or 1.08% of the
installment portfolio at June 30, 2004. This compares favorably to $2.7 million
or 1.41% at December 31, 2003 and $2.5 million or 1.41% at June 30, 2003.
This improvement in installment loan delinquencies, as well as our
overall loss experience, was considered in management's assessment of the
allowance for loan losses. However, countering this improvement was a $2.6
million increase in non-accrual loans for the second quarter of 2004, which was
the result of the addition of two agriculture loans to non-accrual status. Our
exposure to these relationships has been appropriately considered in determining
the adequacy of the allowance for loan losses. As a result of management's
evaluation of the loan portfolio using the factors and methodology summarized
above, the allowance for loan losses increased slightly to $6.3 million at June
30, 2004, compared to $6.0 million at December 31, 2003. Management believes
that the allowance for loan losses at June 30, 2004 is adequate to absorb the
probable loan losses inherent in the loan portfolio.
The provision for loan losses was $.8 million for the first six months
of 2004, as compared to $.3 million for the same period of 2003. The provision
for the second quarter of 2004 was $.7 million, as compared to a credit of $.3
million for the second quarter of 2003. Amounts to be recorded for the provision
for loan losses in future periods will depend upon trends in the loan balances,
including the composition of the loan portfolio, changes in loan quality and
loss experience trends, potential recoveries on previously charged-off loans,
and other factors that would have an impact on inherent losses in the loan
portfolio.
14
Investment Securities
At June 30, 2004, our entire investment securities portfolio was
categorized as available-for-sale and carried at market value. The following
table presents the composition of our securities portfolio at the dates
indicated:
(Dollars in millions) June, 30 2004 December 31, 2003
- ------------------------------------------------------------ -------------------
U.S. government and agencies $ 85.3 42% $ 75.7 34%
Mortgage-backed securities 81.3 40 89.1 40
Obligations of states and
political subdivisions 24.4 12 29.3 13
Corporate and other debt securities 12.6 6 18.3 8
Other securities - - 11.2 5
Total Investment Securities $ 203.6 100% $223.6 100%
======= ==== ====== ====
The decrease in our securities portfolio during the first six months of
2004 was primarily attributable to the utilization of securities to fund rapid
loan growth during the period.
Deposits
The following table presents the composition of our deposits at the
dates indicated:
(Dollars in millions) June, 30 2004 December 31, 2003
- ---------------------------------------------------------- -------------------
Noninterest-bearing demand deposits $ 106.8 14% $ 99.2 13%
Interest-bearing demand deposits 261.2 34 254.1 34
Savings deposits
61.0 8 65.1 8 61.0 8
Time deposits less than $.1 193.0 25 218.4 29
Time deposits $.1 or more 143.6 19 117.5 16
Total Deposits $ 769.7 100% $750.2 100%
======= ==== ====== ====
Deposits grew less than 3% during the first six months of 2004 when
compared to December 31, 2003. This increase is attributable to an increase in
brokered certificates of deposit of $100,000 or more. Brokered certificates of
deposit were purchased in order to fund the rapid loan growth during the period.
Borrowed Funds
The following table presents the composition of our borrowings at the
dates indicated:
(In millions) June 30, 2004 December 31, 2003
- --------------------------------------------------------------------------------
Federal funds purchased $ 9.0 $ 5.8
Securities sold under agreements
to repurchase 74.4 66.0
------- ------
Total short-term borrowings $ 83.4 71.8
======= ======
FHLB advances $ 164.5 $168.0
Junior subordinated debt 54.6 23.7
------- ------
Total long-term borrowings $ 219.1 $ 191.7
======= ======
In March 2004, we issued approximately $31 million of junior
subordinated debentures to FUST I and FUST II. We intend to use some of these
borrowings to redeem $23.7 million of the junior subordinated debentures issued
to Capital Trust on September 30, 2004. Management anticipates that we will have
to
15
expense approximately $.9 million of pretax unamortized issuance costs as a
result of this redemption. Using the blended initial weighted average rate of
the trust preferred securities recently issued by FUST I and FUST II, management
believes that it would take approximately 12 months of interest savings to
offset this expense. For further information about our debentures, the trust
preferred securities, and the planned redemption, see Note D to the consolidated
financial statements above.
Liquidity and Capital
We derive liquidity through increased customer deposits, maturities in
the investment portfolio, loan repayments and income from earning assets. To the
extent that deposits are not adequate to fund customer loan demand, liquidity
needs can be met in the short-term funds markets through arrangements with our
correspondent banks or through the purchase of brokered certificates of deposit.
The Bank is also a member of the Federal Home Loan Bank of Atlanta, which
provides another source of liquidity. Finally, as evidenced by the issuance of
the trust preferred securities as discussed above in Note D to the consolidated
financial statements, we may from time to time access capital markets to meet
some of our liquidity needs. Management knows of no known trends or demands,
commitments, events or uncertainties that will materially affect our ability to
maintain liquidity at satisfactory levels.
The following table presents our capital ratios at June 30, 2004:
For
Capital To Be
Adequacy Well
Actual Purposes Capitalized
- --------------------------------------------------------------------------------
Total Capital (to risk-weighted assets) 14.80% 8.00% 10.00%
Tier 1 Capital (to risk-weighted assets) 11.25 4.00 6.00
Tier 1 Capital (to average assets) 8.62 3.00 5.00
We are categorized as "well capitalized" under federal banking
regulatory capital requirements. Management anticipates that the redemption on
September 30, 2004 of our junior subordinated debentures issued to Capital
Trust, which in turn will require Capital Trust to redeem an equal amount of its
trust preferred securities, will reduce our total capital by approximately $23.0
million. If this redemption had occurred on June 30, 2004, and assuming no other
changes, we estimate that our total capital ratio would have been 12.16% at June
30, 2004, with no material impact on the ratio of Tier 1 capital to
risk-weighted assets or the ratio of Tier 1 capital to average assets.
We paid a cash dividend of $.18 per share on May 1, 2004. On June 16,
2004, we declared another dividend of an equal amount, to be paid on August 1,
2004 to stockholders of record at July 16, 2004.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our primary market risk is interest rate fluctuation and we have
procedures in place to evaluate and mitigate these risks. This market risk and
our procedures are described in our Annual Report on Form 10-K for the year
ended December 31, 2003 under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operation - Interest Rate Sensitivity".
Management believes that no material changes in our market risks or in the
procedures used to evaluate and mitigate these risks have occurred since
December 31, 2003.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our reports filed under the
Securities Exchange Act of 1934 with the SEC, such as this Quarterly Report, is
recorded, processed, summarized and reported within the time periods specified
in those rules and forms, and that such information is accumulated and
communicated to our management, including the Chief Executive Officer ("CEO")
and the Chief Financial Officer ("CFO"), as appropriate, to allow for timely
decisions regarding required disclosure. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system
16
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake. Additionally, controls can be circumvented
by the individual acts of some persons, by collusion of two or more people, or
by management override of the control. The design of any system of controls 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.
An evaluation of the effectiveness of these disclosure controls as of
June 30, 2004 was carried out under the supervision and with the participation
of our management, including the CEO and the CFO. Based on that evaluation,
management, including the CEO and the CFO, has concluded that our disclosure
controls and procedures are effective.
During the second quarter of 2004, there was no change in our internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
First United Corporation's annual meeting of stockholders was held on
April 27, 2004. At this meeting, the stockholders elected five individuals to
serve as directors until the 2007 annual meeting of stockholders and until their
successors are duly elected and qualify. The Corporation submitted the matter to
a vote through solicitation of proxies. The results of the elections are as
follows:
Class III (Term expires 2007) FOR AGAINST ABSTAINED BROKER NON-VOTES
01 Karen F. Myers 4,101,960 15,522 N/A N/A
02 I. Robert Rudy 4,095,220 22,262 N/A N/A
03 James F. Scarpelli, Sr. 4,094,181 23,301 N/A N/A
04 Richard G. Stanton 3,728,810 388,672 N/A N/A
05 Robert G. Stuck 4,058,940 58,542 N/A N/A
Item 5. Other Information
On May 14, 2004, the Bank completed its previously announced
restructuring initiative by liquidating First United Securities, Inc., which
held and managed a portion of our investment portfolio. In the future, these
investment activities will be conducted through the Bank. For additional
information, see Note E to the consolidated financial statements above.
On August 4, 2004, the Corporation elected to redeem all of the
outstanding 9.375% Junior Subordinated Deferrable Interest Debentures that it
issued to Capital Trust in 1999. The date set for
17
redemption is September 30, 2004. For additional information, see Note D to the
consolidated financial statements above.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits filed or furnished with this quarterly report are
listed in the Exhibit Index that follows the signatures, which
index is incorporated herein by reference.
(b) Reports on Form 8-K
On April 27, 2004, we furnished statements made by management at
the 2004 annual meeting of stockholders in Item 9 of a Current
Report on Form 8-K.
On May 7, 2004, we furnished results of operations for the
first three months of 2004 in Item 12 of a Current Report on
Form 8-K.
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST UNITED CORPORATION
Date: August 4, 2004 /s/ William B. Grant
----------------------------------------
William B. Grant, Chairman of the Board
and Chief Executive Officer
Date August 4, 2004 /s/ Robert W. Kurtz
----------------------------------------
Robert W. Kurtz, President and Chief
Financial Officer
18
EXHIBIT INDEX
Exhibit Description
3.1 Amended and Restated Articles of Incorporation (incorporated by
reference to Exhibit 3.1 of the Corporation's Quarterly Report on Form
10-Q for the period ended June 30, 1998)
3.2 Amended and Restated By-Laws (incorporated by reference to Exhibit
3(ii) of the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1997)
10.1 First United Bank & Trust Supplemental Executive Retirement Plan
("SERP") (incorporated by reference to Exhibit 10.1 of the
Corporation's Quarterly Report on Form 10-Q for the period ended June
30, 2003)
10.2 Form of SERP Participation Agreement between the Bank and each of
William B. Grant, Robert W. Kurtz, Jeannette R. Fitzwater, Phillip D.
Frantz, Eugene D. Helbig, Jr., Steven M. Lantz, Robin M. Murray,
Frederick A. Thayer, IV (incorporated by reference to Exhibit 10.2 of
the Corporation's Quarterly Report on Form 10-Q for the period ended
June 30, 2003)
10.3 Endorsement Split Dollar Agreement between the Bank and William B.
Grant (incorporated by reference to Exhibit 10.3 of the Corporation's
Quarterly Report on Form 10-Q for the period ended June 30, 2003)
10.4 Endorsement Split Dollar Agreement between the Bank and Robert W.
Kurtz (incorporated by reference to Exhibit 10.4 of the Corporation's
Quarterly Report on Form 10-Q for the period ended June 30, 2003)
10.5 Endorsement Split Dollar Agreement between the Bank and Jeannette R.
Fitzwater (incorporated by reference to Exhibit 10.5 of the
Corporation's Quarterly Report on Form 10-Q for the period ended June
30, 2003)
10.6 Endorsement Split Dollar Agreement between the Bank and Phillip D.
Frantz (incorporated by reference to Exhibit 10.6 of the Corporation's
Quarterly Report on Form 10-Q for the period ended June 30, 2003)
10.7 Endorsement Split Dollar Agreement between the Bank and Eugene D.
Helbig, Jr. (incorporated by reference to Exhibit 10.7 of the
Corporation's Quarterly Report on Form 10-Q for the period ended June
30, 2003)
10.8 Endorsement Split Dollar Agreement between the Bank and Steven M.
Lantz (incorporated by reference to Exhibit 10.8 of the Corporation's
Quarterly Report on Form 10-Q for the period ended June 30, 2003)
10.9 Endorsement Split Dollar Agreement between the Bank and Robin M.
Murray (incorporated by reference to Exhibit 10.9 of the Corporation's
Quarterly Report on Form 10-Q for the period ended June 30, 2003)
10.10 Endorsement Split Dollar Agreement between the Bank and Frederick A.
Thayer, IV (incorporated by reference to Exhibit 10.10 of the
Corporation's Quarterly Report on Form 10-Q for the period ended June
30, 2003)
10.11 First United Corporation Executive and Director Deferred Compensation
Plan (incorporated by reference to Exhibit 10.10 of the Corporation's
Quarterly Report on Form 10-Q for the period ended September 30, 2003)
31.1 Certifications of the CEO pursuant to Section 302 of the
Sarbanes-Oxley Act (filed herewith)
31.2 Certifications of the CFO pursuant to Section 302 of the
Sarbanes-Oxley Act (filed herewith)
32.1 Certification of the CEO pursuant to 18 U.S.C.ss.1350 (furnished
herewith)
32.2 Certification of the CFO pursuant to 18 U.S.C.ss.1350 (furnished
herewith)