FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended June 30, 2001
Commission file number 0-14237
First United Corporation
(Exact name of registrant as specified in its charter)
Maryland 52-1380770
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification no.)
19 South Second Street, Oakland, Maryland 21550-0009
(address of principal executive offices) (zip code)
(301) 334-4715
Registrant's telephone number, including area code
Not applicable
Former name, address and former fiscal year, if changed since
last report.
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter periods that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Common stock, $.01 Par value--6,080,568 shares outstanding as of
June 30, 2001 Preferred stock, No par value--No shares
outstanding as of June 30, 2001.
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INDEX
FIRST UNITED CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2001
(unaudited) and December 31, 2000.
Consolidated Statements of Income (unaudited) - For the three and six
months ended June 30, 2001 and 2000.
Consolidated Statements of Cash Flows (unaudited) - For the six
months ended June 30, 2001 and 2000.
Notes to Unaudited Consolidated Financial Statements.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Item 2. Changes in Securities.
Item 3. Defaults upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
SIGNATURES
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FIRST UNITED CORPORATION
Consolidated Balance Sheets
June 30, December 31
Assets 2001 2000
(unaudited)
--------------------------
(in thousands)
Cash and due from banks $15,805 $15,521
Federal funds sold 6,224 11,400
Interest-bearing deposits in banks 1,645 20,534
Investment securities:
U.S. Treasury Securities and
Obligations of other U.S.
Government Agencies 40,734 74,532
Obligations of State and
Local Government 25,318 19,674
Other investments 80,522 58,652
------------------------
Total investment securities 146,574 152,858
Federal Home Loan Bank stock, at cost 5,950 5,950
Loans and Leases 618,634 614,647
Reserve for possible credit losses (5,144) (5,094)
------------------------
Net loans 613,490 609,553
Bank premises and equipment 11,251 10,831
Accrued interest receivable and other assets 31,661 20,942
------------------------
Total Assets $832,600 $847,589
============================
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FIRST UNITED CORPORATION
Consolidated Balance Sheets
June 30, December 31,
2001 2000
(unaudited)
Liabilities and Shareholders' Equity -----------------------
(in thousands)
Liabilities
Non-interest bearing deposits $ 54,916 $51,339
Interest bearing deposits 557,091 598,638
-----------------------
Total deposits 612,007 649,977
Reserve for taxes, accrued interest, and
other liabilities 13,930 9,105
Federal Home Loan Bank borrowings
and other borrowed funds 137,238 122,000
Dividends payable 1,003 996
-----------------------
Total Liabilities 764,178 782,078
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 June 30,
2001, and December 31, 2000 61 61
Surplus 20,199 20,199
Retained earnings 47,422 45,132
Accumulated comprehensive income 740 119
----------------------
Total Shareholders' Equity 68,422 65,511
----------------------
Total Liabilities and
Shareholders' Equity $832,600 $847,589
======================
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FIRST UNITED CORPORATION
Consolidated Statements Of Income
(in thousands, except per share data) Six Months
Ended June 30,
2001 2000
-------------------
(unaudited)
Interest income
Interest and fees on loans and leases $ 26,829 $ 25,560
Interest on investment securities:
Taxable 4,528 4,631
Exempt from federal income tax 504 663
------------------
5,032 5,294
Interest on federal funds sold 294 92
------------------
Total interest income 32,155 30,946
Interest expense
Interest on deposits:
Savings 225 327
Interest-bearing transaction accounts 2,163 2,441
Time, $100,000 or more 4,016 3,138
Other time 7,501 6,711
Interest on Federal Home Loan Bank
borrowings and other borrowed
funds 4,113 3,956
------------------
Total interest expense 18,018 16,573
------------------
Net interest income 14,137 14,373
Provision for possible credit losses 1,082 1,513
------------------
Net interest income after provision
for possible credit losses 13,055 12,860
Other operating income
Trust department income 1,368 1,000
Service charges on deposit accounts 1,178 1,025
Insurance premium income 508 460
Securities gains (losses) 76 (124)
Other income 1,543 1,200
--------------------
Total other operating income 4,673 3,561
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Other operating expenses
Salaries and employees benefits 6,154 5,579
Occupancy expense of premises 645 539
Equipment expense 897 904
Data processing expense 480 545
Deposit assessments and related fees 88 88
Other expense 3,235 3,186
--------------------
Total other operating expenses 11,499 10,841
--------------------
Income before income taxes 6,229 5,580
Applicable income taxes 1,928 1,773
--------------------
Net income $4,301 $3,807
====================
Earnings per share $0.71 $0.63
====================
Dividends per share $0.33 $0.32
====================
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FIRST UNITED CORPORATION
Consolidated Statements Of Income
(in thousands, except per share data) Three Months
Ended June 30,
2001 2000
-------------------
(unaudited)
Interest income
Interest and fees on loans and leases $ 13,277 $ 13,196
Interest on investment securities:
Taxable 2,194 2,187
Exempt from federal income tax 275 301
--------------------
2,469 2,488
Interest on federal funds sold 105 15
--------------------
Total interest income 15,851 15,699
Interest expense
Interest on deposits:
Savings 110 164
Interest-bearing transaction accounts 865 1,274
Time, $100,000 or more 1,855 1,523
Other time 3,764 3,383
Interest on Federal Home Loan Bank
borrowings and other borrowed
funds 2,061 2,114
--------------------
Total interest expense 8,655 8,458
-------------------
Net interest income 7,196 7,241
Provision for possible credit losses 547 950
--------------------
Net interest income after provision
for possible credit losses 6,649 6,291
Other operating income
Trust department income 662 500
Service charges on deposit accounts 611 516
Insurance premium income 279 280
Securities (losses) 23 (80)
Other income 817 569
--------------------
Total other operating income 2,392 1,785
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Other operating expenses
Salaries and employees benefits 3,072 2,830
Occupancy expense of premises 310 265
Equipment expense 451 467
Data processing expense 239 262
Deposit assessments and related fees 47 53
Other expense 1,642 1,596
--------------------
Total other operating expenses 5,761 5,473
--------------------
Income before income taxes 3,280 2,603
Applicable income taxes 996 797
--------------------
Net income $2,284 $1,806
====================
Earnings per share $0.38 $0.30
====================
Dividends per share $0.165 $0.16
====================
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FIRST UNITED CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months
Ended June 30,
2001 2000
--------------------
(unaudited)
Operating activities
Net Income $ 4,301 $ 3,807
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible credit losses 1,082 1,513
Provision for depreciation 753 787
Net accretion and amortization of investment
security discounts and premiums 63 (14)
Realized (gain) loss on sale of investment
securities (76) 124
Increase in accrued interest and other assets (11,217) (1,425)
Increase in reserve for taxes accrued interest
and other liabilities 4,825 312
--------------------
Net cash (used) provided by operating activities (269) 5,104
Investing activities
Proceeds from maturities of available-for-
sale securities 98,979 150,513
Purchases of available-for-sale securities (72,669) (122,229)
Net increase in loans (5,018) (46,262)
Purchases of premises and equipment (1,173) (986)
-------------------
Net cash provided (used) in investing activities 20,119 (18,964)
Financing activities
Increase in Federal Home Loan Bank borrowings
and other borrowed money 15,238 22,945
Net (decrease) increase in demand deposits,
NOW accounts and savings accounts (20,485) 4,974
Net (decrease) increase in certificates of deposits (17,485) (11,281)
Cash dividends paid or declared (2,010) (1,948)
Acquisition and retirement of Common Stock - (70)
-------------------
Net cash (used) provided by financing activities (24,742) 14,620
Cash and cash equivalents at beginning of the year 26,921 21,494
Increase in cash and cash equivalents (4,892) 760
--------------------
Cash and cash equivalents at end of period $22,029 $22,254
====================
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FIRST UNITED CORPORATION
Note to Unaudited Consolidated Financial Statements
June 30, 2001
Note A -- Basis of Presentation
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
the instructions to Form 10-Q. Accordingly, they do not include
all the information and footnotes required for complete financial
statements. In the opinion of management, all adjustments
considered necessary for a fair presentation, consisting of
normal recurring items have been included. Operating results for
the three and six month period ended June 30, 2001, are not necessarily
indicative of the results that may be expected for the year
ending December 31, 2001. The enclosed consolidated financial
statements should be read in conjunction with the consolidated
financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December
31, 2000.
Earnings per share are based on the weighted average number of
shares outstanding of 6,081 for the three and six months ended
June 30, 2001 and 2000.
Note B - Accumulated Comprehensive Income
Accumulated comprehensive income represents the unrealized gains
and losses on the company's available-for-sale securities, net of income taxes.
During the first six months of 2001 and 2000, total comprehensive
income, net income plus the change in unrealized gains (losses) on
available-for-sale securities, amounted to $4,922 thousand and $3,380
thousand, net of income taxes, respectively.
Note C - Accounting Pronouncement
In June 2001, Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("Statement No. 142"), was
issued. In accordance with Statement No. 142, goodwill and intangible
assets determined to have indefinite lives will no longer be amortized,
but instead be subject to an annual impairment test. Other intangible
assets will continue to be amortized over their estimated useful lives.
The effective date for Statement No. 142 is for fiscal years beginning
after December 15, 2001. The impact on the consolidated financial
statements of the implementation of Statement No. 142 is in the process
of being evaluated by the Corporation.
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Part I. Financial Information
Item II. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Consolidated net income for the six months ended June 30, 2001 totaled
$4.30 million, which is $.49 million more than was recorded for the
six months ended June 30, 2000. This translates into $.71 per share for
the current six month period. For the same period of 2000, each share
earned $.63. Annualized Return on Average Equity (ROAE) increased from 12.34%
for the six months ended June 30, 2000, to 12.87% for the six months ended
June 30, 2001.
The "efficiency ratio" is a key measuring tool for profitability
and operating efficiency. The calculation of the efficiency ratio is
noninterest expense divided by net operating revenue,(net interest income
plus other operating income) excluding nonrecurring items and securities
gains and losses. A lower ratio equals higher profitability and operating
efficiencies. The Corporation's efficiency ratio was 59.81% for the period
ended June 30, 2001. This represents a decline in efficiency from year-end
2000 when the ratio was 59.36%.
Fee income from our Business Manager product and Trust Services
has increased 46.70% or $.53 million for the six months ended June 30, 2001,
compared to the same period in 2000. Driven by these two income sources, other
operating income increased 31.23% to $4.67 million in comparison to June 30,
2000. Other operating expense for the first six months of 2001 was $11.50
million compared to $10.84 million for the same period in 2000. This 6.07%
increase is a direct result of salaries and employee benefits increasing
from $5.58 million in 2000 to $6.15 million in 2001.
In the first six months of 2001, net loans grew $3.94 million to a total
of $613.49 million. The growth for the same period of 2000 was $45.70 million,
bringing the total to $610.47 million. Commercial loans increased $20.92
million, including an increase of $14.02 million in commercial mortgages and
$4.94 million in commercial installment loans. In contrast, the indirect auto
installment loan portfolio decreased $17.51 million as a direct result of
Management's decision in the year 2000 to slow loan growth by increasing the
credit quality standards of the portfolio as well as maintaining higher rates
on installment loans in order to maximize yield. Other installment loans
decreased $.79 million. Mortgage loans, excluding commercial mortgages,
decreased $.27 million. Home equity loans and leases have decreased $.14
million and $1.14 million, respectively.
As a result of our loan growth, interest income for the six months ended
June 30, 2001, was $32.16 million compared to $30.95 million for the same
period in 2000. This total represents an increase of $1.21 million or 3.91%.
Total investment securities, interest bearing deposits in banks, and Federal
Home Loan Bank stock has decreased a total of $25.17 million or 14.04% since
December 31, 2000. At December 31, 2000, the Corporation had $20.53
million in excess funds invested at the Federal Home Loan Bank of Atlanta. In
December 2000, the Corporation purchased $20.10 million of 90-day brokered
deposits as part of a plan for the Trust Department to invest
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approximately $28.12 million of its liquid assets in investments outside of the
Bank. Funding for the remaining $8.02 million of the plan was completed with
a new $10.00 million convertible advance from the Federal Home Loan Bank of
Atlanta in January 2001. The outflow of deposits occurred in January 2001 as
discussed in the following paragraph. Declining interest rates resulted in
$29.14 million of agency securities being called during the first and second
quarters of 2001. To properly collateralize our municipal deposits, $19.40
million of the calls were replaced. Late in the fourth quarter of 2000, the
Corporation sold $14.88 million of mortgage-backed securities and $1.94 million
of municipal securities to obtain funding for a Bank Owned Life Insurance
("BOLI") policy. These funds were held in short-term investments as the
Corporation awaited the purchase of the policy. In the first quarter of 2001,
the Corporation purchased $10.00 million of a BOLI policy. The cash surrender
value of the policy is reported as an other asset on the accompanying
consolidated balance sheets. The remaining $8.00 million policy is expected to
be purchased in the third quarter of 2001.
The corporation's interest expense year to date was $1.45 million
higher than was incurred for the same period in 2000. The increase in expense
can be attributed to deposit growth of $19.74 million from June 30, 2000 to
June 30, 2001. The deposits of the Corporation have decreased $37.97 million
since December 31, 2000. When the $20.10 million of brokered deposits matured in
March 2001, the Corporation elected to not renew. Also, the Trust Depart-
ment's deposits held at the Bank have decreased $31.73 million since December
2000. Most of the decrease relates to the $28.12 million transaction discussed
in the preceding paragraph. Excluding these transactions, core deposits grew
$15.77 million or 2.76% for the six months ended June 30, 2001.
Net interest income for the first six months of 2001 decreased
1.64% from the same period in 2000, to a total of $14.14 million. The
result was a Corporate net interest margin of 3.75% in comparison to the net
interest margin of 3.79% for the year ending 2000. During the first and second
quarters of 2001, the Corporation had more assets available to reprice than
liabilities. Therefore, when the Federal Reserve decreased rates 275 basis
points in the first half of 2001, the loans and investments in the portfolio
repriced more quickly than deposits, causing the margin to decrease. Annualized
Return on Average Assets (ROAA) has increased 8.33% to 1.04% for the six months
ended June 30, 2001, compared to 0.96% for the six months ended June 30, 2000.
The provision for possible credit losses was $1.08 million for the
first six months of 2001 compared to $1.51 million for the same period
in 2000. Net charge-offs for the first six months were $1.03 million,
which equates to 0.34% of average net loans of $611.28 million. For the same
period of 2000, net charge-offs were $.86 million or .30% of the June 30, 2000,
average net loans of $586.05 million. The over 30-day delinquency ratio is 1.37%
of gross loans, a number which compares very favorably with our peers.
Non-performing loans were .40% of gross loans as of June 30, 2001, and our loan
loss reserve was 0.83% of gross loans representing 206.75% of non-performing
loans.
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Summary of Loan Loss Experience
ANALYSIS OF THE RESERVE FOR POSSIBLE CREDIT LOSSES
June 30, 2001
----------------
Balance at the Beginning of the period $5,094
Charge-offs:
Domestic:
Commercial, financial and agricultural 116
Real estate - mortgage 40
Installment loans to individuals 1,072
----------------
1,228
----------------
Recoveries:
Domestics:
Commercial, financial and agricultural 18
Real estate - mortgage 3
Installment loans to individuals 175
---------------
196
---------------
Net Charge-offs 1,032
---------------
Provision for Possible Credit Losses 1,082
---------------
Balance at end of period $5,144
===============
Ratio of net charge-offs during the period to average
Loans outstanding during the period, annualized .34%
===============
Risk Elements of Loan Portfolio
The following table provides a comparison of the Risk Elements
of the Loan Portfolio in the format prescribed by Item III-C of Industry
Guide 3. The Bank has no foreign loans or loans defined as troubled debt
restructurings. Further, the Bank has no potential problem loans other than
those in the table below. As of June 30, 2001, First United's non-accrual
loans increased $.16 million from the year end total of $1.07 million.
June 30 December 31
2001 2000
----------------------
Non-accrual loans $1,228 $1,066
Accruing loans past due 90 days or more 1,260 1,448
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Information with respect to non-accrual loans at June 30, 2001 and
December 31, 2000, are as follows:
Non-accrual Loans $1,228 $1,066
Interest income that would have been recorded
under original terms 24 19
Interest income recorded during the period 10 9
Shareholders' equity remained strong at $68.42 million, a 4.44%
increase from December 31, 2000, which was $65.51 million. Risk based capital,
was 15.52%, which is greater than the 14.55% reported at December 31, 2000.
Both are in excess of the regulatory minimum of 8.00%.
The Corporation paid a cash dividend of $.165 on May 1,
2000. On June 20, 2001, the Corporation declared another dividend of an
equal amount, to be paid August 1, 2001, to shareholders of record at
July 18, 2001.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
First United Corporation's annual meeting of
Shareholders' was held on April 24, 2001. The only
item ratified by 2001 proxy vote was the election of
six directors.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
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SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
FIRST UNITED CORPORATION
Date 8/13/01 /s/ WILLIAM B. GRANT
---------- ----------------------------------------
William B. Grant, Chairman of the Board
and Chief Executive Officer
Date 8/13/01 /s/ Robert W. Kurtz
---------- ----------------------------------------
Robert W Kurtz, President and Chief
Financial Officer
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
FIRST UNITED CORPORATION
Date 8/13/01
---------- ----------------------------------------
William B. Grant, Chairman of the
Board and Chief Executive Officer
Date 8/13/01
---------- ---------------------------------------
Robert W. Kurtz, President and Chief
Financial Officer
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