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 September 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
September 30, 2001 Preferred stock, No par value--No shares
outstanding as of September 30, 2001.
-01-
INDEX
FIRST UNITED CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 2001
(unaudited) and December 31, 2000.
Consolidated Statements of Income (unaudited) - For the three and nine
months ended September 30, 2001 and 2000.
Consolidated Statements of Cash Flows (unaudited) - For the nine
months ended September 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
-02-
FIRST UNITED CORPORATION
Consolidated Balance Sheets
September 30, December 31
Assets 2001 2000
(unaudited)
--------------------------
(in thousands)
Cash and due from banks $15,976 $15,521
Federal funds sold - 11,400
Interest-bearing deposits in banks 242 20,534
Investment securities:
U.S. Treasury Securities and
Obligations of other U.S.
Government Agencies 33,613 74,532
Obligations of State and
Local Government 26,507 19,674
Other investments 77,677 58,652
------------------------
Total investment securities 137,797 152,858
Federal Home Loan Bank stock, at cost 5,950 5,950
Loans and Leases 624,736 614,647
Reserve for possible credit losses (5,190) (5,094)
------------------------
Net loans 619,546 609,553
Bank premises and equipment 11,223 10,831
Accrued interest receivable and other assets 41,088 20,942
------------------------
Total Assets $831,822 $847,589
============================
-03-
FIRST UNITED CORPORATION
Consolidated Balance Sheets
September 30, December 31,
2001 2000
(unaudited)
Liabilities and Shareholders' Equity -----------------------
(in thousands)
Liabilities
Non-interest bearing deposits $ 59,439 $51,339
Interest bearing deposits 551,841 598,638
-----------------------
Total deposits 611,280 649,977
Reserve for taxes, accrued interest, and
other liabilities 14,407 9,105
Federal Home Loan Bank borrowings
and other borrowed funds 134,109 122,000
Dividends payable 1,002 996
-----------------------
Total Liabilities 760,798 782,078
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 September 30,
2001, and December 31, 2000 61 61
Surplus 20,199 20,199
Retained earnings 49,023 45,132
Accumulated comprehensive income 1,741, 119
----------------------
Total Shareholders' Equity 71,024 65,511
----------------------
Total Liabilities and
Shareholders' Equity $831,822 $847,589
======================
-04-
FIRST UNITED CORPORATION
Consolidated Statements Of Income
(in thousands, except per share data) Nine Months
Ended September 30,
2001 2000
-------------------
(unaudited)
Interest income
Interest and fees on loans and leases $ 40,163 $ 39,017
Interest on investment securities:
Taxable 6,435 6,825
Exempt from federal income tax 803 932
------------------
7,238 7,757
Interest on federal funds sold 359 108
------------------
Total interest income 47,760 46,882
Interest expense
Interest on deposits:
Savings 336 489
Interest-bearing transaction accounts 2,844 3,674
Time, $100,000 or more 5,640 4,903
Other time 11,130 10,444
Interest on Federal Home Loan Bank
borrowings and other borrowed
funds 6,189 6,191
------------------
Total interest expense 26,139 25,701
------------------
Net interest income 21,621 21,181
Provision for possible credit losses 1,856 1,906
------------------
Net interest income after provision
for possible credit losses 19,765 19,275
Other operating income
Trust department income 2,008 1,540
Service charges on deposit accounts 1,806 1,518
Insurance premium income 774 742
Securities gains (losses) 427 (124)
Other income 2,339 2,071
--------------------
Total other operating income 7,354 5,747
-05-
Other operating expenses
Salaries and employees benefits 9,331 8,430
Occupancy expense of premises 952 821
Equipment expense 1,375 1,358
Data processing expense 738 809
Deposit assessments and related fees 133 143
Other expense 4,815 4,764
--------------------
Total other operating expenses 17,344 16,325
--------------------
Income before income taxes 9,775 8,697
Applicable income taxes 2,870 2,789
--------------------
Net income $6,905 $5,908
====================
Earnings per share $1.14 $0.97
====================
Dividends per share $0.495 $0.48
====================
-06-
FIRST UNITED CORPORATION
Consolidated Statements Of Income
(in thousands, except per share data) Three Months
Ended September 30,
2001 2000
-------------------
(unaudited)
Interest income
Interest and fees on loans and leases $ 13,335 $ 13,561
Interest on investment securities:
Taxable 1,907 2,194
Exempt from federal income tax 299 269
--------------------
2,206 2,463
Interest on federal funds sold 64 16
--------------------
Total interest income 15,605 16,040
Interest expense
Interest on deposits:
Savings 110 162
Interest-bearing transaction accounts 681 1,233
Time, $100,000 or more 1,624 1,765
Other time 3,629 3,733
Interest on Federal Home Loan Bank
borrowings and other borrowed
funds 2,076 2,235
--------------------
Total interest expense 8,120 9,128
-------------------
Net interest income 7,485 6,912
Provision for possible credit losses 774 393
--------------------
Net interest income after provision
for possible credit losses 6,711 6,519
Other operating income
Trust department income 640 540
Service charges on deposit accounts 628 493
Insurance premium income 266 282
Securities (losses) 350 -
Other income 796 767
--------------------
Total other operating income 2,680 2,082
-07-
Other operating expenses
Salaries and employees benefits 3,176 2,851
Occupancy expense of premises 308 282
Equipment expense 478 454
Data processing expense 258 264
Deposit assessments and related fees 45 55
Other expense 1,580 1,578
--------------------
Total other operating expenses 5,845 5,484
--------------------
Income before income taxes 3,546 3,117
Applicable income taxes 942 1,016
--------------------
Net income $2,604 $2,101
====================
Earnings per share $0.43 $0.34
====================
Dividends per share $0.165 $0.16
====================
-08-
FIRST UNITED CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months
Ended September 30,
2001 2000
--------------------
(unaudited)
Operating activities
Net Income $ 6,905 $ 5,908
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible credit losses 1,856 1,906
Provision for depreciation 1,175 1,148
Net accretion and amortization of investment
security discounts and premiums 23 17
Realized (gain) loss on sale of investment
securities (427) 124
Increase in accrued interest and other assets (20,147) (520)
Increase in reserve for taxes accrued interest
and other liabilities 5,302 473
--------------------
Net cash (used) provided by operating activities (5,313) 9,056
Investing activities
Proceeds from maturities of available-for-
sale securities 211,928 181,506
Purchases of available-for-sale securities (174,541) (155,126)
Net increase in loans (11,849) (46,102)
Purchases of premises and equipment (1,567) (1,627)
-------------------
Net cash provided (used) in investing activities 23,971 (21,349)
Financing activities
Increase in Federal Home Loan Bank borrowings
and other borrowed money 12,109 7,875
Net (decrease) increase in demand deposits,
NOW accounts and savings accounts (15,290) 4,035
Net (decrease) increase in certificates of deposits (23,407) 2,901
Cash dividends paid or declared (3,015) (2,923)
Acquisition and retirement of Common Stock - (70)
-------------------
Net cash (used) provided by financing activities (29,603) 11,818
Cash and cash equivalents at beginning of the year 26,921 21,494
Increase in cash and cash equivalents (10,945) (475)
--------------------
Cash and cash equivalents at end of period $15,976 $21,019
====================
-09-
FIRST UNITED CORPORATION
Note to Unaudited Consolidated Financial Statements
September 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 nine month period ended September 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 nine months ended
September 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 nine months of 2001 and 2000, total comprehensive
income, net income plus the change in unrealized gains (losses) on
available-for-sale securities, amounted to $8.53 million and $6.42 million,
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.
-10-
Part I. Financial Information
Item II. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Consolidated net income for the nine months ended September 30, 2001
totaled $6.90 million, which is $1.00 million more than was recorded for the
nine months ended September 30, 2000. This translates into $1.14 per share
for the current nine month period. For the same period of 2000, each share
earned $.97. Annualized Return on Average Equity (ROAE) increased from 12.69%
for the nine months ended September 30, 2000, to 13.51% for the nine months
ended September 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 58.48% for the period
ended September 30, 2001. This represents an increase in efficiency from
year-end 2000 when the ratio was 59.36%.
Fee income from our Business Manager product and Trust Services
has increased 37.96% or $.68 million for the nine months ended September 30,
2001, compared to the same period in 2000. Also, the Corporation realized
$.43 million of security gains in the nine months ended September 30, 2001,
compared to a $.12 million loss experienced in the nine months ended September
30, 2000. Driven by increased fees and increased accounts, service charges
on deposit accounts increased $.29 million to $1.81 million as of September
30, 2001 compared to $1.52 million as of September 30, 2000. This was an
increase of 18.97%. Other operating income increased 27.96% to $7.35 million
in comparison to $5.75 million at September 30, 2000. Other operating expense
for the first nine months of 2001 was $17.34 million compared to $16.33 million
for the same period in 2000. This 6.24% increase is a direct result of
salaries and employee benefits increasing from $8.43 million in 2000 to $9.33
million in 2001.
In the first nine months of 2001, net loans grew $9.99 million to a total
of $619.55 million. The growth for the same period of 2000 was $45.54 million,
bringing the total to $610.31 million. Commercial loans increased $29.99
million, including an increase of $19.14 million in commercial mortgages and
$8.20 million in commercial installment loans in the first nine months of 2001.
In contrast, the indirect auto installment loan portfolio decreased $23.30
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 $.17 million. Mortgage loans,
excluding commercial mortgages, increased $2.69 million. Consumer lines of
credit increased $2.13 million. Home equity loans and leases have decreased
$1.09 million and $1.81 million, respectively.
-11-
As a result of our loan growth, interest income for the nine months ended
September 30, 2001, was $47.76 million compared to $46.88 million for the same
period in 2000. This total represents an increase of $.88 million or 1.88%.
Total investment securities, interest bearing deposits in banks, and Federal
Home Loan Bank stock has decreased a total of $35.35 million or 19.71% 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 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 $40.70 million
of agency securities being called during the first three quarters of 2001. To
properly collateralize our municipal deposits, $28.23 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 three quarters of 2001, the Corporation purchased
$18.00 million in BOLI policies. The cash surrender value of the policy is
reported as an other asset on the accompanying consolidated balance sheets.
The corporation's interest expense year to date was $.44 million
higher than was incurred for the same period in 2000, $26.14 million in the
first nine months of 2001 compared to $25.70 million for the same period in
2000. The increase in expense can be attributed to deposit growth of $5.77
million from September 30, 2000 to September 30, 2001. The deposits of the
Corporation have decreased $38.70 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 Department's deposits held at the Bank
have decreased $31.41 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 $12.81 million or 1.97% for
the nine months ended September 30, 2001.
Net interest income for the first nine months of 2001 increased
2.08% from the same period in 2000, to a total of $21.62 million. The
result was a Corporate net interest margin of 3.83% in comparison to the net
interest margin of 3.79% for the year ending 2000. Although the Corporation
had more assets available to reprice than liabilities during the first three
quarters of 2001, management actively decreased the rates on deposit accounts
more quickly than loan accounts in response to the Federal Reserve's rate
decreases. This caused the margin to increase. Annualized Return on Average
Assets (ROAA) has increased 11.71% to 1.11% for the nine months ended
September 30, 2001, compared to 0.98% for the nine months ended September
30, 2000. The Corporation experienced a decrease in the effective tax rate
for 2001 versus 2000 as a result of the implementation of certain tax planning
strategies.
The provision for possible credit losses was $1.86 million for the
first nine months of 2001 compared to $1.91 million for the same period
in 2000. Net charge-offs for the first nine months were $2.06 million,
-12-
which on an annualized basis equates to 0.45% of average net loans of $611.57
million. For the same period of 2000, net charge-offs were $1.13 million or,
on an annualized basis, 0.26% of the September 30, 2000, average net loans of
$586.05 million. The 30-day and over delinquency ratio is 1.22% of gross
loans as of September 30, 2001, a number which compares very favorably with
our peers. At September 30, 2000, the 30-day and over delinquency ratio was
1.21%. Non-performing loans were .49% of gross loans as of September 30, 2001,
and our loan loss reserve was 0.83% of gross loans representing 171.68% of
non-performing loans.
Summary of Loan Loss Experience
ANALYSIS OF THE RESERVE FOR POSSIBLE CREDIT LOSSES
September 30, 2001
----------------
Balance at the Beginning of the period $5,094
Charge-offs:
Domestic:
Commercial, financial and agricultural 274
Real estate - mortgage 58
Installment loans to individuals 1,719
----------------
2,051
----------------
Recoveries:
Domestics:
Commercial, financial and agricultural 19
Real estate - mortgage 5
Installment loans to individuals 267
---------------
291
---------------
Net Charge-offs 1,764
---------------
Provision for Possible Credit Losses 1,856
---------------
Balance at end of period $5,190
===============
Ratio of net charge-offs during the period to average
Loans outstanding during the period, annualized 0.45%
===============
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. As of September 30, 2001, First United's non-accrual
loans increased $.83 million from the year end total of $1.07 million.
-13-
September 30 December 31
2001 2000
----------------------
Non-accrual loans $1,891 $1,066
Accruing loans past due 90 days or more 1,132 1,448
Information with respect to non-accrual loans at September 30, 2001 and
December 31, 2000, are as follows:
Non-accrual Loans $1,891 $1,066
Interest income that would have been recorded
under original terms 24 19
Interest income recorded during the period 26 9
Shareholders' equity remained strong at $71.02 million, a 8.42%
increase from December 31, 2000, which was $65.51 million. Risk based capital,
was 15.18%, 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, and August 1, 2001. On September 19, 2001, the Corporation declared
another dividend of an equal amount, to be paid November 1, 2001, to share-
holders of record at October 17, 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.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
-14-
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 11/13/01 /s/ WILLIAM B. GRANT
---------- ----------------------------------------
William B. Grant, Chairman of the Board
and Chief Executive Officer
Date 11/13/01 /s/ Robert W. Kurtz
---------- ----------------------------------------
Robert W Kurtz, President and Chief
Financial Officer
-15-
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 11/13/01
---------- ----------------------------------------
William B. Grant, Chairman of the
Board and Chief Executive Officer
Date 11/13/01
---------- ---------------------------------------
Robert W. Kurtz, President and Chief
Financial Officer
-16-