UNITED STATES SECURITIES AND EXCHANGE COMMISSION FORM 10-K
WASHINGTON, DC 20549
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995
OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from January 1, 1995, to December 31, 1995
Commission file number 0-14237
FIRST UNITED CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 52-1380770
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
19 South Second Street
Oakland, Maryland 21550-0009
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (301) 334-9471
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _
Indicate by check mark if disclosures of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of the registrant's knowledge,
in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. X
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of February 29, 1996: Common Stock $.01 Par Value_$92,915,745
The number of shares outstanding of the registrant classes of common stock
as of February 29, 1996: 6,194,383 Shares
Documents Incorporated by Reference
Portions of the registrant's definitive proxy statement for the annual
shareholders meeting to be held April 23, 1996, are incorporated by reference
into Part III.
(1)
First United Corporation
Table of Contents
PART I
Item 1. Business 3
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
PART II
Item 5. Market for the Registrant's Common Stock and Related
Shareholder Matters 6
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-20
Item 8. Financial Statements and Supplementary Data 21-39
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 39
PART III
Item 10. Directors and Executive Officers of the Registrant 40
Item 11. Executive Compensation 40
Item 12. Security Ownership of Certain Beneficial Owners
and Management 40
Item 13. Certain Relationships and Related Transactions 41
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 41
Signatures 42
(2)
PART I
Item 1. BUSINESS
FIRST UNITED CORPORATION
First United Corporation (the "Corporation") headquartered in Oakland,
Maryland, is a one-bank holding company with one non-bank subsidiary. The
Corporation was organized under the laws of the State of Maryland in 1985. In
1995, the Corporation merged two of its three wholly owned banking
subsidiaries, First United Bank of West Virginia, N.A. and Myersville Bank,
with its other wholly owned banking subsidiary, First United National Bank &
Trust.
First United National Bank & Trust and Oakfirst Life Insurance Corporation
are the only operating subsidiaries of the Corporation.
FIRST UNITED NATIONAL BANK & TRUST
First United National Bank & Trust is a national banking association
chartered in 1900 and is a member of the Federal Reserve System. The deposits of
First United National Bank & Trust are insured by the Federal Deposit Insurance
Corporation (FDIC).
First United National Bank & Trust operates twenty-two banking offices,
five facilities in Garrett County, Maryland, seven in Allegany County, Maryland,
four in Washington County, Maryland, two in Frederick County, Maryland, two in
Mineral County, West Virginia, one in Hampshire County, West Virginia and one
in Hardy County, West Virginia. First United also operates a total of
twenty-four Automated Teller Machines (ATM's), five of which are located in
Garrett County, Maryland, nine in Allegany County, Maryland, four in
Washington County, Maryland, three in Frederick County, Maryland, and one each
in Mineral, Hampshire and Hardy Counties in West Virginia. First United
National Bank & Trust provides a complete range of retail and commercial
banking services to a customer base in Garrett, Allegany, Washington and
Frederick Counties in Maryland, in Mineral, Hampshire and Hardy Counties in
West Virginia and to residents in surrounding regions of Pennsylvania and West
Virginia. The customer base in the aforementioned geographical area consists
of individuals, businesses and various governmental units. The services
provided by First United National Bank & Trust include checking, savings, NOW
and Money Market deposit accounts, business loans, personal loans, mortgage
loans, educational loans, lines of credit and consumer-oriented financial
services including IRA and KEOGH accounts. In addition, First United National
Bank & Trust provides a variety of insurance products, such as annuities and
home owner's insurance, and full brokerage services through a networking
arrangement with PrimeVest Financial Services, Inc., a full service
broker-dealer. First United National Bank & Trust also provides safe deposit
and night depository facilities and a complete line of trust services. As of
December 31, 1995, First United National Bank & Trust had total deposits of
$427.20 million and total loans of $360.58 million. The total market value of
assets under the supervision of the Trust Department was approximately $141.94
million.
OAKFIRST LIFE INSURANCE CORPORATION
Oakfirst Life Insurance Corporation is a reinsurance company that reinsures
credit life and credit accident and health insurance written by U.S. Life
Credit Life Insurance Corporation on consumer loans made by First United
National Bank & Trust. Oakfirst Life Insurance Corporation, which was
chartered in 1989, is a wholly owned subsidiary of the Corporation.
Competition
The Corporation's banking subsidiary, First United National Bank & Trust
competes with various other national banking associations, state banks,
branches of major regional banks, savings and loan associations, savings
banks, and credit unions, as well as other financial service institutions such
as insurance companies, brokerage firms and various other investment firms. In
addition to this local competition, First United National Bank & Trust also
competes for banking business with institutions located outside the States of
Maryland and West Virginia.
(3)
Supervision and Regulation of Banking Entities
The Corporation is a registered bank holding company subject to regulation
and examination by the Board of Governors of the Federal Reserve System under
the Bank Holding Company Act of 1956 (the "Act"). The Corporation is required to
file with the board of governors quarterly and annual reports and any
additional information that may be required according to the Act. The Act also
requires every bank holding company to obtain the prior approval of the
Federal Reserve Board before acquiring direct or indirect ownership or control
of more than 5% of the voting shares of any bank which is not already majority
owned. The Act also prohibits a bank holding company, with certain exceptions,
from engaging in or acquiring direct or indirect control of more than 5% of
the voting shares of any company engaged in non-banking activities. One of the
principal exceptions to these provisions is for engaging in or acquiring
shares of a company engaged in activities found by the Federal Reserve Board
to be so closely related to banking or managing banks as to be a proper
incident thereto.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") was enacted in December 1991. FDICIA was primarily designed to
provide additional financing for the FDIC by increasing its borrowing ability.
The FDIC was given the authority to increase deposit insurance premiums to repay
any such borrowing. In addition, FDICIA identifies capital standard categories
for financial institutions: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized. FDICIA imposes progressively more restrictive constraints on
operations, management and capital distributions depending on the category in
which an institution is classified. Pursuant to FDICIA, undercapitalized
institutions must submit recapitalization plans, and a holding company
controlling a failing institution must guarantee such institution's compliance
with its plan.
During 1995, the FDIC reached the funding levels required by FDICIA. As a
result of the well capitalized position of First United National Bank & Trust,
the Bank incurred a reduction in its FDIC premium from twenty-three cents per
100 dollars of deposits to seven cents per 100 dollars of deposits or a
savings of approximately $.46 million.
FDICIA also requires the various regulatory agencies to prescribe certain
non-capital standards for safety and soundness relating generally to
operations and management, asset quality and executive compensation and
permits regulatory action against a financial institution that does not meet
such standards. The statute also imposes limitations on certain mergers and
consolidations between insured depository institutions with different home
states.
In addition to limitations on bank holding company acquisitions under laws
administered by the Federal Reserve Board and FDIC, other restrictions on
acquisitions are contained in certain state laws. For example, the banking
laws of many states, including Maryland and West Virginia, generally permit
out-of-state bank holding companies to acquire and control domestic banks so
long as there is a reciprocal right under the statutes of the acquiring
company's home state. On September 29, 1994, the Interstate Banking Efficiency
Act was signed into Federal law. This legislation is intended to diminish the
barriers to interstate acquisitions and mergers among banking institutions,
and to provide greater flexibility in interstate branching. This statute is
not expected to have any immediate impact on the business and operations of
the Corporation, but no prediction can be made as the effect of the new law on
competitive conditions facing the banking industry in general or the
Corporation in particular.
First United National Bank & Trust is a Federally insured national banking
association. Its operation is subject to Federal and state laws applicable to
commercial banks with trust powers and to regulation by the Comptroller of the
Currency, the Federal Reserve Board, and the FDIC. The Corporation is examined
regularly by the Federal Reserve Board, the national banking subsidiary is
periodically examined by the Office of the Comptroller of the Currency and
Oakfirst Life Insurance Corporation is periodically examined by the Arizona
Department of Insurance.
In accordance with Federal Reserve regulations, the subsidiary bank is
limited as to the amount it may loan affiliates, including the Corporation,
unless such loans are collateralized by specific obligations. Additionally,
banking law limits the amount of dividends that a bank can pay without prior
approval from bank regulators.
Governmental Monetary and Credit Policies and Economic Controls
The earnings and growth of the banking industry and ultimately of First
United National Bank & Trust are affected by the monetary and credit policies of
governmental authorities, including the Federal Reserve System. An important
function of the Federal Reserve System is to regulate the national supply of
bank credit in order to control recessionary and inflationary pressures. Among
the instruments of monetary policy used by the Federal Reserve to implement
(4)
these objectives are open market operations in U.S. Government securities,
changes in the discount rate of member bank borrowings, and changes in reserve
requirements against member bank deposits. These means are used in varying
combinations to influence overall growth of bank loans, investments and
deposits and may also affect interest rates charged on loans or paid for
deposits. The monetary policies of the Federal Reserve authorities have had a
significant effect on the operating results of commercial banks in the past
and are expected to continue to have such an effect in the future.
In view of changing conditions in the national economy and in the money
markets, as well as the effect of actions by monetary and fiscal authorities,
including the Federal Reserve System, no prediction can be made as to possible
future changes in interest rates, deposit levels, loan demand or their effect
on the business and earnings of the Corporation and its subsidiaries.
Employees
At December 31, 1995, the Corporation and its subsidiaries employed
approximately 373 individuals, of whom 59 were officers, 170 were full-time
employees, and 144 part-time employees.
Executive Officers of the Corporation
Information concerning the executive officers of the Corporation is
contained on page 5 of the Corporation's definitive Proxy Statement for the
annual shareholders meeting to be held April 23, 1996, and in Part III, Item 10
of this Annual Report on Form 10-K under the caption "Directors and Executive
Officers of the Registrant."
Item 2. PROPERTIES
The main office of the Corporation and First United National Bank & Trust
occupies approximately 29,000 square feet at 19 South Second Street, Oakland,
Maryland, and is owned by First United National Bank & Trust. First United
National Bank & Trust operates a network of twenty-two banking offices
throughout Garrett, Allegany, Washington and Frederick Counties, Maryland and
Mineral, Hampshire and Hardy Counties, West Virginia. All of the banking
offices of First United National Bank & Trust are owned by the Corporation
except for six of these offices, which are leased.
The properties of the Corporation which are not owned are held under
long-term leases. Total rent expense for 1995, 1994 and 1993 was $.22, $.17 and
$.14 million, respectively.
Item 3. LEGAL PROCEEDINGS
The Corporation and its subsidiaries are at times, and in the ordinary
course of business, subject to legal actions. Management, upon the advice of
counsel, is of the opinion that losses, if any, resulting from the settlement of
current legal actions will not have a material adverse effect on the financial
condition of the Corporation.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
(5)
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The common stock of First United Corporation is traded on the Nasdaq
National Market System. This listing became effective on September 2, 1992.
There are 12,000,000 shares of common stock authorized and the total number of
shares outstanding as of December 31, 1995 was 6,194,383. As of December 31,
1995 the Corporation had approximately 2,485 holders of record of its common
stock. There are also 2,000,000 shares of preferred stock authorized with no
shares outstanding as of December 31, 1995. The following tables reflect the
high bid and high ask prices, and the cash dividends paid on common stock for
the periods indicated. The market value information has not been restated
because no significant changes in the stock price occurred due to the 5% stock
dividend.
1995 High Ask High Bid
1st Quarter $23.50 $20.50
2nd Quarter 20.50 17.50
3rd Quarter 18.50 16.50
4th Quarter 18.50 17.00
1994 High Ask High Bid
1st Quarter $25.00 $22.33
2nd Quarter 24.50 22.25
3rd Quarter 20.50 19.00
4th Quarter 21.00 19.50
Cash Dividends
Cash dividends were paid by the Corporation on the dates indicated as follows:
1995 1994
February $.11 $.11
May .11 .10
August .12 .11
November .12 .11
Quotes for the Stock can be found on the Nasdaq/NMS under the symbol "FUNC."
Market Makers for the Stock are:
Ferris Baker Watts Legg Mason Wood Walker Wheat First Securities
12 North Liberty St. 125 West Street, Suite 201 33 West Franklin Street
Cumberland, MD 21502 Annapolis, MD 21401 Hagerstown, MD 21740
(301) 724-7161 (800) 638-9165 (800) 388-1248
(800) 776-0629
29 North Liberty Street
Parker/Hunter Cumberland, MD 21502
14th and Chaplin St. (301) 724-2660
700 Riley Building
Wheeling, WV 26003 107 South Second Street
(800) 523-2153 Oakland, MD 21550
(301) 334-5806
The Board of Directors declared a 5% stock dividend on January 17, 1996, to
shareholders of record at March 15, 1996. The dividend will result in the
issuance of 309,720 shares of common stock.
(6)
Item 6. SELECTED FINANCIAL DATA
(In thousands, except per share data)
1995 1994 1993 1992 1991
Balance Sheet Data
Total Assets $487,169 $459,040 $423,380 $417,083 $400,296
Total Deposits 424,294 391,650 368,527 365,827 354,618
Total Net Loans 358,464 333,375 314,476 299,663 281,516
Total Shareholder Equity 55,504 51,131 48,372 44,894 40,636
Operating Data
Interest Income $ 37,274 $ 33,059 $32,484 $ 34,981 $ 38,638
Interest Expense 14,721 11,265 11,356 14,834 20,308
Net Interest Income 22,553 21,794 21,128 20,147 18,330
Other Operating Income 4,290 3,832 3,488 2,750 2,674
Prov. for Possible Credit Losses 0 165 269 719 952
Other Operating Expense 18,390 16,220 15,158 13,058 12,386
Income Before Tax 8,453 9,241 9,189 9,120 7,666
Income Tax 2,849 3,014 3,177 2,918 2,356
Net Income $ 5,604 $ 6,227 $ 6,012 $ 6,202 $ 5,310
Per Share Data
Net Income $0.86 $0.96 $0.93 $0.96 $0.82
Regular Dividends Paid 0.46 0.43 0.35 0.33 0.31
Special Dividend 0.06
Book Value $8.54 $7.87 $7.46 $6.94 $6.30
<FN>
** Per Share data has been restated to reflect the 100% stock dividend
paid on June 15,1993, and the 50% stock dividend paid on February 8, 1994 and
the 5% stock dividend to be paid on March 29, 1996.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This section presents management's discussion and analysis of the financial
condition and results of operations of First United Corporation and
subsidiaries (collectively, the "Corporation") including First United National
Bank & Trust (the "Bank"), and Oakfirst Life Insurance Corporation.
This discussion and analysis should be read in conjunction with the
financial statements which appear elsewhere in this report.
On January 17, 1996, the Board of Directors declared a 5% stock dividend to
shareholders on record at March 15, 1996. The dividend will result in the
issuance of 309,720 shares. Earnings and dividends per share have been
restated to reflect the stock split.
On November 30, 1993, the Corporation acquired all the outstanding stock of
Hometown Bancorp, Inc. in exchange for 697,500 shares of the Corporation's
common stock, along with cash in lieu of fractional shares, consummating the
acquisition announced in March 1993. Hometown's sole subsidiary was Myersville
Bank. The acquisition was accounted for as a pooling-of-interests.
Accordingly, financial data presented has been restated to reflect this
acquisition as if it had occurred at the beginning of the periods presented.
(7)
EARNINGS ANALYSIS
OVERVIEW
The Corporation's net earnings for 1995 decreased to $5.60 million or
10.11% less than the $6.23 million reported in 1994. Earnings for the year were
less than the previous year's earnings because of a one time restructuring
charge of $1.08 million. The restructuring charge included the costs associated
with the consolidation of First United Bank of West Virginia and Myersville Bank
into First United National Bank & Trust and the expenses associated with a
voluntary retirement plan offered and accepted by eleven employees who met the
Plan's requirements. The expense associated with the voluntary retirement
plan was $0.81 million of the $1.08 million discussed above. Return on average
assets was 1.18%, 1.40% and 1.42% in 1995, 1994, and 1993, respectively.
The return on average shareholders equity for 1995 decreased to 10.47% from
12.32% the previous year, as compared to 12.86% in 1993. Earnings per share
decreased to $0.86 in 1995 from $0.96 in 1994, and compared with $0.93 in
1993.
The restructuring charge discussed above had a significant impact on First
United's key ratios. Excluding these restructuring costs, return on average
assets would have been 1.32% while return on average equity would have been
11.72%. Earnings per share, excluding the one time restructuring charge, would
have been $0.96.
Net Interest Income
The primary source of earnings continued to be net interest income_the
difference between interest income and related fees on earning assets, and the
interest expense incurred on deposits and other borrowed funds. This segment
of earnings is affected by changes in interest rates, account balances and the
mix of earning assets and interest bearing funding sources.
Total interest income for 1995 increased 12.73% over 1994, from $33.06
million to $37.27 million, primarily due to growth in earning assets. Total
interest expense at $14.72 million represented an increase of 30.73% from $11.26
in 1994. This increase was the result of growth in our depository accounts as
well as the effect of higher rates being paid. The net effect of these
changes was a 3.48% improvement in net interest income to $22.55 million in
1995 from $21.79 million in 1994. This compares to $21.13 million in 1993.
The improvement in 1994 represents an increase of 3.15% over 1993's net
interest income. Table 3 analyzes the changes in net interest income
attributable to volume and rate components.
For analytical purposes, net interest income is adjusted to a taxable
equivalent basis. This adjustment facilitates performance comparisons between
taxable and tax-exempt assets by increasing tax-exempt income by an amount
equal to the federal income taxes which would have been paid if this income
were taxable at the statutorily applicable rate.
The taxable equivalent net interest margin decreased to 5.19% in 1995 from
5.34% in 1994, compared with 5.37% in 1993. Table 2 compares the components of
the net interest margin and the changes occurring between 1995, 1994 and 1993.
Allowance for Loan Losses
The allowance for loan losses is based on management's continuing
evaluation 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.
As a result of continued efforts by management to improve procedures for
credit analysis, problem loan detection, and delinquency follow-ups, no
provision for credit losses was required in 1995. This is a continuation of a
favorable declining trend for the provision for possible credit losses which
decreased from $.27 million in 1993 to $.17 million in 1994.
Table 8 presents the activity in the allowance for loan losses by major
loan category for the past five years. Table 9 presents management's allocation
of the allowance for loan losses by major loan catagory. Specific allocations in
any particular category may be reallocated in the future to reflect current
conditions. Accordingly, the entire allowance is considered available to
absorb losses in any category.
(8)
Other Operating Income
Non-interest income for 1995, at $4.29 million, increased 12.01% over the
$3.83 million earned in 1994. Although insurance premium income declined $.19
million, this decrease was more than offset by improvements in income from
Trust and Fiduciary activities, service charges on depository accounts and
real estate appraisal processing. With the exception of service charges on
deposit accounts, which declined $.63 million in 1994, similar improvements
accounted for the 1994 increase of 9.7% in non-interest income over the $3.49
million earned in 1993.
Other Operating Expense
Non-interest expense increased to $18.39 million in 1995 from $16.22
million in 1994, or 13.38%. As was previously discussed, the restructuring costs
for 1995, which totalled $1.08 million, represented a significant portion of the
increase in non-interest expense for the year. Higher salary and benefit
costs associated with merit compensation increases and additional staffing
required for the opening of the Martin's Dual Highway office in Hagerstown,
Maryland also contributed to the increase in non-interest expense in 1995.
Expenditures to further increase the role of technology in improving the
efficiency of customer service delivery and internal processing activities,
such as the installation of a wide area computer network, accounted for much
of the increase in equipment expenses. In order to better meet the needs of
our customers and to insure more efficient service, the Corporation opened a
Customer Service Center. A majority of the costs related to the Customer
Service Center were equipment related, and therefore, contributed to the
increase in equipment expenses in 1995. It is anticipated that the long run
efficiencies gained by projects such as these will be a net benefit to the
earnings performance of the Corporation.
Salary, benefit, occupancy and equipment expenses related to the opening of
the Riverside office as well as expenditures for technology advancements
accounted for much of the $1.06 million increase in 1994 non-interest expense
over the 1993 amount.
Applicable Income Taxes
Applicable income taxes are detailed in Note 10 of the Corporation's
audited consolidated financial statements. Income tax expense amounted to $2.85
million in 1995 as compared with $3.01 million in 1994 and $3.18 million in
1993. These amounts represented effective tax rates of 33.7%, 32.6% and 34.6%
for 1995, 1994 and 1993, respectively.
Investment Securities
Investment securities classified as available-for-sale are held for an
indefinite period of time and may be sold in response to changing market and
interest rate conditions as part of the asset/liability management strategy.
Available-for-sale securities are carried at market value, with unrealized
gains and losses excluded from earnings and reported as a separate component
of stockholders' equity net of income taxes. Investment securities classified
as held-to-maturity are those that management has both the positive intent and
the ability to hold to maturity, and are reported at amortized cost. The
Corporation does not currently follow a strategy of making security purchases
with a view to near-term resales and therefore, does not own trading
securities. The Corporation's adoption of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," as of January 1, 1994, resulted in a change in classification of
$71 million of investment securities from held-to-maturity to
available-for-sale. For additional information, see Notes 1 and 3 to the
Corporation's audited consolidated financial statements.
Total investment securties remained relatively unchanged at $96.15 million
and $95.62 million at December 31, 1995 and 1994, respectively. At December 31,
1993, total investment securities were $81.53 million. The increase in
investment securities which occurred in 1994 was mainly attributed to excess
funds resulting from the growth of deposits over loans.
The Corporation manages its investment portfolios within policies which
seek to achieve desired levels of liquidity, manage interest rate sensitivity
risk, meet earnings objectives and provide required collateral support for
deposit activities. Excluding the U.S. Government and U.S. Government sponsored
agencies, the Corporation had no concentrations of investment securities from
any single issues that exceeded 10% of shareholders' equity. Table 4 exhibits
the distribution by type, of the investment portfolio for the three years
ended December 31, 1995, 1994 and 1993, respectively.
(9)
Loan Portfolio
The Corporation, through its Bank, is actively engaged in originating loans
to customers primarily in Garrett, Allegany, Washington and Frederick Counties
in Maryland; Mineral, Hardy and Hampshire Counties in West Virginia and the
surrounding regions of West Virginia and Pennsylvania. The Corporation has
policies and procedures designed to mitigate credit risk and to maintain the
quality of the Corporation's loan portfolio. These policies include
underwriting standards for new credits and the continuous monitoring and
reporting of asset quality and the adequacy of the reserve for loan losses.
These policies, coupled with on-going training efforts, have provided an
effective check and balance for the risk associated with the lending process.
Lending authority is based on the level of risk, size of the loan and the
experience of the lending officer. Table 5 presents the composition of the
Corporation's loan portfolio by significant concentration.
The Corporation's policy is to make the majority of its loan commitments in
the market area it serves. This tends to reduce risk because management is
familiar with the credit histories of loan applicants and has an in-depth
knowledge of the risk to which a given credit is subject. The Corporation had
no foreign loans in its portfolio as of December 31, 1995.
During 1995, net loans increased $25.08 million or 7.52% to a total of
$358.46 million. In comparison, net loans at year-end 1994 increased $18.90
million or 6.0% to a total of $333.38 million. Mortgage lending continued to be
the primary source of loan growth in 1995. Part of the mortgage growth included
63.10% increase in our Home Equity product. Home Equity loans increased from
$10 million at year-end 1994 to $16 million at year-end 1995. We anticipate
our Home Equity product to continue to experience growth as more of our
customers look for tax advantages associated with this product. Table 5
details the dollar amount and percentage distribution of the various key
categories of credit in the loan portfolio.
Funding for loan growth during 1995 and 1994 was provided by increased
levels of deposits.
It is the policy of the Corporation to place a loan in non-accrual status
whenever there is substantial doubt about the ability of a borrower to pay
principal or interest on any outstanding credit. Management considers such
factors as payment history, the nature of the collateral securing the loan and
the overall economic situation of the borrower when making a non-accrual
decision. Non-accrual loans are closely monitored by management. A
non-accruing loan is restored to accrual status when principal and interest
payments have been brought current, it becomes well-secured or is in the
process of collection and the prospects of future contractual payments are no
longer in doubt. At December 31, 1995, $1.075 million of non-accrual loans
were secured by collateral with an estimated value of $2.150 million. The
amount listed in Table 7 under restructured loans in 1992 is also included in
the non-accrual loans total for that year.
As of December 31, 1995, the Corporation had $3.478 million in loans for
which payments were current, but the borrowers were experiencing financial
difficulties. The corresponding total for year-end 1994 was $1.52 million.
These loans are subject to on-going management attention and their
classifications are reviewed monthly.
Deposit and Other Funding
Deposit liabilities increased to $424.29 million in 1995 from $391.65
million at the end of 1994, or an increase of 8.33%. The $32.64 million in
deposit growth compares favorably to the $23.12 million growth in deposits
experienced in 1994. Time deposits continue to be the main source of deposit
growth, although interest bearing demand deposits exhibited some growth during
both 1995 and 1994. The Corporation continues to experience strong competition
for deposits from other commercial banks, credit unions, and stock market and
mutual funds. Table 10 displays the average balances and average rates paid
on all major deposit classifications for 1995, 1994, and 1993.
Capital Resources
The Bank and the Corporation itself are subject to risk-based capital
regulations which were adopted by Federal banking regulators and became fully
phased in on December 31, 1992. These guidelines are used to evaluate capital
adequacy, and are based on an institution's asset/risk profile and off-balance
sheet exposures, such as unused loan commitments and stand-by letters of
credit. The regulatory guidelines require that a portion of total capital be
Tier 1 Capital, consisting of common shareholders' equity and perpetual
preferred stock, less goodwill and certain other deductions. The remaining
capital, or Tier 2 capital, consists of elements such as subordinated debt,
mandatory convertible debt, and grandfathered senior debt, plus the allowance
for credit losses, subject to certain limitations.
(10)
Under the risk-based capital regulations, banking organizations are
required to maintain a minimum 8% total risk-based capital ratio (total
qualifying capital divided by risk-weighted assets), including a Tier 1 ratio of
4%. The risk-based capital rules have been further supplemented by a leverage
ratio, defined as Tier 1 capital divided by average assets, after certain
adjustments. The minimum leverage ratio is 3% for banking organizations that
do not anticipate significant growth and have well-diversified risk (including
no undue interest rate risk exposure), excellent asset quality, high liquidity
and good earnings. Other banking organizations not in this category are
expected to have ratios of at least 4-5%, depending on their particular
condition and growth plans. Higher capital ratios could be required if
warranted by the particular circumstances or risk profile of a given banking
organization. In the current regulatory environment, banking companies must
stay well capitalized in order to receive favorable regulatory treatment on
acquisition and other expansion activities and favorable risk-based deposit
insurance assessments. The Corporation's capital policy establishes
guidelines meeting these regulatory requirements, and which take into account
current or anticipated risks and future growth opportunities.
On December 31, 1995, the Corporation's risk-based capital ratio was
15.19%, well above the regulatory minimum of 8%. The risk-based capital ratios
for year-end 1994 and 1993 were 16.18% and 18.88%, respectively.
Retained earnings and shareholder participation in the Corporation's
dividend reinvestment and stock purchase plan provided an additional $2.67
million in total stockholders' equity, which grew to $55.50 million at the end
of 1995, from $52.64 million at the year-end 1994 and $48.37 million at year-end
1993. The equity to assets ratio at December 31, 1995, was 11.39%, compared
with 11.14% and 11.43% at year-end 1994 and 1993. As a result of the
Corporation's adoption of Statement of Financial Accounting Standards No. 115
"Accounting for Investments in certain Debt and Equity Securities", an
adjustment to shareholders equity as of January 1, 1994, of $0.51 million, net
of taxes, was recorded.
Cash dividends of $.46 per share were paid during 1995, compared with $.43
and $.35 in 1994 and 1993. This represents a dividend payout rate (dividends
per share divided by net income per share) of 52.75%, 44.55%, and 37.11% for
1995, 1994 and 1993, respectively.
ASSET AND LIABILITY MANAGEMENT
Introduction
The Investment and Funds Management Committee of the Corporation seeks to
assess and manage the risks associated with fluctuating interest rates while
maintaining adequate liquidity. This is accomplished by formulating and
implementing policies that take into account the sources and uses of funds,
maturity and repricing distributions of assets and liabilities, pricing
strategies, and marketability of assets.
Liquidity
The objective of liquidity management is to assure that the withdrawal
demands of depositors and the legitimate credit needs of the Corporation's
delineated market areas are accommodated. Total liquid assets, represented by
cash, investment securities (available-for-sale and held-to-maturity maturing
within one year) and loans maturing within one year, amounted to $96.26 million,
or 19.76% of total assets at December 31, 1995. This compares with $102.71
million, or 22.4% of 1994 year-end assets, and $128.96 million, or 30.5% of
1993 year-end assets. The decrease from 1995 to 1994 and 1994 to 1993 is
primarily the result of assets being invested for longer periods of time to
enhance the yield of the Corporation's portfolio.
Additional liquidty of $88 million is available from unused lines of credit
at various upstream correspondent banks and the Federal Home Loan Bank of
Atlanta.
INTEREST RATE SENSITIVITY
Interest rate sensitivity refers to the degree that earnings will be
impacted by changes in the prevailing level of interest rates. Interest rate
risk arises from mismatches in the repricing or maturity characteristics between
assets and liabilities. Management seeks to avoid fluctuating net interest
margin, and to enhance consistent growth of net interest income through
periods of changing interest rates. The Corporation uses interest sensitivity
gap analysis and simulation models to measure and manage these risks. The gap
report assigns each interest-earning asset and interest-bearing liability to a
time frame reflecting its next repricing or maturity date. The differences
between total interest-sensitive assets and liabilities at each time interval
(11)
represent the interest sensitivity gap for that interval. A positive gap
generally indicates that rising interest rates during a given interval will
increase net interest income, as more assets than liabilities will reprice. A
negative gap position would benefit the Corporation during a period of
declining interest rates.
In order to manage interest sensitivity risk, management of the Corporation
formulates guidelines regarding asset generation and pricing, funding sources
and pricing and off-balance sheet commitments. These guidelines are based on
management's outlook regarding future interest rate movements, the state of
the regional and national economy, and other financial and business risk
factors. Management uses computer simulations to measure the effect on net
interest income of various interest rate scenarios. This modeling reflects
interest rate changes and the related impact on net income over specified
periods. Management does not use derivative financial instruments to effect
its interest rate sensitivity.
Rates on different assets and liabilities within a single maturity category
adjust to changes in interest rates to varying degrees and over varying
periods of time. The relationships between prime rates and rates paid on
purchased funds are not constant over time. The rate or growth in
interest-free sources of funds will influence the level of interest-sensitive
funding sources. In addition, the absolute level of interest rates will
affect the volume of earning assets and funding sources. As a result of these
limitations, the interest-sensitive gap is only one factor to be considered in
estimating the net interest margin.
Table 13 presents the Corporation's interest rate gap position at December
31, 1995. This is a one-day position which is continually changing and is not
necessarily indicative of the Corporation's position at any other time.
(12)
Distribution of Assets, Liabilities and Shareholders' Equity
Interest Rates and Interest Differential_Tax Equivalent Yields
( In thousands )
Table 1
For the Years Ended December 31,
1995 1994 1993
-----------------------------------------------------------------------------------------------------------
Average Annual Average Annual Average Annual
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-----------------------------------------------------------------------------------------------------------
Federal funds sold $ 7,368 $ 454 6.16% $ 574 $ 144 5.23% $ 7,851 $ 260 3.31%
Other interest-earning
assets 0 0 0.00% 125 4 3.20% 0 0 0.00%
Investments:
Taxable 78,162 4,985 6.38% 84,915 3,424 5.45% 73,562 3,929 5.34%
Non Taxable 4,836 451 9.33% 8,579 1,192 9.39% 8,954 583 9.89%
------------------------------------------------------------------------------------------------------------
Total investment
securities 82,998 5,436 6.55% 93,494 4,616 5.59% 82,516 4,512 8.21%
Loans 352,720 31,630 8.97% 324,140 28,295 8.73% 308,804 27,712 8.97%
-------------------------------------------------------------------------------------------------------------
Total earning assets 443,086 37,520 8.51% 418,333 33,059 8.05% 399,171 32,484 8.21%
Reserve for possible
credit losses (2,283) (2,333) (2,775)
Other non-earning
assets 29,450 28,931 25,875
-------------------------------------------------------------------------------------------------------------
Total non-earning
assets 27,167 26,598 23,100
-------------------------------------------------------------------------------------------------------------
Total Assets $470,253 $37,520 8.51% $444,931 $33,059 8.05% $422,271 $32,484 8.21%
=============================================================================================================
Liabilities and
Shareholders' Equity
Deposits:
Noninterest-bearing
deposits $46,114 0 0% $43,763 $ 0 0.00% $ 36,054 $ 0 0.00%
Interest-bearing
demand deposit 95,959 2,628 2.74% 93,352 2,136 2.29% 87,538 2,115 2.42%
Savings deposits 70,699 2,045 2.89% 85,998 2,359 2.74% 73,528 1,983 2.70%
Time deposits
$100,00 or more 29,283 1,600 5.46% 29,937 1,142 3.81% 17,093 445 4.40%
Time deposits less
than $100,000 166,877 8,296 4.97% 133,528 5,326 3.99% 154,863 6,813 2.60%
Short-term
borrowings 3,674 152 4.14% 6,040 302 5.50% 0 0 0
Total deposits and
short-term
borrowings 412,606 14,721 3.62% 392,618 11,265 2.87% 369,076 11,356 3.41%
Other liabilities 3,960 2,283 6,455
Shareholders' equity 53,687 50,030 46,740
------------------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $470,253 $14,721 3.62% $444,931 $11,265 2.87% $422,271 $11,356 3.41%
============================================================================================================
<FN>
**The above table reflects the average rates earned or paid stated on a tax
equivalent basis assuming a tax rate of 34%.
(13)
Net Interest Margin
( In thousands )
Table 2
1995 1994 1993
Average Tax Equivalent Average Tax Equivalent Average Tax Equivalent
Balance Rate Balance Rate Balance Rate
Earning Assets $443,086 8.51% $418,333 8.05% $399,171 8.21%
Interest-bearing
Liabilities 366,492 3.62% 348,855 2.87% 333,022 3.41%
Net Benefit of
Noninterest-bearing Sources .30% 0.60% 0.57%
Average Cost of Funds 3.32% 2.71% 2.84%
NET INTEREST MARGIN 5.19% 5.34% 5.37%
<FN>
*The above table reflects the average rates earned or paid stated on a tax
equivalent basis assuming a tax rate of 34%.
Interest Variance Analysis (1)
( In thousands )
Table 3
1995 COMPARED TO 1994 1994 COMPARED TO 1993
INCREASE INCREASE
(DECREASE) DUE TO (DECREASE) DUE TO
Volume Rate Net Volume Rate Net
Interest income:
Loans $2,564 $ 771 $3,335 $1,196 $ (613) $ 583
Taxable Investments (431) 1,315 884 556 (384) 172
Non-Taxable Investments (349) 285 (64) (118) 50 (68)
Federal Funds Sold 419 (355) 64 (366) 250 (116)
---------------------------------------------------------------------------
Total Interest Income $2,202 $2,017 $4,219 $1,272 $ (697) $575
Interest expense:
Interest-bearing $ 71 $ 421 $ 492 $ 89 $ (68) $ 21
Savings (442) 128 (314) 188 188 376
Time Deposits 1,657 1,313 2,970 (248) (1,239) (1,487)
Time Deposits >100,000 (36) 494 458 294 403 697
---------------------------------------------------------------------------
Total Deposits $1,251 $2,355 $ 3,606 $ 322 $ (715) $ (393)
---------------------------------------------------------------------------
Total Interest Expense $1,101 $2,355 $ 3,456 $ 624 $ (715) $ (91)
---------------------------------------------------------------------------
Net Interest Income $1,101 $ (338) $ 763 $ 647 $ 19 $ 666
<FN>
(1) The change in interest income/expense due to both volume and rate
has been allocated to volume and rate changes in proportion to the
relationship of the absolute dollar amounts of the change in each.
(14)
Investment Security Maturities, Yields, and Market Values
( In thousands )
Table 4
December 31, 1995
Taxable
U.S. T.E. Federal T.E. State & T.E. T.E. Equiv.
Treasury Yield Agencies Yield Municipal Yield Other Yield Total Yield
Maturity Book Value
Available-for-Sale
Within One Year $ 6,612 4.94% $17,770 7.38% $ 0 0.00% $ 0 0.00% $24,382 6.72%
One to Five Years 5,100 6.17% 18,087 6.79% 3,930 8.94% 13,477 5.50% $40,594 6.49%
Five to Ten Years 0 0.00% 0 0.00% 0 0.00% 1,179 7.40% 1,179 7.40%
Over Ten Years 0 0.00% 0 0.00% 0 0.00% 7,188 6.16% 7,188 6.16%
----------------------------------------------------------------------------------------------------------
Book Value $11,712 $35,857 $3,930 $21,844 $73,343 6.55%
==========================================================================================================
Taxable Equivalent Yield 5.48% 7.08% 8.94% 5.82% 6.55%
Held-to-Maturity
Within One Year $ 0 0.00% $ 0 0.00% $ 505 7.42% $ 2,258 7.76% $ 2,763 7.70%
One to Five Years 0 0.00% 800 6.08% 3,396 7.68% 9,905 7.03% 14,101 7.13%
Five to Ten Years 0 0.00% 0 0.00% 645 5.49% 0 0.00% 645 5.49%
Over Ten Years 0 0.00% 0 0.00% 0 0.00% 4,985 7.28% 4,985 7.28%
-----------------------------------------------------------------------------------------------------------
Book Value $ 0 $ 800 $4,546 $17,148 $22,494 7.47%
===========================================================================================================
Taxable Equivalent Yield 0.00% 6.08% 8.76% 7.20% 7.47%
===========================================================================================================
Total Book Value $11,712 $36,657 $8,476 $38,992 $95,837
===========================================================================================================
Market Value $11,735 $37,223 $8,268 $39,086 $96,312
===========================================================================================================
December 31,1994
Book Value $21,749 $34,548 $8,025 $33,582 $97,904
===========================================================================================================
December 31,1993
Book Value $23,467 $33,315 $8,538 $16,211 $81,531
===========================================================================================================
<FN>
**The above yields have been adjusted to reflect a tax equivalent basis
assuming a tax rate of 34%.
(15)
Summary of Loan Portfolio
( In thousands )
Table 5
Loans Outstanding as of December 31,
1995 1994 1993 1992 1991
------------------------------------------------------------------
Commercial, Financial, & Agricultural $ 56,893 $47,111 $38,351 $48,295 $46,666
Real Estate_Construction 10,696 19,838 10,902 4,568 2,118
Real Estate_Mortgage 242,789 220,991 220,228 198,659 173,364
Installment 50,206 47,785 47,301 50,939 61,940
-------------------------------------------------------------------
TOTAL $360,584 $335,725 $316,782 $302,461 $284,088
===================================================================
Percentage of Portfolio as of December 31,
1995 1994 1993 1992 1991
------------------------------------------------------------------
Commercial, Financial, & Agricultural 15.78% 14.03% 12.11% 15.97% 16.43%
Real Estate_Construction 2.97% 5.91% 3.44% 1.51% 0.75%
Real Estate_Mortgage 67.33% 65.83% 69.52% 65.68% 61.02%
Installment 13.92% 14.23% 14.93% 16.84% 21.80%
------------------------------------------------------------------
TOTAL 100.00% 100.00% 100.00% 100.00% 100.00%
==================================================================
Maturities of Loan Portfolio
(In thousands)
Table 6
December 31, 1995
MATURING
MATURING AFTER ONE MATURING
WITHIN BUT WITHIN AFTER FIVE
ONE YEAR FIVE YEARS YEARS TOTAL
--------------------------------------------------------------
Commercial, Financial & Agricultural $24,474 $2,237 $ 30,182 $ 56,893
Real Estate_Construction 0 10,696 0 10,696
Real Estate_Mortgage 11,475 50,130 181,184 242,789
Installment 17,164 31,817 1,225 50,206
--------------------------------------------------------------
Total $53,113 $94,880 $212,591 $360,584
==============================================================
Classified by Sensitivity to Change in Interest Rates
Fixed-Interest Rate Loans $45,214 $58,910 $53,929 $158,053
Adjustable-Interest Rate Loans 7,899 35,970 158,662 202,531
---------------------------------------------------------------
Total $53,113 $94,880 $212,591 $360,584
===============================================================
(16)
Risk Elements of Loan Portfolio
( In thousands )
Table 7
For the Years Ended December 31
1995 1994 1993 1992 1991
---------------------------------------------------------------
Non-accrual Loans $1,075 $1,027 $438 $2,337 $3,155
Accruing Loans Past Due 90 Days or More 963 489 1,243 463 887
Restructured Loans 0 0 0 1,530 0
Information with respect to non-accrual loans at December 31,1995 and 1994 is
as follows:
1995 1994
----------------------
Non-accrual Loans $1,075 $1,027
Interest income that would have been recorded under original terms $ 86 $ 82
Interest income recorded during the period $ 18 $ 48
Activity of Loan Loss Provision
Table 8 ( In thousands )
Summary of Loan Loss Experience
For the Years Ended December 31
1995 1994 1993 1992 1991
------------------------------------------------------------------
Balance at Beginning of Period $ 2,350 $ 2,306 $ 2,798 $ 2,572 $ 2,527
Loans Charged Off:
Commercial, Financial, and Agricultural 19 35 469 53 250
Real Estate_Construction 0 0 0 0 0
Real Estate_Mortgage 205 164 359 359 276
Installment 186 121 264 349 588
-------------------------------------------------------------------
TOTAL CHARGED OFF 410 320 1,092 761 1,114
Recoveries of Loans:
Commercial, Financial, and Agricultural 59 39 135 87 50
Real Estate_Construction 0 0 0 0 0
Real Estate_Mortgage 31 35 97 79 60
Installment 90 126 99 102 97
-------------------------------------------------------------------
TOTAL RECOVERIES 180 200 331 268 207
Net Loans Charged Off 230 120 761 493 907
Provision Charged to Operations 0 164 269 719 952
-------------------------------------------------------------------
Balance at the End of Period 2,120 2,350 2,306 2,798 2,572
-------------------------------------------------------------------
Loans Net of Unearned Income at End of Period $360,584 $335,725 $316,782 $302,461 $284,088
===================================================================
Daily Average Balance of Loans $352,720 $324,140 $308,804 $289,722 $283,558
===================================================================
Allowance for Possible Loan Loss to
Loans Outstanding 0.59% 0.70% 0.73% 0.93% 0.91%
====================================================================
Net Charge Offs to Average Loans Outstanding 0.07% 0.04% 0.24% 0.06% 0.03%
=====================================================================
(17)
Allocation of Allowance for Loan Losses
( In thousands )
Table 9
1995 1994 1993 1992 1991
---------------------------------------------------------------
Commercial $ 301 $ 457 $ 448 $ 544 $ 500
Real Estate_Mortgage 1,214 661 649 787 723
Home Equity 48 11 11 13 12
Consumer 206 223 219 266 244
Commitments 171 78 77 93 85
Unallocated 180 920 902 1,095 1,008
---------------------------------------------------------------
Total $2,120 $2,350 $2,306 $2,798 $2,572
===============================================================
Average Deposit Balances
Table 10 ( In thousands )
Deposits by Major Classification for the Years Ended December 31,
1995 1994 1993
--------------------------------------------------------------------------------------
Average Average Average
Balance Yield Balance Yield Balance Yield
---------------------------------------------------------------------------------------
Noninterest-bearing
demand deposits $ 46,114 $ 43,763 $ 36,054
Interest-bearing demand deposits 95,959 2.74% 93,352 2.29% 87,539 2.42%
Savings deposits 70,699 2.89% 85,998 2.74% 73,528 2.70%
Time deposits $100,000 or more 29,283 5.46% 29,937 3.81% 17,093 4.41%
Time deposits less than $100,000 166,877 4.97% 133,528 3.99% 154,863 2.60%
------------------------------------------------------------------------------------------
Total $408,932 $386,578 $369,077
==========================================================================================
(18)
Maturity of Time Deposits
( In thousands )
Table 11 For the Year Ended December 31, 1995
Greater than Less Than
$100,000 $100,000
--------------------------------
Maturities
3 Months or Less $ 3,670 $ 19,367
3 - 6 Months 7,403 23,477
6-12 Months 10,692 46,724
Over 1 Year 8,568 66,675
--------------------------------
Total $30,333 $156,243
================================
Summary of Significant Ratios
Table 12
1995 1994 1993
------------------------------------
Return on Average Assets 1.18% 1.40% 1.42%
Return on Average Equity 10.47% 12.32% 12.86%
Dividend Payout Ratio 53.05% 33.80% 37.11%
Total Equity to Total Assets at Year End 11.39% 11.14% 11.43%
Primary Capital Ratio 11.76% 10.02% 11.91%
Total Risk-based Capital Ratio 15.19% 16.18% 18.88%
Leverage Ratio 15.19% 16.18% 18.88%
(19)
Summary of Interest Sensitivity Analysis
Table 13 (In thousands)
As of December 31, 1995
0-90 91-365 1-5 Over 5
Days Days Years Years TOTAL
-----------------------------------------------------------------
Assets
Rate Sensitive
Securities
(Available-for-Sale & Held-to-Maturity) (1) $ 14,603 $ 30,457 $ 48,000 $ 3,091 $ 96,151
Loans (2) 64,395 88,168 166,550 41,471 360,584
Fed Funds Sold 0 0 0 0 0
-----------------------------------------------------------------
TOTAL RATE SENSITIVE $ 78,998 $118,625 $214,550 $44,562 $456,735
Liabilities
Rate Sensitive Deposits
Investors' Choice 10,479 0 0 0 10,479
Time Deposits Less Than $100,000 19,367 70,201 66,675 0 156,243
Time Deposits $100,000 or More 3,670 18,095 8,569 0 30,334
IMMA 29,821 0 0 0 29,821
ONE & Now Accounts 53,178 0 0 0 53,178
Fed Funds Purchased
and Other Borrowed Funds 3,000 0 0 0 3,000
-----------------------------------------------------------------
TOTAL RATE SENSITIVE (3) and (4) $119,515 $88,296 $ 75,244 $ 0 $283,055
GAP ( Rate Sensitive Assets less Rate
Sensitive Liabilities ) ($40,517) $30,329 $139,306 $44,562 $173,680
GAP to TOTAL Assets (8.32%) 6.23% 28.60% 9.15% 35.65%
<FN>
(1) Securities are based on estimated maturities at book value.
(2) Adjustable Rate Loans are shown in the time frame corresponding
to the next contractual interest rate adjustment.
(3) Transaction Accounts such as IMMA , ONE, and NOW are generally
assumed to be subject to repricing within one year. This is based on the
Corporation's historical experience with respect to such accounts.
(4) This total does not include any type of savings accounts.
Management feels these accounts are not rate sensitive.
(21)
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) The following audited consolidated financial statements and related
documents are set forth in this Annual Report on Form 10-K on the following
pages:
Page Number
Independent Auditors' Report 23
Consolidated Balance Sheet 24
Consolidated Statements of Income 25
Consolidated Changes in Shareholder Equity 26
Consolidated Statement of Cash Flows 27
Notes to Consolidated Financial Data 28
(b) The following supplementary data is set forth in this Annual
Report on Form 10-K on the following pages:
Summary of Quarterly Financial Data 40
(21)
To the Shareholders:
The consolidated financial statements, accompanying notes and related
financial data of First United Corporation were prepared by Management, who
has the primary responsibility for the integrity of the financial institution.
The Corporation has a comprehensive system of internal accounting controls
designed to provide reasonable assurance that assets are safe-guarded and
reported financial information accurately reflects the condition of First
United Corporation and its subsidiaries. This system of controls is reviewed
by both internal auditors and independent auditors who monitor the adequacy and
effectiveness of the control sytem.
The audit function, selection of independent auditors, and review of the
results of regulatory examinations are under the general oversight of the
Audit Committee of the Board of Directors. Regular meetings are held with the
internal auditors and the independent auditors, both of whom have free, direct
access to the Committee. Ernst & Young LLP, independent auditors, have audited
the financial statements of First United Corporation and subsidiaries for the
years ended December 31, 1995, 1994, and 1993, as stated in their report.
Richard Stanton
/s/ RICHARD STANTON
Chairman of the Board, President
and Chief Executive Officer
(22)
Report of Independent Auditors
Board of Directors and Shareholders
First United Corporation
We have audited the accompanying consolidated statements of financial
condition of First United Corporation and subsidiaries as of December 31, 1995
and 1994, the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of First United
Corporation and subsidiaries at December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
As discussed on Note 1 to the financial statements effective January 1,
1994, the Corporation changed its method of accounting for investments in debt
and equity securities.
/S/ ERNST & YOUNG LLP
(Ernst & Young LLP)
Baltimore, Maryland
February 2, 1996
(23)
First United Corporation and Subsidiaries
Consolidated Statements of Financial Condition
(In thousands)
December 31
1995 1994
Assets
Cash and due from banks $ 16,011 $ 14,536
Investments:
Available-for-sale securities-at market value-cost-$73,343 and $75,198
at December 31, 1995 and 1994 respectively 73,657 72,913
Held-to-maturity market-value_$22,655 and $22,100
at December 31, 1995 and 1994, respectively 22,494 22,706
--------------------------
Total investment securities 96,151 95,619
Loans 360,584 335,725
Reserve for possible credit losses (2,120) (2,350)
-------------------------
Net loans 358,464 333,375
Bank premises and equipment 9,605 9,354
Accrued interest receivable and other assets 6,938 6,156
-------------------------
Total Assets $487,169 $459,040
=========================
Liabilities and Shareholders' Equity
Liabilities:
Noninterest-bearing deposits $ 49,541 $ 43,090
Interest-bearing deposits 374,753 348,560
--------------------------
Total deposits 424,294 391,650
Federal funds purchased and other borrowed money 3,000 11,373
Reserve for taxes, interest and other liabilities 4,371 4,886
-------------------------
Total Liabilities 431,665 407,909
-------------------------
Shareholders' Equity:
Preferred stock_no par value
Authorized and unissued 2,000 shares
Capital stock_par value $.01 per share
Authorized 12,000 shares, issued and outstanding 6,194 and
6,192 shares at December 31, 1995 and 1994 respectively 62 62
Surplus 23,184 23,141
Retained earnings 32,065 29,435
Unrealized gain (loss) on available-for-sale securities, net of tax 193 (1,507)
-------------------------
Total Shareholders' Equity 55,504 51,131
-------------------------
Total Liabilities and Shareholders' Equity $487,169 $459,040
=========================
See notes to consolidated financial statements.
(24)
First United Corporation and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share amounts)
Year ended December 31
1995 1994 1993
--------------------------------------
Interest income
Interest and fees on loans $31,630 $28,295 $27,712
Interest on investment securities:
Taxable 4,985 4,101 3,929
Exempt from federal income taxes 451 515 583
---------------------------------------
5,436 4,616 4,512
Interest on federal funds sold 208 144 260
Interest on time deposits with other banks 0 4 0
---------------------------------------
Total interest income 37,274 33,059 32,484
Interest expense
Interest on deposits:
Savings 2,045 2,359 2,668
Interest-bearing transaction accounts 2,628 2,136 2,147
Time, $100,000 or more 1,600 1,142 889
Other time 8,296 5,326 5,617
Interest on federal funds purchased and other borrowed funds 152 302 35
---------------------------------------
Total interest expense 14,721 11,265 11,356
--------------------------------------
Net interest income 22,553 21,794 21,128
Provision for possible credit losses 0 165 269
-------------------------------------
Net interest income after provision for possible credit losses 22,553 21,629 20,859
Other operating income
Trust Department income 1,175 839 744
Service charges on deposit accounts 1,593 1,302 1,365
Insurance premium income 283 302 314
Security (losses) and gains (20) (5) 28
Other income 1,259 1,394 1,037
------------------------------------
4,290 3,832 3,488
Other operating expense
Salaries and employee benefits 9,144 8,838 7,627
Occupancy expense of premises 835 894 977
Equipment expense 1,300 1,154 1,053
Data processing expense 643 486 386
Deposit assessment and related fees 585 965 923
Restructuring costs 1,085 0 0
Other expense 4,798 3,883 4,192
-------------------------------------
18,390 16,220 15,158
-------------------------------------
Income before income taxes 8,453 9,241 9,189
Applicable income taxes 2,849 3,014 3,177
-------------------------------------
Net income 5,604 $ 6,227 $ 6,012
=====================================
Earnings per share $0.86 $0.96 $0.93
======================================
See notes to consolidated financial statements.
(25)
First United Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
(In thousands, except per share amounts)
Unrealized
Common Gains Retained Total
Stock Surplus (Losses) Earnings Capital
-------------------------------------------------------------------------------
Balance at January 1, 1993 $62 $22,638 0 $22,194 $44,894
Net income for the year 6,012 6,012
Dividend reinvestment and stock purchase plan 367 367
Cash dividends_$.35 per share (2,901) (2,901)
----------------------------------------------------------------------------
Balance at December 31, 1993 62 23,005 0 25,305 48,372
Adjustment to beginning balance
for change in accounting method,
net of income tax of $261 506 506
Change in unrealized gains (losses),
net of tax of $516 (2,013) (2,013)
Net income for the year 6,227 6,227
Dividend reinvestment and stock purchase plan 136 136
Cash dividends_$.43 per share (2,097) (2,097)
------------------------------------------------------------------------------
Balance at December 31, 1994 $62 $23,141 $(1,507) $29,435 $51,131
Change in unrealized gains (losses),
net of tax of $121 1,700 1,700
Net income for the year 5,604 5,604
Dividend reinvestment and stock purchase plan 43 43
Cash dividends_$.46 per share (2,974) (2,974)
--------------------------------------------------------------------------------
Balance at December 31, 1995 $62 $23,184 193 $32,065 $55,504
================================================================================
<FN>
( ) indicate deduction
See notes to consolidated financial statements.
(26)
First United Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Year ended December 31
1995 1994 1993
------------------------------------
Operating activities
Net income $ 5,604 $ 6,227 $ 6,012
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for possible credit losses 0 165 269
Provision for depreciation 1,145 864 821
Net accretion and amortization of investment
security discounts and premiums 399 717 1,365
Loss (gain) on sale of investment securities 20 5 (28)
(Increase) decrease in accrued interest receivable
and other assets (782) (1,544) 457
(Decrease) increase in reserve for taxes, interest
and other liabilities (515) (1,595) 119
-------------------------------------
Net cash provided by operating activities 5,871 4,839 9,015
Investing activities
Proceeds from sales of investment securities 0 0 1,614
Proceeds from maturities and sales of investment
securities available for sale 105,834 45,747 0
Purchases of available for sale investment securities (103,911) (59,770) (71,156)
Purchases of investment securities held-to-maturity (7,597) (8,428) 0
Proceeds from maturities of investment securities
held-to-maturity 6,423 6,133 68,922
Net (increase) in loans (25,089) (19,064) (15,082)
Purchase of premises and equipment (1,396) (2,192) (2,068)
-------------------------------------
Net cash used in investing activities (25,736) (37,574) (17,770)
Financing activities
Net increase in demand deposits, NOW accounts
and savings accounts 3,765 8,733 8,219
Net increase (decrease) in certificates of deposit 28,879 14,391 (5,519)
Increase in federal funds purchased and other
borrowed funds (8,373) 11,373 0
Cash dividends paid or declared (2,974) (2,097) (2,901)
Proceeds from issuance of common stock 43 136 367
-------------------------------------
Net cash provided by financing activities 21,340 32,536 166
-------------------------------------
Increase (Decrease) in cash and cash equivalents 1,475 (199) (8,589)
Cash and cash equivalents at beginning of year 14,536 14,735 23,324
-------------------------------------
Cash and cash equivalents at end of year $16,011 $14,536 $14,735
=====================================
See notes to consolidated financial statements.
(27)
First United Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except per share amounts)
1. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying financial statements of First United Corporation
(Corporation) include the accounts of its wholly owned subsidiaries, First
United National Bank & Trust (Bank) and Oakfirst Life Insurance Corporation
(Non-Bank). All significant intercompany accounts and transactions have been
eliminated.
Business
First United Corporation is a registered bank holding company, incorporated
under the laws of Maryland. It is the parent company of First United National
Bank & Trust and Oakfirst Life Insurance Corporation. First United National
Bank & Trust provides a complete range of retail and commercial banking
services to a customer base serviced by a net work of twenty-two offices and
twenty-four automated teller machines. This customer base includes
individuals, businesses and various governmental units. Oakfirst Life
Insurance Corporation is a reinsurance company that reinsures credit life and
credit accident and health insurance written by U.S. Life Credit Life
Insurance Corporation on consumer loans made by First United National Bank &
Trust.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles that require the
Corporation to make estimates and assumptions that affect the reported amounts
of certain assets and liabilities at the date of the financial statements as
well as the reported amount of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
Investments
The Corporation adopted Statements of Financial Accounting Standard No.115,
"Accounting for Certain Investments in Debt and Equity Securities," as of
January 1, 1994, which resulted in a change in classification of $71 million
of investment securities from held-to-maturity to available-for-sale.
Securities held-to-maturity and available-for-sale: Management determines
the appropriate classification of debt securities at the time of purchase and
reevaluates such designation as of each balance sheet date. Debt securities
are classified as held-to-maturity when the Corporation has the positive
intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost.
Debt securities not classified as held-to-maturity and marketable equity
securities are classified as available-for-sale. Available-for-sale securities
are stated at fair value, with the unrealized gains and losses, net of tax,
reported as a separate component of shareholders' equity.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization is included in interest
income from investments. Interest and dividends are included in interest
income from investments. Realized gains and losses, and declines in value
judged to be other-than-temporary are included in net securities gains
(losses). The cost of securities sold is based on the specific identification
method.
At December 31, 1995, there were no securities held in the investment
portfolio which were classified as trading.
Interest on Loans
Interest on loans is recognized based upon the principal amount outstanding.
It is the Corporation's policy to discontinue the accrual of interest when
circumstances indicate that collection is doubtful.
Bank Premises and Equipment
Bank premises and equipment are carried at cost, less accumulated provision
for depreciation. The provision for depreciation for financial reporting
generally has been made by using the straight-line method based on the
estimated useful lives of the assets, which range from 18 to 50 years for
buildings and 4 to 20 years for equipment. The provision
(28)
for depreciation for general tax purposes and for the Alternative Minimum Tax
generally has been made using the double-declining balance method and the ACRS
method based on the estimated useful lives of the assets which range from 18 to
50 years for buildings and 4 to 10 years for equipment.
Reserve for Possible Credit Losses
For financial reporting purposes, management regularly reviews the loan
portfolio and determines a provision for possible credit losses based upon the
impact of economic conditions on the borrower's ability to repay, past
collection experience, the risk characteristics of the loan portfolio and such
other factors which, in management's judgement, deserve current recognition.
For income tax purposes, the Corporation provides the maximum addition to the
reserve for possible credit losses allowable under applicable federal income
tax law. Deferred taxes are provided or reversed in the statement of income
for any difference.
Income Taxes
The provision for income taxes is based on income and expense amounts
reported in the Consolidated Statements of Income adjusted for the effects of
the alternative minimum tax. Under the liability method, the deferred tax
liability or asset is determined based on the difference between the financial
statement and tax bases of assets and liabilities (temporary differences) and
is measured at the enacted tax rates that will be in effect when these
differences reverse. Deferred tax expense is determined by the change in the
liability or asset for deferred taxes adjusted for changes in the deferred tax
asset valuation allowance.
Statement of Cash Flow
The Corporation has defined cash and cash equivalents as those amounts
included in the balance sheet captions "Cash and due from banks" and "Federal
funds sold." The Corporation paid $14,721, $11,265 and $11,356 in interest on
deposits and other borrowed money for the years ending December 31, 1995, 1994
and 1993, respectively.
Earnings Per Share
Earnings per share are based on the weighted average number of shares
outstanding of 6,503, 6,501 and 6,488 for 1995, 1994 and 1993, respectively.
For comparative purposes, earnings per share, dividends per share and
weighted average shares outstanding for the years ended December 31, 1995, 1994
and 1993 have been restated to reflect the 50% stock dividend paid February 8,
1994, and the 5% stock dividend to be paid on March 29, 1996.
Recently Issued Accounting Guidance
In March 1995, the FASB issued Statements No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
The Corporation is required to adopt Statement No. 121 in the fiscal year
ending December 31, 1996. The Corporation has completed the analysis of
Statement No. 121 and has determined that the effect of implementing this
Statement will be immaterial to the Corporation's financial position and
results of operations.
2. Merger
On November 30, 1993, the Corporation merged with HomeTown Bancorp (and its
subsidiary Myersville Bank). On that date, the Corporation issued 697,500
shares of its common stock in exchange for all of the outstanding shares of
HomeTown Bancorp's common stock. On December 23, 1993, HomeTown Bancorp (the
holding Company) was dissolved resulting in Myersville Bank becoming a direct
subsidiary of the Corporation. The consolidated financial statements of the
Corporation give retroactive effect to the merger, which has been accounted
for as a pooling of interests. Accordingly, the financial statements of the
Corporation and Myersville Bank have been combined and are included in the
consolidated financial statements of the Corporation for all periods
presented.
(29)
Revenue, net income and dividends per share for the Corporation and for
HomeTown Bancorp were as follows:
Year ended December 31
1993
----------------------
Revenue:
First United Corp. $31,346
Myersville 4,626
-------
Combined $35,972
=======
Net Income:
First United Corp. $ 5,332
Myersville 680
--------
Combined $ 6,012
========
Dividends per share:
First United Corp. .53
Myersville 1.40
Combined .35
3. Consolidation
During 1995, First United Corporation received regulatory approval to
consolidate its three banking subsidiaries into one bank, First United
National Bank & Trust. Effective August 28, 1995, First United National Bank &
Trust merged with First United Bank of West Virginia, N.A. Effective November
20, 1995, First United National Bank & Trust merged with Myersville Bank. Both
mergers were accounted for as a pooling of interests.
4. Investment Securities
The following is a comparison of book and market values of
available-for-sale securities and held-to-maturity securities:
Available-for-Sale Securities
-----------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------
December 31, 1995 (In thousands)
U. S. Treasury securities and obligations of
U. S. government agencies $47,570 $290 $ 61 $47,799
Obligations of states and political subdivisions 3,929 96 2 4,023
Mortgage-backed securities 21,844 122 131 21,835
U. S. corporate securities and other debt securities 0 0 0 0
---------------------------------------------------
Total debt securities $73,343 $508 $194 $73,657
===================================================
Held-to-Maturity Securities
---------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------
December 31, 1995 (In thousands)
U. S. Treasury securities and obligations of
U. S. government agencies $ 800 $ 0 $ 0 $ 800
Obligations of states and political subdivisions 4,546 67 9 4,604
U. S. corporate securities 14,209 113 9 14,313
----------------------------------------------------
Total debt securities 19,555 180 18 19,717
Equity securities 2,939 0 0 2,939
----------------------------------------------------
Totals $22,494 $180 $ 18 $22,656
====================================================
(30)
Equity securities consist of Federal Reserve Bank and Federal Home Loan Bank
Stock. These securities have no maturity and therefore are classified in the
"Due after 10 years" maturity line.
During the year ended December 31, 1995, available-for-sale securities with
a fair market value at the date of sale of $8.70 million were sold. The gross
realized gains on such sales totaled $2, and the gross realized losses totaled
$22.
Available-for-Sale Securities
------------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------
December 31, 1994 (In thousands)
U. S. Treasury securities and obligations of
U. S. government agencies $52,497 $ 0 $1,270 $51,227
Obligations of states and political subdivisions 2,731 0 68 2,663
Mortgage-backed securities 19,711 13 958 18,766
U. S. corporate securities and other debt securities 259 0 2 257
------------------------------------------------------
Total debt securities $75,198 $13 $2,298 $72,913
======================================================
Held-to-Maturity Securities
-------------------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------------
December 31, 1994 (In thousands)
U. S. Treasury securities and obligations of
U. S. government agencies $3,800 $ 0 $163 $ 3,637
Obligations of states and political subdivisions 5,294 71 259 5,106
U. S. corporate securities 11,185 0 255 10,930
----------------------------------------------------
Total debt securities 20,279 71 677 19,673
Equity securities 2,427 0 0 2,427
------------------------------------------------------
Totals $22,706 $71 $677 $22,100
======================================================
The amortized cost and estimated fair value of debt and marketable equity
securities at December 31, 1995, by contractual maturity, are shown below.
Actual maturities will differ from contractual maturities because the issuers
of the securities may have the right to prepay obligations without prepayment
penalties.
Available-for-sale Securities
-----------------------------
Amortized Market
Cost Value
------------------------------
Due in one year or less $24,383 24,452
Due after one year through five years 40,594 40,739
Due after five years through ten years 1,179 1,226
Due after ten years 7,187 7,240
------------------------------
$73,343 $73,657
==============================
Held-to-Maturity Securities
-------------------------------
Amortized Market
Cost Value
-------------------------------
Due in one year or less $ 2,763 $ 2,774
Due after one year through five years 14,101 14,234
Due after five years through ten years 645 663
Due after ten years 4,985 4,985
-------------------------------
$22,494 $22,656
===============================
At December 31, 1995, investment securities with a book value of $24,110 were
pledged to secure public and trust deposits as required or permitted by law.
5. Reserve for Possible Credit Losses
Transactions in the reserve for possible credit losses are summarized as
follows:
1995 1994 1993
--------------------------------------
Balance at January 1 $2,350 $2,306 $2,798
Provision charged to operating expense 0 164 269
---------------------------------------
2,350 2,470 3,067
Gross credit losses (410) (320) (1,092)
Recoveries 180 200 331
---------------------------------------
Net credit losses 230 120 761
---------------------------------------
Balance at December 31 $2,120 $2,350 $2,306
=======================================
Non-accruing loans were $1,075, $1,027 and $438 at December 31, 1995, 1994
and 1993, respectively. Interest income not recognized as a result of
non-accruing loans was $68, $34 and $132 during the years ended December 31,
1995, 1994, and 1993, respectively.
6. Loans and Concentrations of Credit Risk
The Corporation through its banking subsidiaries is active in originating
loans to customers primarily in Garrett, Allegany, Washington and Frederick
counties in Maryland; and Mineral, Hardy and Hampshire Counties in West
Virginia, and the surrounding regions of West Virginia and Pennsylvania. The
following table presents the Corporation's composition of credit risk by
significant concentration.
December 31, 1995
--------------------------------------
Loans
Loan Commitments Total
--------------------------------------
Commercial, financial and agricultural $ 56,893 $13,931 $ 70,824
Real estate_construction 10,696 5,075 15,771
Real estate_mortgage 242,789 12,823 255,612
Installment 50,206 3,003 53,209
Letters of credit 0 856 856
---------------------------------------
$360,584 $35,688 $396,272
=======================================
December 31, 1994
---------------------------------------
Loans
Loan Commitments Total
---------------------------------------
Commercial, financial and agricultural $ 47,111 $27,868 $ 74,979
Real estate_construction 19,838 14,190 34,028
Real estate_mortgage 220,991 21,482 242,473
Installment 47,785 7,570 55,355
Letters of credit 0 886 886
---------------------------------------
$335,725 $ 71,996 $407,721
=======================================
Loan commitments are made to accommodate the financial needs of the
Corporation's customers. Letters of credit commit the Corporation to make
payments on behalf of customers when certain specified future events occur.
Letters of credit are issued to customers to support contractual obligations
and to insure job performance. Historically, more than 99 percent of letters
of credit expire unfunded. Loan commitments and letters of credit have credit
risk essentially the same as that involved in extending loans to customers and
are subject to normal credit policies. Collateral is obtained based on
management's credit assessment of the customer.
(32)
Commercial, financial and agricultural loans are collateralized by real
estate and equipment, and the loan-to-value ratios generally do not exceed 70
percent. Real estate mortgage loans are collateralized by the related
property, and the loan-to-value ratios generally do not exceed 80 percent.
Any customer real estate mortgage loan exceeding a loan-to-value ratio of
80 percent will require private mortgage insurance. Installment loans are
typically collateralized with loan-to-value ratios which are established based
on historical experience and the financial condition of the borrower and
generally range from 80 percent to 90 percent of the amount of the loan. The
Corporation will also make unsecured consumer loans to qualified borrowers
meeting with the underwriting standards of the Corporation.
7. Bank Premises and Equipment
The composition of Bank premises and equipment is as follows:
1995 1994
----------------------
Bank premises $ 8,721 $ 9,292
Equipment 10,329 8,735
----------------------
19,050 18,027
Less accumulated depreciation (9,445) (8,673)
----------------------
Total $ 9,605 $ 9,354
======================
8. Fair Value of Financial Instruments
As required by the Statement of Financial Accounting Standards ("SFAS") No.
107, "Disclosures about Fair Value of Financial Instruments," the Corporation
has presented fair value information about financial instruments, whether or
not recognized in the statement of financial condition, for which it is
practicable to estimate that value. Fair value is best determined by values
quoted through active trading markets. Active trading markets are
characterized by numerous transactions of similar financial instruments
between willing buyers and willing sellers. Because no active trading market
exists for various types of financial instruments, many of the fair values
disclosed were derived using present value discounted cash flow or other
valuation techniques. As a result, the Corporation's ability to actually
realize these derived values cannot be assumed.
The fair values disclosed under SFAS No. 107 may vary significantly between
institutions based on the estimates and assumptions used in the various
valuation methodologies. SFAS No. 107 excludes disclosure of non financial
assets such as buildings as well as certain financial instruments such as
leases. Accordingly, the aggregate fair values presented do not represent the
underlying value of the Corporation.
The actual carrying amounts and estimated fair values of the Corporation's
financial instruments that are included in the statement of financial
condition at December 31 are as follows:
1995 1994
----------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------------------------------------------
Cash and due from banks $ 16,011 16,011 $14,536 $ 14,536
Investment securities 96,151 96,312 95,619 95,013
Loans 360,584 360,169 335,725 329,143
Deposits 424,294 423,832 391,650 392,195
Federal funds purchased
and other borrowed funds 3,000 3,000 11,373 11,373
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments:
Cash and Cash Equivalents: The carrying amounts as reported in the
statement of financial condition for cash and short-term instruments approximate
those assets' fair values.
Investment Securities: Fair values for investment securities are based on
quoted market values.
(33)
8. Fair Value of Financial Instruments (continued)
Loans Receivable: For variable rate loans that reprice frequently or "in
one year or less," and with no significant change in credit risk, fair values
are based on carrying values. Fair values for fixed rate loans and loans that do
not reprice frequently are estimated using a discounted cash flow calculation
that applies current interest rates being offered on the various loan
products.
Federal Funds Purchased and Other Borrowed Funds: Federal funds purchased
and other borrowed funds include federal funds purchased, Federal Home Loan Bank
borrowings and other short-term borrowings. The fair value of short-term
borrowings approximates the carrying value of these instruments based upon
their short-term nature.
Deposit Liabilities: The fair values disclosed for demand deposits (e.g.,
interest and non-interest checking, savings, and certain types of money market
accounts) are, by definition, equal to the amount payable on demand at the
reporting date (i.e., their carrying amounts.) The carrying amounts for
variable rate certificates of deposit approximate their fair values at the
reporting date. Fair values for fixed rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered on the various certificates of deposit to the cash
flow stream.
Off-balance-sheet Financial Instruments: In the normal course of business,
the Corporation makes commitments to extend credit and issues standby letters of
credit. As a result of excessive costs, the Corporation considers estimation
of fair values for commitments and standby letters of credit to otherwise be
impracticable. The Corporation's estimate of impairment due to collectibility
concerns related to these off-balance-sheet financial instruments is
included in the reserve for possible credit losses. The Corporation does not
have any derivative financial instruments at December 31, 1995.
9. Federal Home Loan Bank (FHLB) Advances and Other Borrowings
Borrowings consist of the following:
December 31, 1995
FHLB advances payable to FHLB Atlanta,
secured by all FHLB advances and certain first Mortgage Loans:
Due January 3, 1996 @ 6.14% $3,000
-------
Total $3,000
December 31, 1994
FHLB advances payable to FHLB Atlanta,
secured by all FHLB advances and certain first Mortgage Loans:
Due January 4, 1995 @ 6.88% $4,000
Due January 21, 1995 @ 6.25% 2,000
Due January 22, 1995 @ 6.18% 2,000
-------
Total $8,000
=======
The Corporation through its banking subsidiary, First United National Bank
& Trust, has a credit agreement with FHLB of Atlanta in an amount up to $75,000.
The line of credit is secured with the first lien on the 1-4 family mortgage
portfolio totaling $197.94 million on December 31, 1995.
The Corporation's banking subsidiary First United National Bank & Trust has
established various unsecured lines of credit totaling $6 million at various
upstream correspondent banks. As of December 31, 1995, there was no
outstanding balance under these lines. The subsidiary also has established $8
million reverse repo lines at various correspondent banks. As of December 31,
1995, there was nothing outstanding on these facilities. The Corporation
utilizes the lines to meet daily liquidity and does not rely on lines as a
source of long term liquidity.
(34)
10. Income Tax
A reconciliation of the statutory income tax at the applicable rates to the
income tax expense included in the statement of income is as follows:
Liability
Method
------------------------------
1995 1994 1993
------------------------------
Income before income taxes $8,453 $9,241 $9,189
Statutory income tax rate 34% 34% 34%
------------------------------
Income tax 2,874 3,142 3,124
State franchise tax, net of federal tax benefit 233 283 424
Effect of nontaxable interest and loan income (249) (283) (369)
Effect of TEFRA interest limitation 27 27 32
Other (36) (155) (34)
-------------------------------
Income tax expense for the year $2,849 $3,014 $3,177
===============================
Taxes currently payable 2,862 $2,738 2,901
Deferred taxes (benefit) (13) 366 276
-------------------------------
Income tax expense for the year $2,849 $3,014 $3,177
===============================
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Corporation's deferred tax assets and liabilities as of December 31 are
as follows:
1995 1994
-----------------------
Deferred tax assets:
Reserve for possible credit losses $335 $422
Deferred loan origination fees 271 287
Pension expense 144 68
Merger costs 122 115
Unrealized loss on investment securites 0 777
Other 25 18
----------------------
Total deferred tax assets 897 1,687
Valuation allowance (122) (153)
----------------------
Total deferred tax assets less valuation allowance 775 1,534
Deferred tax liabilities:
Market discount (45) 0
Excess depreciation (535) (487)
Employee compensation (28) (207)
Unrealized gain on investment securities (112) 0
Other (91) 0
---------------------
Total deferred tax liability (811) (694)
---------------------
Net deferred tax assets ($ 36) $840
=====================
The Corporation made income tax payments of $2,150, $3,142, and $2,030 for
the years ending December 31, 1995, 1994 and 1993, respectively.
11. Employee Benefit Plans
The Bank sponsors a noncontributory pension plan covering substantially all
full-time employees who qualify as to age and length of service.
(35)
Pension expense charged to operations was $711, $243 and $225 in 1995, 1994,
and 1993, respectively. The benefits are based on years of service and the
employees compensation during the last five years of employment. The
Corporation's funding policy is to make annual contributions in amounts
sufficient to meet the current year's funding requirements.
The following table sets forth the plan's consolidated funded status and
amounts recognized in the Corporation's financial statements for the years
ended December 31:
1995 1994
-------------------
Actuarial present value of accumulated benefit obligations:
Accumulated benefit obligation, including vested
benefits of $5,228 in 1995 and $4,178 in 1994 $(5,296) $(4,214)
-------------------
Projected benefit obligation for service rendered to date (6,943) (6,147)
Plan assets at fair value, primarily listed stocks and
fixed income securities 6,683 5,419
-------------------
Projected benefit obligation in excess of plan assets (260) (728)
Unrecognized net loss 552 1,268
Unrecognized prior service cost arising from amendment
effective January 1, 1991 (34) (36)
Unrecognized net asset arising at transition at January 1 (762) (800)
------------------
Accrued pension cost $ (504) $ (296)
==================
1995 1994 1993
--------------------------
Net pension cost included the following components:
Service costs_benefits earned during the year $270 $261 $249
Interest cost on projected benefit obligation 475 417 426
Actual return on plan assets (1,087) 177 (341)
Net amortization and deferral 640 (612) (109)
--------------------------
Net pension expense included in employee benefits $298 $243 $225
==========================
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.5% for 1995 and 1994, and 8%
for 1993. The expected long-term rate of return on plan assets was 7.5% in
1995 and 1994, and 8% in 1993. Salaries were assumed to increase at 4% in 1995
and 1994 and at 5% and 6.25% in 1993 for the Corporation and Myersville,
respectively. During 1994, the Corporation lowered the discount rate used to
value its projected benefit obligation and the long-term rate of return on
plan assets to reflect the current rate environment. These changes in
assumptions will not have a material impact on the Corporation's consolidated
financial statements for 1996.
12. Federal Reserve Requirements
The banking subsidiaries are required to maintain reserves with the Federal
Reserve Bank. During 1995, the daily average amount of these required reserve
was approximately $4,187.
13. Restrictions on Subsidiary Dividends, Loans or Advances
Banking law limits the amount of dividends which a bank can pay without
obtaining prior approval from bank regulators. Under this law the banking
subsidiaries could, without regulatory approval, declare dividends in 1995 of
approximately $6,760 plus an additional amount equal to the net profits for
1996 up to the date of any such dividend declaration.
Under Federal Reserve regulations, the banking subsidiaries are also limited
to the amount they may loan to their affiliates, including the Corporation,
unless such loans are collateralized by specified obligations. At December 31,
1995, the maximum amount available for transfer from the bank to the
Corporation in the form of loans was approximately $5,762.
(36)
14. Parent Company Financial Information (Parent Company Only)
Condensed Statements of Financial Condition December 31,
1995 1994
---------------------
Assets
Cash $ 2,068 $ 775
Investment securities 4,024 2,913
Investment in bank subsidiary 44,003 43,924
Dividend receivable and other assets 65 82
Investment in non-bank subsidiaries 5,255 4,908
----------------------
Total Assets $55,415 $52,602
Liabilities and Shareholder's Equity
Reserve for taxes,interest and other
liabilities $ 46 $ 11
Shareholders' equity 55,369 52,591
----------------------
Total Liabilities and Shareholder's Equity $55,415 $52,602
======================
Year ended December 31
Condensed Statement of Income 1995 1994 1993
-----------------------------
Income:
Dividend income from subsidiaries $ 5,000 $4,959 $3,251
Other income 200 147 25
-----------------------------
Total income 5,200 5,106 3,276
Expense:
Other expenses 23 73 18
-----------------------------
Total expense 23 73 18
-----------------------------
Income before income taxes and equity
in undistributed net income of subsidiaries 5,177 5,033 3,258
-----------------------------
Equity in undistributed net income of subsidiaries:
Bank 95 939 2,532
Non-bank 332 270 222
Less income tax 0 (15) 0
-----------------------------
Net income $5,604 $6,227 $6,012
=============================
Condensed Statement of Cash Flows
(37)
Year ended December 31
1995 1994 1993
-------------------------------
Operating activities
Net income $5,604 $6,227 $6,012
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in other receivables 0 0 (660)
Undistributed equity in subsidiaries:
Banks (95) (939) (2,532)
Non-bank (332) (270) (222)
Increase in other assets 17 578 660
Increase (Decrease) in other liabilities 35 (649) 0
---------------------------------
Net cash provided by operating activities 5,229 4,947 3,258
Investing activities
(Purchase) Disposal of premises and equipment 0 548 (548)
Purchase of investment securities (1,006) (2,959) (216)
Proceeds from investment maturities 0 200 35
---------------------------------
Net cash used in investing activities (1,006) (2,211) (729)
Financing activities
Cash dividends (2,973) (2,097) (2,901)
Proceeds from issuance of common stock 43 136 367
--------------------------------
Net cash used by financing activities (2,930) (1,961) (2,534)
--------------------------------
Increase in cash and cash equivalents 1,293 775 (5)
Cash and cash equivalents at beginning of year 775 0 5
--------------------------------
Cash and cash equivalents at end of year $2,068 $775 $ 0
================================
15. Commitments and Contingent Liabilities
The Corporation and its subsidiaries are at times, and in the ordinary
course of business, subject to legal actions. Management, upon the advice of
counsel, is of the opinion that losses, if any, resulting from the settlement of
current legal actions will not have a material adverse effect on the financial
condition of the Corporation.
Oakfirst Life Insurance Corporation, a wholly owned subsidiary of the
Corporation, had $10,240 of life, accident and health insurance in force at
December 31, 1995. In accordance with state insurance laws, this subsidiary is
capitalized at $5,255.
16. Related Party Transactions
In the ordinary course of business, executive officers and directors of the
Corporation, including their families and companies in which certain directors
are principal owners, were loan customers of the Corporation and its
subsidiaries. Pursuant to the Corporation's policy, such loans were made on
the same terms, including interest rates and collateral, as those prevailing
at the time for comparable transactions with unrelated persons and do not
involve more than the normal risk of collectibility. Changes in the dollar
amount of loans outstanding to officers, directors and their associates were
as follows for the years ended December 31:
1995 1994 1993
-----------------------------------------
Balance, January 1 $7,477 $2,940 $2,924
Loans or advances 144 5,971 1,023
Repayments (995) (1,434) (1,007)
------------------------------------------
Balance, December 31 $6,626 $7,477 $2,940
(38)
17. Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the
years ended December 31, 1995 and 1994.
Three months ended
March 31 June 30 Sept 30 Dec 31
----------------------------------------------
1995
Interest income $8,847 $9,220 $9,498 $9,709
Interest expense 3,364 3,589 3,810 3,958
----------------------------------------------
Net interest income $5,483 $5,631 $5,688 $5,751
Provision for possible credit losses 30 (30) 0 0
Other income 949 987 1,078 1,276
Restructuring expense 0 819 266 0
Other expenses 4,305 4,332 4,048 4,620
----------------------------------------------
Income before income taxes $2,097 $1,497 $2,452 $2,407
Applicable income taxes 698 467 850 834
----------------------------------------------
Net income $1,399 $1,030 $1,602 $1,573
==============================================
Earnings per share $0.21 $0.16 $0.25 $0.24
==============================================
Three months ended
March 31 June 30 Sept 30 Dec 31
-----------------------------------------------
1994
Interest income $7,841 $8,088 $8,302 $8,828
Interest expense 2,483 2,659 2,859 3,264
-----------------------------------------------
Net interest income 5,358 5,429 5,443 5,564
Provision for possible credit losses 80 83 2 0
Other income 891 988 994 959
Other expenses 3,867 3,957 4,186 4,210
-----------------------------------------------
Income before income taxes 2,302 2,377 2,249 2,313
Applicable income taxes 702 815 725 772
-----------------------------------------------
Net income $1,600 $1,562 $1,524 $1,541
===============================================
Earnings per share $0.25 $0.24 $0.23 $0.24
===============================================
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
(39)
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to Directors of the Registrant is incorporated
by reference from the Registrant's definitive Proxy Statement for the annual
shareholders meeting to be held April 23, 1996, from pages 2 through 6.
Executive Officers of the Registrant are:
NAME POSITION AGE
Richard G. Stanton Chairman of the Board 56
President and
Chief Executive Officer
Robert W. Kurtz Executive Vice President 49
and Treasurer
William B. Grant Executive Vice President 42
and Secretary
No family relationships, as defined by the rules and regulations of the
Securities and Exchange Commission, exist among any of the Directors,
Nominees, or Executive Officers.
All officers are elected annually by the Board of Directors and hold office at
the pleasure of the Board.
Mr. Stanton has been President and CEO of First United Corporation since 1987
and Chairman of the Board of First United Corporation since 1990 and First
United National Bank & Trust since 1987.
Mr. Kurtz has been Treasurer of First United Corporation since 1990 and
Executive Vice-President of First United National Bank & Trust since 1987.
Mr. Grant has been Secretary of First United Corporation since 1990 and
Executive Vice-President of First United National Bank & Trust since 1987.
OTHER SIGNIFICANT EMPLOYEES OF THE REGISTRANT ARE:
NAME POSITION AGE
Philip D. Frantz Senior Vice President 35
and Controller
Benjamin W. Ridder Senior Vice President 54
Director of Sales
and Training
L. Scott Rush Senior Vice President 42
Mr. Frantz has been Controller of the Corporation since 1988 and Vice
President since 1990. He was appointed Senior Vice President in 1993.
Mr. Ridder and Mr. Rush have both been Senior Vice Presidents of the Corporation
since 1987.
Item 11. EXECUTIVE COMPENSATION
Information required by Item 11 is incorporated by reference from pages 4
and 5 of the definitive Proxy Statement of the Corporation for the annual
meeting of shareholders to be held on April 23, 1996.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by Item 12 is incorporated by reference from pages 2
and 3 of the definitive Proxy Statement of the Corporation for the annual
meeting of shareholders to be held on April 23, 1996.
(40)
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from page
6 of the definitive Proxy Statement of the Corporation for the annual meeting of
shareholders to be held on April 23, 1996, and from Note 15 on page 33 of this
Form 10-K. There are no other relationships required to be disclosed in this
item pursuant to the instructions for this report.
PART IV.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) and (2) Finaincial Statements and Financial Statement Schedules.
The consolidated financial statements of the Corporation are listed in Item
6 of the Annual Report on Form 10-K. All schedules applicable to the Corporation
are shown in the financial statements or in the notes thereto included in this
Annual Report on Form 10-K.
All other schedules to the consolidated financial statements required by
Article 9 of Regulation S-X and all other schedules to the financial
statements of the Registrant required by Article 5 of Regulation S-X are not
required under the related instructions or are inapplicable and, therefore,
have been omitted.
(3) Listing of Exhibits.
(a) 3.1_Articles of Incorporation of the Corporation, incorporated by
reference to Annual Report on Form 10-K for the year ended December 31, 1993.
3.2_By-laws of the Corporation, incorporated by reference to Annual Report
on Form 10-K for the year ended December 31, 1993.
21.1_Subsidiaries of the Corporation, incorporated by reference on pages
1-4 of this Form 10-K.
(b) The Registrant filed no reports on Form 8-K during the quarter ended
December 31, 1995.
(41)
This page intentionally left blank.
(42)
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
First United Corporation
By:
/s/ RICHARD G. STANTON
Richard G. Stanton
Chairman of the Board, President,
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated.
Signatures
/S/ DAVID J. BEACHY
- ---------------------------------
(David J. Beachy) Director
/S/ DONALD M. BROWNING
- ---------------------------------
(Donald M. Browning) Director
/S/ REX W. BURTON
- ---------------------------------
(Rex W. Burton) Director
/S/ JOHN L. CONWAY
- ---------------------------------
(John L. Conway) Director
/S/ PAUL COX, JR.
- ---------------------------------
(Paul Cox, Jr.) Director
/S/ DR. B.L. GRANT
- ---------------------------------
(Dr. B. L. Grant) Director
/S/ ROBERT W. KURTZ
- ---------------------------------
(Robert W. Kurtz) Director
/S/ DR. ANDREW E. MANCE
- ---------------------------------
(Dr. Andrew E. Mance) Director
/S/ DONALD E. MORAN
- ---------------------------------
(Donald E. Moran) Director
/S/ WILLIAM B. GRANT
- ---------------------------------
(William B. Grant) Director
/S/ I. ROBERT RUDY
- ---------------------------------
(I. Robert Rudy) Director
/S/ ROBERT G. STUCK
- ---------------------------------
(Robert G. Stuck) Director
/S/ JAMES F. SCARPELLI, SR.
- ---------------------------------
(James F. Scarpelli, Sr.) Director
/S/ KAREN F. SPIKER
- --------------------------------
(Karen F. Spiker) Director