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, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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 28, 1997:
Common Stock $.01 Par Value-$104,236,259
The number of shares outstanding of the registrant's classes of common
stock as of February 28, 1997:
6,414,539 Shares
Documents Incorporated by Reference
Portions of the registrant's definitive proxy statement for the annual
shareholders meeting to be held April 29, 1997, 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 41
Item 12. Security Ownership of Certain Beneficial Owners and
Management 41
Item 13. Certain Relationships and Related Transactions 41
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 41
Signatures 43
(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, six 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, one in
Berkeley County, West Virginia and one in Hardy County, West Virginia. First
United also operates a total of twenty-six Automated Teller Machines (ATM's),
six 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, Berkeley 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, Berkeley
and Hardy Counties in West Virginia and to residents in surrounding regions of
Pennsylvania and West Virginia. The customer base in the aforementioned
geographical area consists of individuals, businesses and various governmental
units. The services provided by First United National Bank & Trust include
checking, savings, NOW and Money Market deposit accounts, business loans,
personal loans, mortgage loans, lines of credit and consumer-oriented financial
services including IRA and KEOGH accounts. In addition, First United National
Bank & Trust provides 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, 1996, First
United National Bank & Trust had total deposits of $452.54 million and total
loans of $382.78 million. The total market value of assets under the supervision
of the Trust Department was approximately $158.88 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 Bank Insurance Fund (BIF) 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. As a result of its
continued well capitalized position, the Bank paid no FDIC premium in 1996.
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.
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
periodically by the Federal Reserve Board, the national banking subsidiary is
regularly 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
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
(4)
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, 1996, the Corporation and its subsidiaries employed
approximately 389 individuals, of whom 59 were officers, 190 were full-time
employees, and 140 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 29, 1997, 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, Berkeley and Hardy Counties, West Virginia. All of the
banking offices of First United National Bank & Trust are owned by the
Corporation except for seven 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 1996, 1995 and 1994 was $.23, $.22 and
$.17 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, 1996, was 6,442,041. As of December 31,
1996, the Corporation had approximately 2,556 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, 1996. 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.
1996 High Ask High Bid
1st Quarter $18.00 $15.50
2nd Quarter 15.50 14.37
3rd Quarter 15.62 14.75
4th Quarter 16.25 15.00
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
Cash Dividends
Cash dividends were paid by the Corporation on the dates indicated as follows:
1996 1995
February $.12 $.11
May .13 .11
August .13 .12
November .13 .12
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, payable March 29, 1996. The dividend
resulted in the issuance of 309,817 shares of common stock.
The Board of Directors authorized the Corporation's officers to repurchase
up to 5% of its outstanding common stock. Purchases of the Corporation's stock
under the program were completed in brokered transactions or directly from the
Corporation's market makers. As of December 31, 1996, 64,240 shares have been
repurchased and retired under the plan authorized by the Board of Directors.
(6)
Item 6. SELECTED FINANCIAL DATA
(In thousands, except per share data)
1996 1995 1994 1993 1992
------------------------------------------------------
Balance Sheet Data
Total Assets $523,621 $487,169 $459,040 $423,380 $417,083
Total Deposits 452,539 424,294 391,650 368,527 365,827
Total Net Loans 380,594 358,464 333,375 314,476 299,663
Total Shareholders' Equity 56,815 55,504 51,131 48,372 44,894
Operating Data
Interest Income $ 39,273 $ 37,274 $ 33,059 $ 32,484 $ 34,981
Interest Expense 16,376 14,721 11,265 11,356 14,834
-----------------------------------------------------
Net Interest Income 22,897 22,553 21,794 21,128 20,147
Other Operating Income 4,869 4,290 3,832 3,488 2,750
Provision for Possible Credit Losses 749 0 165 269 719
Other Operating Expense 17,394 18,390 16,220 15,158 13,058
------------------------------------------------------
Income Before Tax 9,623 8,453 9,241 9,189 9,120
Income Tax 3,144 2,849 3,014 3,177 2,918
------------------------------------------------------
Net Income $ 6,479 $ 5,604 $ 6,227 $ 6,012 $ 6,202
======================================================
Per Share Data
Net Income $1.00 $0.86 $0.96 $0.93 $0.96
Regular Dividends Paid 0.51 0.46 0.43 0.35 0.33
Special Dividend 0.06
Book Value $8.82 $8.54 $7.87 $7.46 $6.94
<FN>
Per Share data has been restated to reflect the 100% stock dividend paid on
June 15, 1993, the 50% stock dividend paid on February 8, 1994, and the 5% stock
dividend 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, paid March 29, 1996. The dividend
resulted in the issuance of 309,817 shares. Earnings and dividends per share
have been restated to reflect the stock dividend.
As part of the Corporation's capital plan, the Board of Directors
authorized the Corporation's officers to repurchase up to 5% of its outstanding
common stock. Purchases of the Corporation's stock under this program were
completed in brokered transactions or directly from the Corporation's market
makers. The repurchased stock was retired as required by Maryland law. As of
December 31, 1996, 64,240 shares were repurchased.
(7)
EARNINGS ANALYSIS
OVERVIEW
The Corporation's net earnings for 1996 increased to $6.48 million, or
15.71% over the $5.60 million reported for 1995. Earnings for the year represent
a record level of performance for the Corporation, exceeding the previous record
of $6.23 million achieved in 1994. Return on average assets was 1.29%, 1.18% and
1.40% in 1996, 1995 and 1994, respectively.
In 1996, the Corporation was able to realize savings from the one time
restructuring charge of $1.08 million which occurred in 1995. The restructuring
charge included the costs associated with the consolidation of First United Bank
of West Virginia, N.A. 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 requirement. The expense
associated with the voluntary retirement plan was $0.81 million of the $1.08
million.
The return on average shareholders equity for 1996 increased to 11.28% from
the 10.47% reported in 1995. The return on average equity was 12.32% in 1994.
The earnings per share increased to $1.00 in 1996 from $0.86 in 1995, compared
with $0.96 in 1994.
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 1996 increased 5.36% over 1995, from $37.27
million to $39.27 million, primarily due to growth in earning assets. Total
interest expense at $16.38 million represented an increase of 11.24% from $14.72
in 1995. 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 1.53% improvement in net interest income to $22.90 million in 1996 from
$22.55 million in 1995. This compares to $21.79 million in 1994. The improvement
in 1995 represents an increase of 3.48% over 1994'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 4.97% in 1996 from
5.19% in 1995, compared with 5.34% in 1994. Table 2 compares the components of
the net interest margin and the changes occurring between 1996, 1995 and 1994.
Allowance for Loan Losses
The allowance for loan losses is based on management's continuing
evaluation of the quality of the loan portfolio, assessment of current economic
conditions, diversification and size of the portfolio, adequacy of collateral,
past and anticipated loss experience and the amount of non-performing loans.
During 1996, management continued to place emphasis on procedures for
credit analysis, problem loan detection, and delinquency follow-ups. As a result
of these efforts, the provision for credit losses in 1996 was $0.75 million or
0.20% of gross loans. There was no provision for credit losses required in 1995
and the provision was $.17 million in 1994. Charge-offs for the years ended
December 31, 1996, 1995, and 1994 totaled $.85, $.41, and $.32 million,
respectively.
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 1996, at $4.87 million, increased 13.50% over the
$4.29 million earned in 1995. In 1996, the Corporation experienced an increase
in income from insurance premiums, Trust and Fiduciary activities, service
charges on depository accounts and real estate appraisal services. The
Corporation and its Subsidiaries continue to seek ways of obtaining additional
other operating income. In July, 1996, the Bank implemented a surcharge on
foreign ATM activity and earned $.12 million in income. With the exception of
insurance premium income, which declined $.19 million in 1995, similar
improvements accounted for the 1995 increase of 12.01% in non-interest income
over the $3.83 million earned in 1994.
Other Operating Expense
Non-interest expense decreased $1.0 million or 5.42% from $18.39 million in
1995 to $17.39 million in 1996. As previously discussed, the Corporation
incurred one time restructuring costs in 1995 which totaled $1.08 million. The
elimination of these costs in 1996 accounted for the majority of the decrease in
other operating expense. Effective June 1, 1996, Richard G. Stanton, Chairman of
the Board, President and Chief Executive Officer retired. Costs associated with
Mr. Stanton's retirement were $.27 million. The combination of these two items
resulted in a net savings of $.81 million.
The Corporation incurred a decrease of $.23 million in salary and employee
benefits expense. This cost saving was attained even though staffing levels were
increased during the year at our Customer Service Center and in anticipation of
a January 1997 opening of a new branch in Martinsburg, West Virginia.
The Corporation incurred an increase in 1996 of $.16 million or 19.4% in
occupancy expense of premises to $1.0 million. This increase was the result of
increases in real estate taxes, utility costs and routine building repair and
maintenance. Occupancy expense of premises was comparable at $.84 million and
$.89 million in 1995 and 1994, respectively.
Expenditures to further increase the role of technology in improving the
efficiency of customer service delivery and internal processing activities
accounted for much of the increase in equipment expenses. An expansion in the
Customer Service Center also contributed to an increase in equipment related
expenses. 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.
Applicable Income Taxes
Applicable income taxes are detailed in Note 10 of the Corporation's
audited consolidated financial statements. Income tax expense amounted to $3.14
million in 1996 as compared with $2.85 million in 1995 and $3.01 million in
1994. These amounts represented effective tax rates of 32.67%, 33.70% and 32.58%
for 1996, 1995 and 1994, 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 securities 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. For additional information, see Notes 1 and 4 to the Corporation's
audited consolidated financial statements.
Total investment securties increased $13.92 million or 14.47% in 1996 from
$96.15 million in 1995 to $110.07 million in 1996. The Corporation reported an
increase of $8.85 million or 75.52% during 1996 in its U.S. Treasury securities
from $11.72 million in 1995 to $20.58 million in 1996. This increase was a
result of pledging required for increased balances in State, County and
Municipal depository accounts. Total obligations of state and political
subdivision investments increased $6.75 million or 78.74% in 1996 to $15.32
million as a result of efforts by management to increase the life of the
portfolio and to obtain a higher yield. The Corporation also sought to increase
the investments at the Parent Company level through the purchase of state and
municipal bonds. Total investment securities were $95.62 million as of December
31, 1994.
(9)
The Corporation manages its investment portfolios utilizing 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, 1996, 1995 and 1994, respectively.
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, Berkley 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 ongoing training efforts, have provided an effective check and balance for
the risk associated with the lending process. Lending authority is based on the
level of risk, size of the loan and the experience of the lending officer. Table
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, 1996.
During 1996, net loans increased $22.13 million or 6.17% to a total of
$380.59 million. In comparison, net loans at year-end 1995 increased $25.08
million or 7.52% to a total of $358.46 million. Mortgage lending continued to be
the primary source of loan growth in 1996. Part of the mortgage growth included
28.45% increase in our Home Equity product. Home Equity loans increased from
$16.14 million at year-end 1995 to $20.74 million at year-end 1996. 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 1996 and 1995 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, 1996, the Corporation had $.98 million of non-accrual loans which
were secured by collateral with an estimated value of $2.17 million. At December
31, 1995, the Corporation had $1.08 million of non-accrual loans that were
secured by collateral with an estimated value of $2.15 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, 1996, the Corporation had $4.72 million in loans for
which payments were current, but the borrowers were experiencing financial
difficulties. The corresponding total for year-end 1995 was $3.48 million. These
loans are subject to ongoing management attention and their classifications are
reviewed monthly.
Deposit and Other Funding
Deposit liabilities increased to $452.54 million in 1996 from $424.29
million at the end of 1995, or an increase of 6.66%. The $28.25 million in
deposit growth compares favorably to the $32.64 million growth in deposits
experienced in 1995. Time deposits continue to be the main source of deposit
growth during both 1996 and 1995. 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 1996, 1995, and 1994. In
addition to deposits, the Corporation also has available a line of credit with
(10)
the Federal Home Loan Bank ("FHLB") of Atlanta in an amount up to $75 million.
The total borrowings from FHLB equaled $8 million and $3 million for the years
ended December 31, 1996 and 1995, respectively.
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.
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 takes into account current or anticipated risks and future
growth opportunities.
On December 31, 1996, the Corporation's risk-based capital ratio was
17.92%, well above the regulatory minimum of 8%. The risk-based capital ratios
for year-end 1995 and 1994 were 18.63% and 16.18%, respectively.
Retained earnings and shareholder participation in the Corporation's
dividend reinvestment and stock purchase plan provided an additional $1.31
million in total shareholders' equity, which grew to $56.81 million at the end
of 1996, from $55.50 million at the year-end 1995 and $51.13 million at year-end
1994. The equity to assets ratio at December 31, 1996, was 10.84%, compared with
11.39% and 11.14% at year-end 1995 and 1994. 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.
The Board of Directors also authorized the Corporation's officers to
repurchase up to 5% of its outstanding common stock. Purchases of the
Corporation's stock under the program were completed in brokered transactions or
directly from the Corporation's market makers. As of December 31, 1996, 64,240
shares have been repurchased and retired under the plan authorized by the Board
of Directors.
Cash dividends of $.51 per share were paid during 1996, compared with $.46
and $.43 in 1995 and 1994. This represents a dividend payout rate (dividends per
share divided by net income per share) of 51.57%, 52.75%, and 45.55% for 1996,
1995 and 1994, 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.
(11)
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 $111.35
million, or 21.26% of total assets at December 31, 1996. This compares with
$96.26 million, or 19.76% of 1994 year-end assets, and $102.71 million, or 22.4%
of 1994 year-end assets.
Additional liquidity of $88 million is available from unused lines of
credit at various upstream correspondent banks and the FHLB 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 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, 1996. 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 Basis
( In thousands )
Table 1
For the Years Ended December 31,
1996 1995 1994
---------------------------------------------------------------------------------------
Average Annual Average Annual Average Annual
Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------------------------------------------------------------------------------------
Federal funds sold $ 3,219 $ 182 5.65% $ 3,376 $ 208 6.16% $ 574 $ 144 5.23%
Other interest-earning
assets 0 0 0.00% 0 0 0.00% 125 4 3.20%
Investments:
Taxable 93,073 5,663 6.08% 78,162 4,985 6.38% 84,915 4,101 4.83%
Non taxable 11,139 856 7.68% 4,836 685 9.33% 8,579 783 9.19%
Total investment ---------------------------------------------------------------------------------------
securities 104,212 6,519 6.26% 82,998 5,670 6.83% 93,494 4,884 5.22%
Loans 364,309 33,113 9.09% 352,720 31,866 9.03% 324,140 28,481 8.79%
---------------------------------------------------------------------------------------
Total earning assets 471,740 39,814 8.44% 443,086 37,744 8.51% 418,333 33,513 8.05%
Reserve for possible
credit losses (2,122) (2,283) (2,333)
Other non-earning
assets 33,867 29,450 28,931
----------------------------------------------------------------------------------------
Total non-earning
assets 31,745 27,167 26,598
---------------------------------------------------------------------------------------
Total Assets $503,485 $39,814 8.44% $470,253 $37,744 8.51% $444,931 $33,513 8.05%
=======================================================================================
Liabilities and
Shareholders' Equity
Deposits:
Noninterest-bearing
deposits $48,097 $ 0 0.00% $46,114 $ 0 0.00% $43,763 $ 0 0.00%
Interest-bearing
demand deposits 97,809 2,781 2.84% 95,959 2,628 2.74% 93,352 2,136 2.29%
Savings deposits 77,811 1,783 2.29% 70,699 2,045 2.89% 85,998 2,359 2.74%
Time deposits
$100,00 or more 33,158 1,927 5.81% 29,283 1,600 5.46% 29,937 1,142 3.81%
Time deposits less
than $100,000 180,684 9,787 5.42% 166,877 8,296 4.97% 133,528 5,326 3.99%
Short-term
borrowings 3,532 98 2.77% 3,674 152 4.14% 6,040 302 5.50%
-----------------------------------------------------------------------------------------
Total deposits and
short-term
borrowings 441,091 16,376 3.71% 412,606 14,721 3.62% 392,618 11,265 2.87%
Other liabilities 5,976 3,960 2,283
Shareholders' equity 56,418 53,687 50,030
------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $503,485 $16,376 3.71% $470,253 $14,721 3.62% $444,931 $11,265 2.87%
==========================================================================================
<FN>
**The above table reflects the average rates earned or paid stated on a tax
equivalent basis assuming a tax rate of 34%. The average balance of non-accrual
loans for the years ended December 31, 1996, 1995, and 1994, which were reported
in the average loan balances for these years, were $1,244, $1,006, and $565,
respectively. The fully taxable equivalent adjustments for the years ended
December 31, 1996, 1995, and 1994 were $541, $470, and $473, respectively.
(13)
Net Interest Margin
( In thousands )
Table 2
1996 1995 1994
---------------------------------------------------------------------------
Average Tax Equivalent Average Tax Equivalent Average Tax Equivalent
Balance Rate Balance Rate Balance Rate
---------------------------------------------------------------------------
Earning Assets $471,740 8.44% $443,086 8.51% $418,333 8.05%
Interest-bearing Liabilities 392,994 3.71% 366,492 3.62% 348,855 2.87%
Net Benefit of
Noninterest-bearing Sources 0.24% 0.30% 0.60%
Average Cost of Funds 3.47% 3.32% 2.71%
NET INTEREST MARGIN 4.97% 5.19% 5.34%
<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
1996 COMPARED TO 1995 1995 COMPARED TO 1994
INCREASE INCREASE
(DECREASE) DUE TO (DECREASE) DUE TO
Volume Rate Net Volume Rate Net
-----------------------------------------------------
Interest income:
Loans $1,053 $ 194 $1,247 $2,564 $ 821 $3,385
Taxable Investments 907 (229) 678 (435) 1,315 880
Non-Taxable Investments 484 (313) 171 (383) 285 (98)
Federal Funds Sold (9) (17) (26) 419 (355) 64
Total Interest Income $2,435 ($ 365) $2,070 $2,165 $2,066 $4,231
Interest expense:
Interest-bearing $ 53 $ 100 $ 153 $ 71 $ 421 $ 492
Savings 163 (425) (262) (442) 128 (314)
Time Deposits 748 743 1,491 1,657 1,313 2,970
Time Deposits $100,000 or more 225 102 327 (36) 494 458
Other borowings (4) (50) (54) (150) 0 (150)
Total Interest Expense $1,185 $ 470 $1,655 $1,101 $2,355 $ 3,456
Net Interest Income $1,250 ($ 835) $ 415 $1,064 $ (289) $ 775
(1) The change in interest income/expense due to both volume and rate has been
allocated to volume and rate changes in proportion to the relationship of the
absolute dollar amounts of the change in each.
*The above table is compiled on a tax equivalent basis. The fully taxable
equivalent adjustments for the years ended December 31, 1996 and 1995 were $541
and $470, respectively.
(14)
Investment Security Maturities, Yields, and Market Values
( In thousands )
Table 4
December 31, 1996
Taxable
U.S. T.E. Federal T.E. State & T.E. T.E. Equivalent
Treasury Yield Agencies Yield Municipal Yield Other Yield Total Yield
-------------------------------------------------------------------------------------------
Maturity Book Value
Available-for-Sale
Within One Year $10,584 5.60% $12,893 5.66% $ 201 7.14% $ 33 6.78% $23,711 5.65%
One to Five Years 9,904 6.05% 19,962 6.26% 4,432 7.28% 13,374 5.98% 47,672 6.21%
Five to Ten Years 0 0.00% 3,137 6.40% 1,537 7.72% 926 7.75% 5,600 6.99%
Over Ten Years 0 0.00% 0 0.00% 722 6.43% 5,657 6.89% 6,379 6.84%
-----------------------------------------------------------------------------------------
Book Value $20,488 $35,992 $ 6,892 $19,990 $83,362 6.15%
=========================================================================================
Taxable Equivalent Yield 5.82% 6.06% 7.29% 6.26% 6.15%
=========================================================================================
Held-to-Maturity
Within One Year $ 0 0.00% $ 0 0.00% $ 500 8.04% $ 2,744 6.88% $ 3,244 7.06%
One to Five Years 0 0.00% 1,518 5.24% 3,684 7.54% 10,815 6.40% 16,017 6.55%
Five to Ten Years 0 0.00% 0 0.00% 2,218 10.29% 0 0.00% 2,218 10.29%
Over Ten Years 0 0.00% 0 0.00% 1,960 8.72% 2,918 7.07% 4,878 7.73%
------------------------------------------------------------------------------------------
Book Value $ 0 $ 1,518 $ 8,362 $16,477 $ 26,357 7.15%
==========================================================================================
Taxable Equivalent Yield 0.00% 5.24% 8.58% 6.60% 7.15%
==========================================================================================
Total Book Value $20,488 $37,510 $15,254 $36,467 $109,719
==========================================================================================
Market Value $20,576 $37,682 $15,648 $36,529 $110,435
==========================================================================================
December 31,1995
Book Value $11,712 $36,657 $ 8,476 $38,992 $ 95,837
===========================================================================================
December 31,1994
Book Value $21,749 $34,548 $ 8,025 $33,582 $ 97,904
===========================================================================================
<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,
1996 1995 1994 1993 1992
---------------------------------------------------
Commercial, Financial, & Agricultural $ 56,325 $ 56,893 $47,111 $38,351 $48,295
Real Estate-Construction 21,097 10,696 19,838 10,902 4,568
Real Estate-Mortgage 249,389 242,789 220,991 220,228 198,659
Installment 55,969 50,206 47,785 47,301 50,939
---------------------------------------------------
TOTAL $382,780 $360,584 $335,725 $316,782 $302,461
===================================================
Percentage of Portfolio as of December 31,
1996 1995 1994 1993 1992
Commercial, Financial, & Agricultural 14.72% 15.78% 14.03% 12.11% 15.97%
Real Estate-Construction 5.51% 2.97% 5.91% 3.44% 1.51%
Real Estate-Mortgage 65.15% 67.33% 65.83% 69.52% 65.68%
Installment 14.62% 13.92% 14.23% 14.93% 16.84%
--------------------------------------------------
TOTAL 100.00% 100.00% 100.00% 100.00% 100.00%
==================================================
Maturities of Loan Portfolio
(In thousands)
Table 6
December 31, 1996
MATURING
MATURING AFTER ONE MATURING
WITHIN BUT WITHIN AFTER FIVE
ONE YEAR FIVE YEARS YEARS TOTAL
------------------------------------------
Commercial, Financial & Agricultural $40,991 $ 6,909 $ 8,425 $ 56,325
Real Estate-Construction 0 21,097 0 21,097
Real Estate-Mortgage 11,795 50,216 187,378 249,389
Installment 16,264 33,419 6,286 55,969
-----------------------------------------
Total $69,050 $111,641 $202,089 $382,780
=========================================
Classified by Sensitivity to Change in Interest Rates
Fixed-Interest Rate Loans $60,698 $ 74,509 $ 40,824 $176,031
Adjustable-Interest Rate Loans 8,352 37,132 161,265 206,749
Total $69,050 $111,641 $202,089 $382,780
(16)
Risk Elements of Loan Portfolio
( In thousands )
Table 7
For the Years Ended December 31
1996 1995 1994 1993 1992
----------------------------------------
Non-accrual Loans $ 976 $1,075 $1,027 $438 $2,337
Accruing Loans Past Due 90 Days or More 659 963 489 1,243 463
Restructured Loans 0 0 0 0 1,530
Information with respect to non-accrual loans at December 31,1996 and 1995 is as
follows:
1996 1995
---------------
Non-accrual Loans $ 976 $1,075
Interest income that would have been recorded under original terms 70 86
Interest income recorded during the period 33 18
Activity of Loan Loss Provision
Table 8 ( In thousands )
Summary of Loan Loss Experience
For the Years Ended December 31
1996 1995 1994 1993 1992
------------------------------------------------------
Balance at Beginning of Period $ 2,120 $ 2,350 $ 2,306 $ 2,798 $ 2,572
Loans Charged Off:
Commercial, Financial, and Agricultural 476 19 35 469 53
Real Estate-Construction 0 0 0 0 0
Real Estate-Mortgage 135 205 164 359 359
Installment 236 186 121 264 349
------------------------------------------------------
TOTAL CHARGED OFF 847 410 320 1,092 761
Recoveries of Loans:
Commercial, Financial, and Agricultural 29 59 39 135 87
Real Estate-Construction 0 0 0 0 0
Real Estate-Mortgage 8 31 35 97 79
Installment 127 90 125 99 102
-------------------------------------------------------
TOTAL RECOVERIES 164 180 199 331 268
Net Loans Charged Off 683 230 121 761 493
Provision Charged to Operations 749 0 165 269 719
Balance at the End of Period 2,186 2,120 2,350 2,306 2,798
-------------------------------------------------------
Loans Net of Unearned Income at End of Period $382,780 $360,584 $335,725 $316,782 $302,461
=======================================================
Daily Average Balance of Loans $364,309 $352,720 $324,140 $308,804 $289,722
=======================================================
Allowance for Possible Loan Loss to
Loans Outstanding 0.57% 0.59% 0.70% 0.73% 0.93%
=======================================================
Net Charge Offs to Average Loans Outstanding 0.19% 0.07% 0.04% 0.24% 0.06%
=======================================================
(17)
Allocation of Allowance for Loan Losses
( In thousands )
Table 9
1996 1995 1994 1993 1992
-----------------------------------------
Commercial $ 509 $ 301 $ 457 $ 448 $ 544
Real Estate-Mortgage 923 1,214 661 649 787
Home Equity 73 48 11 11 13
Consumer 201 206 223 219 266
Commitments 180 171 78 77 93
Unallocated 300 180 920 902 1,095
-----------------------------------------
Total $2,186 $2,120 $2,350 $2,306 $2,798
=========================================
Average Deposit Balances
Table 10 ( In thousands )
Deposits by Major Classification for the Years Ended December 31,
1996 1995 1994
--------------------------------------------------
Average Average Average
Balance Yield Balance Yield Balance Yield
--------------------------------------------------
Noninterest-bearing
demand deposits $ 48,097 $ 46,114 $ 43,763
Interest-bearing demand deposits 97,809 2.84% 95,959 2.74% 93,352 2.29%
Savings deposits 77,811 2.29% 70,699 2.89% 85,998 2.74%
Time deposits $100,000 or more 33,158 5.81% 29,283 5.46% 29,937 3.81%
Time deposits less than $100,000 180,684 5.42% 166,877 4.97% 133,528 3.99%
---------- --------- ---------
Total $437,559 $408,932 $386,578
========== ========= =========
(18)
Maturity of Time Deposits
( In thousands )
Table 11 December 31, 1996
Greater than Less Than
$100,000 $100,000
-------------------------------
Maturities
3 Months or Less $ 8,205 $ 33,294
3 - 6 Months 5,265 24,654
6-12 Months 5,710 31,669
Over 1 Year 14,634 93,225
---------------------------
Total $33,814 $182,842
===========================
Summary of Significant Ratios
Table 12
1996 1995 1994
------------------------------
Return on Average Assets 1.29% 1.18% 1.40%
Return on Average Equity 11.48% 10.47% 12.32%
Dividend Payout Ratio 51.57% 52.75% 45.55%
Total Equity to Total Assets at Year End 10.84% 11.39% 11.14%
Primary Capital Ratio 11.66% 11.76% 10.02%
Total Risk-based Capital Ratio 17.92% 18.63% 16.18%
Leverage Ratio 11.31% 11.48% 11.52%
(19)
Summary of Interest Sensitivity Analysis
Table 13 (In thousands)
As of December 31, 1996
0-90 91-365 1-5 Over 5
Days Days Years Years TOTAL
-----------------------------------------------------
Assets
Rate Sensitive
Securities
(Available-for-Sale & Held-to-Maturity) (1) $ 13,698 $ 23,598 $ 68,205 $ 4,567 $110,068
Loans (2) 77,472 92,388 188,459 24,461 382,780
Fed Funds Sold 900 0 0 0 900
-----------------------------------------------------
TOTAL RATE SENSITIVE $ 92,070 $115,986 $256,664 $29,028 $493,748
Liabilities
Rate Sensitive Deposits
Savings 74,430 0 0 0 74,430
Investors' Choice 9,409 0 0 0 9,409
Time Deposits Less Than $100,000 33,294 56,313 93,235 0 182,842
Time Deposits $100,000 or More 8,205 10,974 14,635 0 33,814
IMMA, PMA & Trust DDA 41,696 0 0 0 41,696
ONE & Now Accounts 52,501 0 0 0 52,501
Fed Funds Purchased
and Other Borrowed Funds 8,000 0 0 0 8,000
------------------------------------------------------
TOTAL RATE SENSITIVE (3) $ 227,535 $ 67,287 $107,860 $ 0 $402,692
GAP ( Rate Sensitive Assets less Rate
Sensitive Liabilities ) $(135,465) $ 48,699 $148,804 $29,028 $ 91,056
GAP to TOTAL Assets (25.87%) 9.30% 28.42% 5.54% 17.39%
<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.
(20)
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 Statements of Financial Condition 24
Consolidated Statements of Income 25
Consolidated Statements of Changes in Shareholders' Equity 26
Consolidated Statements of Cash Flows 27
Notes to Consolidated Financial Statements 28
(b) The following supplementary data is set forth in this Annual Report on Form
10-K on the following pages:
Quarterly Results of Operations 39
(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 information.
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, 1996, 1995, and 1994, as stated in their report.
William B. Grant
/S/ WILLIAM B. GRANT
Chairman of the Board
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, 1996
and 1995, 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, 1996. 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, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, 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
Baltimore, Maryland
February 7, 1997
(23)
First United Corporation and Subsidiaries
Consolidated Statements of Financial Condition
(In thousands)
December 31
1996 1995
Assets
Cash and due from banks $ 15,307 $16,011
Investments:
Available-for-sale securities-at market value-cost-$83,362 and $73,343
at December 31, 1996 and 1995, respectively 83,711 73,657
Held-to-maturity market-value-$26,724 and $22,656
at December 31, 1996 and 1995, respectively 26,357 22,494
---------------------
Total investment securities 110,068 96,151
Federal funds sold 900 0
Loans 382,780 360,584
Reserve for possible credit losses (2,186) (2,120)
---------------------
Net loans 380,594 358,464
Bank premises and equipment 9,331 9,605
Accrued interest receivable and other assets 7,421 6,938
-----------------------
Total Assets $523,621 $487,169
======================
Liabilities and Shareholders' Equity
Liabilities:
Noninterest-bearing deposits $ 52,530 $ 49,541
Interest-bearing deposits 400,009 374,753
----------------------
Total deposits 452,539 424,294
Federal funds purchased and other borrowed money 8,000 3,000
Reserve for taxes, interest and other liabilities 5,365 4,371
Dividends payable 902 0
----------------------
Total Liabilities 466,806 431,665
----------------------
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 6,442 and
6,194 shares at December 31, 1996 and 1995, respectively 64 62
Surplus 26,661 23,184
Retained earnings 29,877 32,065
Unrealized gain on available-for-sale securities, net of tax 213 193
------------------------
Total Shareholders' Equity 56,815 55,504
------------------------
Total Liabilities and Shareholders' Equity $523,621 $487,169
========================
<FN>
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
1996 1995 1994
-----------------------------
Interest income
Interest and fees on loans $32,865 $31,630 $28,295
Interest on investment securities:
Taxable 5,663 4,985 4,101
Exempt from federal income taxes 563 451 515
-----------------------------
6,226 5,436 4,616
Interest on federal funds sold 182 208 144
Interest on time deposits with other banks 0 0 4
-----------------------------
Total interest income 39,273 37,274 33,059
Interest expense
Interest on deposits:
Savings 1,783 2,045 2,359
Interest-bearing transaction accounts 2,781 2,628 2,136
Time, $100,000 or more 1,927 1,600 1,142
Other time 9,787 8,296 5,326
Interest on federal funds purchased and other borrowed funds 98 152 302
-----------------------------
Total interest expense 16,376 14,721 11,265
-----------------------------
Net interest income 22,897 22,553 21,794
Provision for possible credit losses 749 0 165
-----------------------------
Net interest income after provision for possible credit losses 22,148 22,553 21,629
Other operating income
Trust Department income 1,200 1,175 839
Service charges on deposit accounts 1,759 1,593 1,302
Insurance premium income 318 283 302
Security gains and (losses) 24 (20) (5)
Other income 1,568 1,259 1,394
-----------------------------
4,869 4,290 3,832
Other operating expense
Salaries and employee benefits 8,916 9,144 8,838
Occupancy expense of premises 997 835 894
Equipment expense 1,503 1,300 1,154
Data processing expense 561 643 486
Deposit assessment and related fees 109 585 965
Restructuring costs 273 1,085 0
Other expense 5,035 4,798 3,883
-----------------------------
17,394 18,390 16,220
-----------------------------
Income before income taxes 9,623 8,453 9,241
Applicable income taxes 3,144 2,849 3,014
-----------------------------
Net income $ 6,479 $ 5,604 $ 6,227
==============================
Earnings per share $1.00 $0.86 $0.96
==============================
<FN>
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 Total
Capital Retained Gains Shareholders'
Stock Surplus Earnings (Losses) Equity
--------------------------------------------------------
Balance at January 1, 1994 $62 $23,005 $25,305 $ 0 $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 $29,435 $(1,507) $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 $32,065 $ 193 $55,504
Change in unrealized gains (losses),
net of tax of $134 20 20
Net income for the year 6,479 6,479
Dividend reinvestment and stock purchase plan 28 28
Aquisition and retirement of common stock (1) (972) (973)
Cash dividends-$.51 per share (4,243) (4,243)
5% stock dividend 3 4,421 (4,424) 0
---------------------------------------------------------
Balance at December 31, 1996 $64 $26,661 $29,877 $ 213 $56,815
=========================================================
<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
1996 1995 1994
--------------------------
Operating activities
Net income $ 6,479 $ 5,604 $ 6,227
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for possible credit losses 749 0 165
Provision for depreciation 1,299 1,145 864
Net accretion and amortization of investment
security discounts and premiums 345 399 717
(Gain) loss on sale of investment securities (24) 20 5
(Increase) in accrued interest receivable
and other assets (483) (782) (1,544)
Increase (decrease) in reserve for taxes, interest
and other liabilities 1,896 (515) (1,595)
------------------------
Net cash provided by operating activities 10,261 5,871 4,839
Investing activities
Proceeds from maturities and sales of investment
securities available for sale 59,489 105,834 45,747
Purchases of available for sale investment securities (65,444)(103,911)(59,770)
Purchases of investment securities held-to-maturity (13,041) (7,597) (8,428)
Proceeds from maturities of investment securities
held-to-maturity 4,777 6,423 6,133
Net (increase) in loans (22,879) (25,089)(19,064)
Purchase of premises and equipment (1,025) (1,396) (2,192)
-------------------------
Net cash used in investing activities (38,123) (25,736)(37,574)
Financing activities
Net increase (decrease) in demand deposits, NOW accounts
and savings accounts (623) 3,765 8,733
Net increase in certificates of deposit 28,869 28,879 14,391
Increase (decrease) in federal funds purchased and other
borrowed funds 5,000 (8,373) 11,373
Cash dividends paid or declared (4,243) (2,974) (2,097)
Proceeds from issuance of common stock 28 43 136
Aquisition and retirement of common stock (973) 0 0
-----------------------
Net cash provided by financing activities 28,058 21,340 32,536
------------------------
Increase (decrease) in cash and cash equivalents 196 1,475 (199)
Cash and cash equivalents at beginning of year 16,011 14,536 14,735
------------------------
Cash and cash equivalents at end of year $16,207 $16,011 $14,536
========================
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 network of twenty-two offices and twenty-six
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, 1996, 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 on loans (including impaired loans) when circumstances indicate that
collection of principal or interest is doubtful. After a loan is placed on
non-accrual, interest is recognized only to the extent of cash received and
principal is not in doubt.
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 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.
(28)
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, estimated
fair value of underlying collateral for collateral dependent loans, and such
other factors which, in management's judgement, deserve current recognition.
Management's evaluation is inherently subjective as it requires estimates
concerning the underlying collateral values on impaired loans that may be
susceptible to change.
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 any deferred tax asset
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 $16,376, $14,721 and $11,265 in interest on
deposits and other borrowed money for the years ending December 31, 1996, 1995
and 1994, respectively.
Earnings Per Share
Earnings per share are based on the weighted average number of shares
outstanding of 6,492, 6,503 and 6,501 for 1996, 1995 and 1994, respectively.
For comparative purposes, earnings per share, dividends per share and
weighted average shares outstanding for the years ended December 31, 1996, 1995
and 1994 have been restated to reflect the 50% stock dividend paid February 8,
1994, and the 5% stock dividend paid on March 29, 1996.
Accounting Change
In May, 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The Corporation adopted the provisions of the new
standard for investments held as of or acquired after January 1, 1994. In
accordance with the Statement, prior period financial statements have not been
restated to reflect the change in accounting principle. The operating balance of
shareholders' equity was increased by $506 (net of $261 in deferred income
taxes) to reflect the net unrealized holding gains on securities classified as
available-for-sale previously carried at amoritized cost.
Recently Issued Accounting Guidance
In June 1996, the Financial Accounting Standards Board issued Statement
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." The Corporation is required to adopt this
Statement for transactions occurring after December 31, 1996. The Corporation
believes the impact of adopting Financial Accounting Standards Board Statement
No. 125 will not have a material impact on the Corporation's financial position
and results of operations.
2. Regulatory Capital Requirements
The Corporation and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Corporation and the Bank must meet specific capital guidelines that involve
quantitative measures of its assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Bank to maintain minimum amounts and ratios of
total and Tier I capital to risk-weighted assets, and of Tier I capital to
average assets. Management believes, as of December 31, 1996, that the
Corporation and the Bank meet all capital adequacy requirements to which it is
subject.
As of December 31, 1996, the Corporation and the Bank were well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios must be maintained. Management is not aware of any condition or
event which has caused the well capitalized position to change.
(29)
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
- --------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------
December 31, 1996
Total Capital (to Risk Weighted Assets)
Consolidated $59,001 17.92% $26,399 8.00% $32,924 10.00%
First United National Bank 46,035 14.10% 26,124 8.00% 32,655 10.00%
Tier I Capital (to Risk Weighted Assets)
Consolidated 56,815 17.26% 13,170 4.00% 19,754 6.00%
First United National Bank 43,849 13.43% 13,062 4.00% 19,593 6.00%
Tier I Capital (to Average Assets)
Consolidated 56,815 11.31% 20,090 3.00% 25,113 5.00%
First United National Bank 43,849 9.37% 19,660 3.00% 24,574 5.00%
December 31, 1995
Total Capital (to Risk Weighted Assets)
Consolidated $57,624 18.63% $24,745 8.00% $30,931 10.00%
First United National Bank 46,258 14.99% 24,689 8.00% 30,861 10.00%
Tier I Capital (to Risk Weighted Assets)
Consolidated 55,504 17.94% 12,372 4.00% 18,558 6.00%
First United National Bank 44,138 14.30% 12,345 4.00% 24,689 6.00%
Tier I Capital (to Average Assets)
Consolidated 55,504 11.48% 19,341 3.00% 24,177 5.00%
First United National Bank 44,138 9.84% 18,881 3.00% 23,514 5.00%
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
Unreal Unreal Fair
Cost Gains Losses Value
-------------------------------
December 31, 1996 (In thousands)
U. S. Treasury securities and obligations of
U. S. government agencies $56,480 $341 $ 63 $56,758
Obligations of states and political subdivisions 6,892 89 25 6,956
Mortgage-backed securities 19,990 104 97 19,997
------------------------------
Total debt securities $83,362 $534 $185 $83,711
==============================
Held-to-Maturity Securities
------------------------------
Gross Gross Estimated
Unreal Unreal Fair
Cost Gains Losses Value
------------------------------
December 31, 1996 (In thousands)
U. S. Treasury securities and obligations of
U. S. government agencies $ 1,518 $ 0 $ 18 $ 1,500
Obligations of states and political subdivisions 8,362 336 6 8,692
U. S. corporate securities 13,559 72 17 13,614
------------------------------
Total debt securities 23,439 408 41 23,806
Equity securities 2,918 0 0 2,918
------------------------------
Totals $26,357 $408 $ 41 $26,724
==============================
(30)
4. Investment Securities (continued)
Available-for-Sale Securities
------------------------------
Gross Gross Estimated
Unreal Unreal 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
------------------------------
Total debt securities $73,343 $508 $194 $73,657
==============================
Held-to-Maturity Securities
-------------------------------
Gross Gross Estimated
Unreal Unreal 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
==============================
During the year ended December 31, 1996, available-for-sale securities with
a fair market value at the date of sale of $4.74 million were sold. The gross
realized gains on such sales totaled $27, and the gross realized losses totaled
$3.
The amortized cost and estimated fair value of debt and marketable equity
securities at December 31, 1996, by contractual maturity, are shown below.
Actual maturities will differ from contractual maturities because the issuers of
the securities may have the right to prepay obligations without prepayment
penalties. Equity securities consist of 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.
Available-for-sale Securities
-----------------------------
Amortized Market
Cost Value
-----------------------------
Due in one year or less $23,711 $23,744
Due after one year through five years 47,672 47,897
Due after five years through ten years 5,600 5,652
Due after ten years 6,379 6,418
----------------------
$83,362 $83,711
======================
Held-to-Maturity Securities
---------------------------
Amortized Market
Cost Value
---------------------------
Due in one year or less $ 3,244 $ 3,264
Due after one year through five years 16,017 16,068
Due after five years through ten years 2,218 2,437
Due after ten years 4,878 4,955
---------------------
$26,357 $26,724
=====================
(31)
At December 31, 1996, investment securities with a book value of $33.41
million were pledged to secure public and trust deposits as required or
permitted by law.
5. Reserve for Possible Credit Losses
Activity in the reserve for possible credit losses is summarized as follows:
1996 1995 1994
----------------------------
Balance at January 1 $2,120 $2,350 $2,306
Provision charged to operating expense 749 0 165
-----------------------------
2,869 2,350 2,471
Gross credit losses (847) (410) (320)
Recoveries 164 180 199
------------------------------
Net credit losses 683 230 121
------------------------------
Balance at December 31 $2,186 $2,120 $2,350
==============================
Non-accruing loans were $976, $1,075 and $1,027 at December 31, 1996, 1995
and 1994, respectively. Interest income not recognized as a result of
non-accruing loans was $37, $68 and $34 during the years ended December 31,
1996, 1995, and 1994, respectively.
6. Loans and Concentrations of Credit Risk
The Corporation through its banking subsidiary is active in originating
loans to customers primarily in Garrett, Allegany, Washington and Frederick
counties in Maryland; and Mineral, Hardy, Berkeley and Hampshire Counties in
West Virginia, and the surrounding regions of West Virginia and Pennsylvania.
The following table presents the Corporation's composition of credit risk by
significant concentration.
December 31, 1996
-------------------------------
Loans
Loan Commitments Total
-------------------------------
Commercial, financial and agricultural $ 54,115 $15,497 $ 69,612
Real estate-construction 21,097 9,750 30,847
Real estate-mortgage 249,389 16,202 265,591
Installment 55,969 4,703 60,672
Letters of credit 2,210 713 2,923
--------------------------------
$382,780 $46,865 $429,645
================================
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
=================================
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 the underwriting standards of the Corporation.
7. Bank Premises and Equipment
The composition of Bank premises and equipment is as follows:
1996 1995
--------------------------
Bank premises $ 8,653 $ 8,721
Equipment 11,289 10,329
---------------------------
19,942 19,050
Less accumulated depreciation (10,611) (9,445)
---------------------------
Total $ 9,331 $ 9,605
===========================
The Corporation recorded depreciation expense of $1,299, $1,145 and $864
in 1996, 1995, and 1994, respectively.
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:
1996 1995
-----------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------------------------
Cash and due from banks $ 15,307 $ 15,307 $ 16,011 16,011
Investment securities 110,068 110,435 96,151 96,312
Loans 382,780 382,458 360,584 360,169
Deposits 452,539 451,112 424,294 423,832
Federal funds purchased and other
borrowed funds 8,000 8,000 3,000 3,000
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.
(33)
Investment Securities: Fair values for investment securities are based on quoted
market values.
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, 1996.
9. Federal Home Loan Bank (FHLB) Advances and Other Borrowings
Borrowings consist of the following:
December 31, 1996
FHLB advances payable to FHLB Atlanta,
secured by all FHLB advances and certain first mortgage loans:
Due January 3, 1997 @ 5.70% $3,500
Due January 6, 1997 @ 5.65% 2,200
Due January 7, 1997 @ 5.63% 2,300
-------
Total $8,000
=======
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
=======
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
million. The line of credit is secured with the first lien on the 1-4 family
mortgage portfolio totaling $208.82 million on December 31, 1996.
The Corporation's banking subsidiary First United National Bank & Trust has
established various unsecured lines of credit totaling $5 million at various
upstream correspondent banks. The Bank has also established a $7 million
reverse repurchase lines of credit with correspondent banks. As of December 31,
1996, there was nothing outstanding on either of these facilities. The
Corporation utilizes the lines to meet daily liquidity requirements 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
----------------------------
1996 1995 1994
----------------------------
Income before income taxes $9,623 $8,453 $9,241
Statutory income tax rate 34% 34% 34%
----------------------------
Income tax 3,272 2,874 3,142
State franchise tax, net of federal tax benefit 274 233 283
Effect of nontaxable interest and loan income (360) (249) (283)
Effect of TEFRA interest limitation 31 27 27
Other (73) (36) (155)
-----------------------------
Income tax expense for the year $3,144 $2,849 $3,014
=============================
Taxes currently payable 3,309 2,862 $2,738
Deferred taxes (benefit) (165) (13) 366
-----------------------------
Income tax expense for the year $3,144 $2,849 $3,014
=============================
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:
1996 1995
------------------
Deferred tax assets:
Reserve for possible credit losses $407 $335
Deferred loan origination fees 228 271
Pension expense 120 144
Merger costs 122 122
Unrealized loss on real property 120 0
Accrued expenses 89 0
Other 32 25
----------------
Total deferred tax assets 1,118 897
Valuation allowance (122) (122)
-----------------
Total deferred tax assets less valuation allowance 996 775
Deferred tax liabilities:
Market discount (19) (45)
Excess depreciation (546) (535)
Employee compensation (37) (28)
Unrealized gain on investment securities (134) (112)
Prepaid expenses (100) (91)
Other (8) 0
----------------
Total deferred tax liability (844) (811)
----------------
Net deferred tax (liability) asset 152 ($ 36)
================
The Corporation made income tax payments of $3,529, $2,675, and $3,142 for
the years ending December 31, 1996, 1995 and 1994, 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.
Pension expense charged to operations was $240, $711 and $243 in 1996,
1995, and 1994, respectively. The
(35)
11. Employee Benefit Plans (continued)
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:
1996 1995
----------------------
Actuarial present value of accumulated benefit obligations:
Accumulated benefit obligation, including vested benefits of $5,534 in 1996
and $5,228 in 1995 $(5,655) $(5,296)
-----------------------
Projected benefit obligation for service rendered to date (7,480) (6,943)
Plan assets at fair value, primarily listed stocks and fixed income securities 7,477 6,683
-----------------------
Projected benefit obligation in excess of plan assets (3) (260)
Unrecognized net loss 644 552
Unrecognized prior service cost arising from amendment effective January 1, 1991 (32) (34)
Unrecognized net asset arising at transition at January 1 (723) (762)
-----------------------
Accrued pension cost $ (114) $ (504)
=======================
1996 1995 1994
Net pension cost included the following components:
Service costs-benefits earned during the year $301 $270 $261
Interest cost on projected benefit obligation 523 475 417
Actual return on plan assets (545) (1,087) 177
Net amortization and deferral (39) 640 (612)
Charge associated with early retirement window 0 413 0
------------------------
Net pension expense included in employee benefits $240 $711 $243
========================
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.5% for 1996, 1995, and
1994. The expected long-term rate of return on plan assets was 8.0% in 1996 and
1995, and 7.5% in 1994. Salaries were assumed to increase at 4% in 1996, 1995
and 1994.
12. Federal Reserve Requirements
The banking subsidiaries are required to maintain reserves with the Federal
Reserve Bank. During 1996, the daily average amount of these required reserve
was approximately $5,665.
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 additional dividends in
1996 of approximately $2,612 plus an additional amount equal to the net profits
for 1997 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, 1996, the maximum amount available for transfer from the bank to
the Corporation in the form of loans was approximately $5,900.
(36)
14. Parent Company Financial Information (Parent Company Only)
Condensed Statements of Financial Condition December 31,
1996 1995
------------------------
Assets
Cash $ 2,127 $ 2,068
Investment securities 6,966 4,024
Investment in bank subsidiary 43,693 44,003
Dividend receivable and other assets 112 65
Investment in non-bank subsidiary 5,564 5,255
-----------------------
Total Assets $58,462 $55,415
=======================
Liabilities and Shareholder's Equity
Reserve for taxes, interest and other liabilities $ 918 $ 46
Dividends payable 902 0
Shareholders' equity 56,642 55,369
-----------------------
Total Liabilities and Shareholder's Equity $58,462 $55,415
=======================
Year ended December 31
Condensed Statement of Income 1996 1995 1994
------------------------
Income:
Dividend income from subsidiaries $ 6,170 $ 5,000 $4,959
Other income 329 200 147
------------------------
Total income 6,499 5,200 5,106
Expense:
Other expenses 13 23 73
------------------------
Total expense 13 23 73
------------------------
Income before income taxes and equity in undistributed
net income of subsidiaries 6,486 5,177 5,033
------------------------
Equity in undistributed net income of subsidiaries:
Bank (326) 95 939
Non-bank 324 332 270
Less income tax (5) 0 (15)
-----------------------
Net income $6,479 $5,604 $6,227
=======================
(37)
Condensed Statement of Cash Flows
Year ended December 31
1996 1995 1994
------------------------
Operating activities
Net income $6,479 $5,604 $6,227
Adjustments to reconcile net income to net cash provided
by operating activities:
Increase in dividends payable 902 0 0
Undistributed equity in subsidiaries:
Bank 326 (95) (939)
Non-bank (324) (332) (270)
Increase in other assets (47) 17 578
Increase (decrease) in other liabilities 872 36 (649)
------------------------
Net cash provided by operating activities 8,208 5,230 4,947
Investing activities
Disposal of premises and equipment 0 0 548
Purchase of investment securities (2,962) (1,006) (2,959)
Proceeds from investment maturities 0 0 200
------------------------
Net cash used in investing activities (2,962) (1,006) (2,211)
Financing activities
Cash dividends (4,243) (2,974) (2,097)
Proceeds from issuance of common stock 28 43 136
Acquisition and retirement of common stock (972) 0 0
------------------------
Net cash used by financing activities (5,187) (2,931) (1,961)
------------------------
Increase in cash and cash equivalents 59 1,293 775
Cash and cash equivalents at beginning of year 2,068 775 0
------------------------
Cash and cash equivalents at end of year $2,127 $2,068 $ 775
========================
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 $10,467 of life, accident and health insurance in force at
December 31, 1996. In accordance with state insurance laws, this subsidiary is
capitalized at $5,581.
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:
1996 1995 1994
--------------------------------
Balance, January 1 $6,626 $7,477 $2,940
Loans or advances 2,775 144 5,971
Repayments (1,420) (995) (1,434)
--------------------------------
Balance, December 31 $7,981 $6,626 $7,477
================================
(38)
17. Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the
years ended December 31, 1996 and 1995.
Three months ended
Mar. 31 Jun. 30 Sept. 30 Dec. 31
--------------------------------------
1996
Interest income $9,585 $9,652 $9,890 $10,146
Interest expense 3,972 3,928 4,131 4,345
---------------------------------------
Net interest income $5,613 $5,724 $5,759 $ 5,801
Provision for possible credit losses 99 99 158 393
Other income 1,080 1,199 1,312 1,278
Other expenses 4,176 4,385 4,268 4,565
--------------------------------------
Income before income taxes $2,418 $2,439 $2,645 $ 2,121
Applicable income taxes 819 821 839 665
--------------------------------------
Net income $1,599 $1,618 $1,806 $ 1,456
======================================
Earnings per share $0.25 $0.25 $0.28 $0.22
======================================
Three months ended
March 31 June 30 September 30 December 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
======================================
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 29, 1997, from pages 2 through 6.
Effective June 1, 1996, Richard G. Stanton, President and Chief Executive
Officer of First United Corporation since 1987, Chairman of the Board of First
United Corporation since 1990 and First United National Bank & Trust since 1987,
retired. In his succession, William B. Grant was appointed Chairman of the Board
and Chief Executive Officer of First United Corporation. Robert W. Kurtz was
appointed President and Chief Operating Officer of the Corporation.
Executive Officers of the Registrant are:
NAME POSITION AGE
William B. Grant Chairman of the Board and 43
Chief Executive Officer
Robert W. Kurtz President and 50
Chief Financial Officer
Benjamin W. Ridder Executive Vice President and 55
Director of Retail Banking
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. Grant has been Chairman of the Board and Chief Executive Officer since 1996.
Previously, he had been Secretary of First United Corporation since 1990 and
Executive Vice-President of First United National Bank & Trust since 1987.
Mr. Kurtz has been President of First United Corporation since 1996 and Chief
Financial Officer since 1997. Previously, he had been Chief Operating Officer of
First United Corporation since 1996, Treasurer of First United Corporation since
1990 and Executive Vice-President of First United National Bank & Trust since
1987.
Mr. Ridder has been Executive Vice President and Director of Retail Banking of
First United Corporation since 1997. Previously, he had been Senior Vice
President of the Corporation since 1987.
OTHER SIGNIFICANT EMPLOYEES OF THE REGISTRANT ARE:
NAME POSITION AGE
Jeannette R. Fitzwater Senior Vice President and 36
Director of Human Resources
Philip D. Frantz Senior Vice President and 36
Director of Operations & Support
Steven M. Lantz Senior Vice President and 40
Director of Lending
Eugene D. Helbig, Jr. Senior Vice President 44
Senior Trust Officer
Frederick A. Thayer IV Senior Vice President 38
Director of Sales
(40)
Mrs. Fitzwater was appointed Senior Vice President and Director of Human
Resources in 1997. She had been First Vice President, Director of Marketing and
Regional Sales Manager of First United National Bank & Trust since 1994.
Mr. Frantz was appointed Senior Vice President in 1993 and previously had been
the Controller of the organization since 1988. He was appointed Director of
Operations & Support of the Corporation in 1997.
Mr. Lantz was appointed Senior Vice President and Director of Lending of the
Corporation in 1997. He had been First Vice President and Commercial Services
Manager of First United National Bank & Trust since 1993.
Mr. Helbig was appointed Senior Vice President in 1997 and Senior Trust Officer
in 1993. He had been a First Vice President since 1993.
Mr. Thayer was appointed Senior Vice President and Director of Sales in 1997.
Previously, he had been First Vice President, Regional Executive Officer and
Regional Sales Manager of First United National Bank & Trust since 1995.
Item 11. EXECUTIVE COMPENSATION
Information required by Item 11 is incorporated by reference from pages 4
and 5 of the definitive Proxy Statement of the Corporation for the annual
meeting of shareholders to be held on April 29, 1997.
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 29, 1997.
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 29, 1997, 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.
None
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, 1996.
(41)
(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/ WILLIAM B. GRANT
William B. Grant
Chairman of the Board
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 /S/ ANDREW E. MANCE, MD
- ------------------------------- -----------------------------
(David J. Beachy) Director (Dr. Andrew E. Mance) Director
/S/ DONALD M. BROWNING /S/ DONALD E. MORAN
- ------------------------------- ------------------------------
(Donald M. Browning) Director (Donald E. Moran) Director
/S/ REX W. BURTON /S/ RICHARD G. STANTON
- -------------------------------- ------------------------------
(Rex W. Burton) Director (Richard G. Stanton) Director
/S/ RICHARD D. DAILEY, JR. /S/ I. ROBERT RUDY
- --------------------------------- -------------------------------
(Richard D. Dailey, Jr.) Director (I. Robert Rudy) Director
/S/ PAUL COX, JR. /S/ ROBERT G. STUCK
- --------------------------------- -------------------------------
(Paul Cox, Jr.) Director (Robert G. Stuck) Director
/S/ FREDERICK A. THAYER, III /S/ JAMES F. SCARPELLI, SR.
- --------------------------------- -------------------------------
(Frederick A. Thayer, III) Director (James F. Scarpelli, Sr) Director
/S/ ROBERT W. KURTZ /S/ KAREN F. SPIKER
- -------------------------------- -------------------------------
(Robert W. Kurtz) Director (Karen F. Spiker) Director
/S/ MAYNARD G. GROSSNICKLE /S/ ELAINE L. MCDONALD
- -------------------------------- -------------------------------
(Maynard G. Grossnickle) Director (Elaine L. McDonald) Director
/S/ RAYMOND F. HINKLE
- -------------------------------
(Raymond F. Hinkle) Director
(43)