UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended March 31, 2004
Commission file number 0-14237
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First United Corporation
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(Exact name of registrant as specified in its charter)
Maryland 52-1380770
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(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification no.)
19 South Second Street, Oakland, Maryland 21550-0009
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(address of principal executive offices) (zip code)
(301) 334-4715
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Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
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Indicate by check mark whether the registrant is an accelerated filer (As
defined in Rule 12b-2 of the Exchange Act). Yes X No __
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 6,087,287 shares of common
--------------------------
stock, par value $.01 per share, as of April 30, 2004.
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INDEX TO REPORT
FIRST UNITED CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - March 31, 2004 and December 31, 2003
Consolidated Statements of Income - for the three months ended
March 31, 2004 and 2003
Consolidated Statements of Cash Flows - for the three months ended
March 31, 2004 and 2003
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
PART I. FINANCIAL INFORMATION
FIRST UNITED CORPORATION
Consolidated Balance Sheets
(In thousands, except per share amounts)
March 31, December
2004 31, 2003
(unaudited)
--------------- --------------
Assets
Cash and due from banks $16,402 $20,272
Federal funds sold 14,000 -
Interest-bearing deposits in banks 13,229 1,474
Investment securities available-for-sale (at market value) 212,479 223,615
Federal Home Loan Bank stock, at cost 8,313 8,660
Loans 826,294 792,025
Allowance for loan losses (5,818) (5,974)
--------------- --------------
Net loans 820,476 786,051
Premises and equipment, net 17,183 16,598
Goodwill and other intangible assets 15,568 15,462
Accrued interest receivable and other assets 32,841 36,109
--------------- --------------
Total Assets $1,150,491 $1,108,241
=============== ==============
Liabilities and Shareholders' Equity
Liabilities:
Non-interest bearing deposits $103,382 $ 99,181
Interest-bearing deposits 659,980 650,980
--------------- --------------
Total deposits 763,362 750,161
Short-term borrowings 71,693 71,840
Long-term borrowings 220,904 191,735
Accrued interest and other liabilities 7,424 9,220
Dividends payable 1,095 1,094
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Total Liabilities 1,064,478 1,024,050
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Shareholders' Equity
Preferred stock --no par value;
Authorized and unissued 2,000 shares
Capital Stock -- par value $.01 per share;
Authorized 25,000 shares; issued and outstanding
6,087 shares at March 31, 2004 and December 31,
2003 61 61
Surplus 20,324 20,324
Retained earnings 63,814 62,201
Accumulated other comprehensive income 1,814 1,605
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Total Shareholders' Equity 86,013 84,191
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Total Liabilities and Shareholders' Equity $1,150,491 $1,108,241
=============== ==============
3
FIRST UNITED CORPORATION
Consolidated Statements of Income
(in thousands, except per share data)
Three Months Ended
March 31,
2004 2003
----------------------------
(unaudited)
Interest income
Loans, including fees $ 12,728 $ 12,133
Investment securities:
Taxable 1,531 1,739
Exempt from federal income tax 341 363
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1,872 2,102
Federal funds sold 1 5
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Total interest income 14,601 14,240
Interest expense
Deposits 2,738 3,467
Short-term borrowings 194 87
Long-term borrowings 2,561 2,592
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Total interest expense 5,493 6,146
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Net interest income 9,108 8,094
Provision for loan losses 45 656
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Net interest income after provision for
loan losses 9,063 7,438
Other operating income
Service charges on deposit accounts 920 714
Trust department income 700 635
Security gains 674 530
Insurance premium income 308 314
Other income 839 878
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Total other operating income 3,441 3,071
Other operating expenses
Salaries and employees benefits 4,253 4,046
Occupancy, equipment and data processing 1,470 1,193
Other expense 2,673 1,871
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Total other operating expenses 8,396 7,110
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Income before income taxes 4,108 3,399
Applicable income taxes 1,396 947
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Net income $2,712 $2,452
============== ==============
Earnings per share $ .45 $ .40
============== ==============
Dividends per share $ .18 $ .175
============== ==============
4
FIRST UNITED CORPORATION
Consolidated Statements of Cash Flows
(in thousands)
Three Months Ended
March 31,
2004 2003
-------------------------------------
(Unaudited)
Operating activities
Net Income $ 2,712 $ 2,452
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 45 656
Depreciation 555 501
Amortization of intangible assets 140 -
Net accretion and amortization of 355 (538)
investment security discounts and
premiums (674) (530)
Gain on sale of investment securities
Decrease in accrued interest receivable
and other assets 3,166 868
(Decrease) increase in accrued interest
and other liabilities (1,795) 1,722
Increase in bank owned life insurance
value (144) (242)
-------------------- -----------------
Net cash provided by operating activities 4,360 4,889
Investing activities
Net increase in federal funds purchased and
interest-bearing deposits in banks (25,755) (7,031)
Proceeds from maturities and sales of
investment securities available-for-sale 38,249 152,944
Purchases of investment securities available-
for-sale (26,746) (154,144)
Net increase in loans (33,965) (20,607)
Purchases of premises and equipment (1,140) (1,127)
-------------------- -----------------
Net cash used in investing activities (49,357) (29,965)
Financing activities
Net decrease in short-term borrowings (147) (18,286)
Proceeds from issuance of junior subordinated
debentures 30,929 --
Net decrease in other long-term borrowings (1,760) (1,759)
Net increase in deposits 13,201 48,933
Cash dividends paid (1,096) (1,065)
Proceeds from issuance of common stock 125
-------------------- -----------------
Net cash provided by financing
activities 41,127 27,948
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Cash and cash equivalents at beginning of the
year 20,272 18,242
Increase/(decrease) in cash and cash
equivalents (3,870) 2,872
-------------------- -----------------
Cash and cash equivalents at end of period $16,402 $21,114
==================== =================
5
FIRST UNITED CORPORATION
Notes to Unaudited Consolidated Financial Statements
March 31, 2004
Note A -- Basis of Presentation
The accompanying unaudited consolidated financial statements of First
United Corporation (the "Corporation") and its consolidated subsidiaries have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all
the information and footnotes required for complete financial statements. In the
opinion of management, all adjustments considered necessary for a fair
presentation, consisting of normal recurring items, have been included.
Operating results for the three-month period ended March 31, 2004 are not
necessarily indicative of the results that may be expected for a full year or
for any other interim period. These consolidated financial statements should be
read in conjunction with the audited consolidated financial statements and
footnotes thereto included in the Corporation's Annual Report on Form 10-K for
the year ended December 31, 2003. For purposes of comparability, certain prior
period amounts have been reclassified to conform to the current period
presentation.
Note B - Earnings per Share
Earnings per share are based on the weighted average number of shares
of common stock outstanding of approximately 6,087,000 for the three months
ended March 31, 2004 and 6,084,000 for the three months ended March 31, 2003.
The Corporation does not have any common stock equivalents.
Note C - Comprehensive Income
Unrealized gains and losses on investment securities available-for-sale
are the only items included in accumulated other comprehensive income. Total
comprehensive income (which consists of net income plus the change in unrealized
gains (losses) on investment securities available-for-sale, net of taxes and
reclassification adjustments) was $2.9 and $1.6 million for the three months
ended March 31, 2004 and 2003, respectively.
Note D - Junior Subordinated Debentures
In March 2004, the Corporation established two Connecticut statutory
trusts, First United Statutory Trust I ("FUST I") and First United Statutory
Trust II ("FUST II") (collectively, the "Trusts"), for the purpose of issuing
$10 million of Floating Rate Trust Preferred Securities and $20 million of
Fixed/Floating Rate Trust Preferred Securities, respectively (collectively, the
"Trust Preferred Securities"), in private placements. The Corporation owns 100%
of the outstanding shares of the common stock of the Trusts. The Trusts used the
proceeds from the issuances of Trust Preferred Securities to purchase an equal
principal amount of junior subordinated debentures issued by the Corporation,
and they used the proceeds from the Corporation's purchase of their shares of
common stock to purchase an additional $310,000 and $619,000 of junior
subordinated debentures, respectively (all junior subordinated debentures
collectively, the "Debentures").
The Debentures issued to FUST I pay interest at a variable rate based
on the three-month LIBOR plus 2.75%, reset quarterly, with the initial rate set
at 3.86%. The Debentures issued to FUST II pay interest at a fixed rate of
6.02%, payable quarterly, for five years, after which time the rate will be
based on the three-month LIBOR plus 2.75%, reset quarterly until maturity.
Holders of the Floating Rate Trust Preferred Securities are entitled to
distributions at the same rate applicable to the Debentures issued to FUST I,
and holders of the Fixed/Floating Rate Trust Preferred Securities are entitled
to distributions at the same rate applicable to the Debentures issued to FUST
II.
The Debentures mature in 30 years and, except in certain extraordinary
circumstances, are redeemable prior to maturity at our option on or after June
17, 2009. The Trust Preferred Securities are mandatorily redeemable, in whole or
in part, upon repayment of their underlying Debentures.
6
The Debentures represent the sole assets of the Trusts, and payments
under the Debentures are the sole source of cash flow of the Trusts. In
accordance with the provisions of FIN 46, neither these Trusts, nor the
Corporation's investment in First United Capital Trust ("Capital Trust"), a
Delaware business trust wholly owned by the Corporation and organized in 1999 to
issue $23.0 million of mandatorily redeemable preferred capital securities, are
consolidated with the Corporation for financial reporting purposes, and their
financial position and results of operations are not included in our
consolidated financial position and results of operations. Despite this
deconsolidation, the Federal Reserve Board continues to permit up to 25% of the
Corporation's Tier I capital to be comprised of, together with other cumulative
preferred stock, trust preferred securities issued by the Corporation's
deconsolidated subsidiaries. Accordingly, $28.1 million of the Trust Preferred
Securities and the preferred securities issued by Capital Trust qualify as Tier
I capital and the remaining $24.9 million qualify as Tier II capital at March
31, 2004. This supervisory position remained in effect at March 31, 2004, but
there remains the potential that the Federal Reserve Board will change its
position in the future.
Note E - Internal Restructurings
On February 28, 2004, First United Bank & Trust, a Maryland trust
company and the Corporation's wholly-owned subsidiary (the "Bank"), liquidated
its subsidiary, First United Capital Investments, Inc. ("Capital Investments").
Capital Investments was the parent company of First United Investment Trust, a
Maryland real estate investment trust that invests in mortgage loans (the
"Investment Trust"). The Investment Trust is now owned directly by the Bank.
Additionally, the Bank intends to liquidate First United Securities, Inc., a
Delaware corporation that invests in securities, in May of 2004. Currently, all
new securities investments are being made directly through the Bank.
Primarily as of result of these internal restructurings, the
Corporation's effective tax rate increased to 34% for the first quarter of 2004
as compared to 28% for the first quarter of 2003 and 30% for the year ended
December 31,2003.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
INTRODUCTION
The following discussion and analysis is intended as a review of
significant factors affecting the financial condition and results of operations
of First United Corporation (the "Corporation") and its consolidated
subsidiaries for the periods indicated. This discussion and analysis should be
read in conjunction with the unaudited consolidated financial statements and the
notes thereto presented herein. Unless the context clearly suggests otherwise,
references to "us", "we", "our", or "the Corporation" in this report are to
First United Corporation and its consolidated subsidiaries.
FORWARD-LOOKING STATEMENTS
This report may contain forward-looking statements within the meaning
of The Private Securities Litigation Reform Act of 1995. Readers of this report
should be aware of the speculative nature of "forward-looking statements."
Statements that are not historical in nature, including those that include the
words "anticipate," "estimate," "should," "expect," "believe," "intend," and
similar expressions, are based on current expectations, estimates and
projections about, among other things, the industry and the markets in which we
operate, and they are not guarantees of future performance. Whether actual
results will conform to expectations and predictions is subject to known and
unknown risks and uncertainties, including risks and uncertainties discussed in
this report; general economic, market, or business conditions; changes in
interest rates, deposit flow, the cost of funds, and demand for loan products
and financial services; changes in our competitive position or competitive
actions by other companies; changes in the quality or composition of our loan
and investment portfolios; our ability to manage growth; changes in laws or
regulations or policies of federal and state regulators and agencies; and other
circumstances beyond our control. Consequently, all of the forward-looking
statements made in this document are qualified by these cautionary statements,
and there can be no assurance that the actual results anticipated will be
realized, or if substantially realized, will have the expected consequences on
our business or operations. These and other risk factors are discussed in detail
in Exhibit 99.1 to our Annual Report on Form 10-K for the year ended December
31, 2003. Except as required by applicable laws, we do not intend to publish
updates or revisions of any forward-looking statements we make to reflect new
information, future events or otherwise.
7
THE COMPANY
We are a Maryland corporation that was incorporated in 1985. We are
registered as both a financial holding company and a bank holding company under
the federal Bank Holding Company Act of 1956, as amended. Our primary business
activity is acting as the parent company of the Bank, Oakfirst Life Insurance
Company, an Arizona reinsurance company, OakFirst Loan Center, Inc., a West
Virginia finance company, OakFirst Loan Center, LLC, a Maryland finance company,
First United Capital Trust, a Delaware statutory business trust (the "Capital
Trust"), and two Connecticut statutory trusts, First United Statutory Trust I
and First United Statutory Trust II. OakFirst Loan Center, Inc. has one
subsidiary, First United Insurance Agency, Inc., which is a Maryland insurance
agency. The Bank has four direct subsidiaries: Gonder Insurance Agency, Inc., a
Maryland full service insurance agency; First United Securities, Inc., a
Delaware corporation that holds and manages a portion of our investment
portfolio ("FUSI"); First United Investment Trust, a Maryland real estate
investment trust that invests in mortgage loans (the "Investment Trust"); and
First United Auto Finance, LLC, an inactive indirect automobile leasing limited
liability company.
We maintain an Internet site at www.mybankfirstunited.com on which we
make available, free of charge, our Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the
foregoing on our Internet site as soon as reasonably practicable after these
reports are electronically filed with, or furnished to, the SEC.
RECENT DEVELOPMENTS
On February 28, 2004, the Bank completed the liquidation of First
United Capital Investments, Inc., which was previously the parent company to the
Investment Trust. Additionally, the Bank intends to complete the liquidation of
FUSI in May of 2004. For additional information, see Note E to the consolidated
financial statements above.
SELECTED FINANCIAL DATA
The following data should be read in conjunction with the unaudited
consolidated financial statements and management's discussion and analysis that
follows:
At or For the Three Months
Ended March 31,
--------------------------
2004 2003
Per Share Data
Net Income $ .45 .40
Dividends Paid .18 .175
Book Value 14.13 13.14
Significant Ratios
Return on Average Assets (a) .97% 1.03%
Return on Average Equity (a) 12.75 12.44
Dividend Payout Ratio 40.00 44.74
Average Equity to Average Assets 7.56 8.19
Note: (a) Annualized
8
RESULTS OF OPERATIONS
Overview
Consolidated net income for the first three months of 2004 totaled $2.7
million or $.45 per share compared to $2.5 million or $.40 per share for the
same period of 2003. This is a net income and earnings per share increase of
11%.
Our performance ratios remain stable. Annualized Returns on Average
Equity ("ROAE") were 12.75% and 12.44% for the three-month periods ending March
31, 2004 and 2003, respectively. Annualized Returns on Average Assets ("ROAA")
were .97% and 1.03% for the first quarter of 2004 and 2003, respectively.
Net Interest Income
Net interest income is the largest source of operating revenue. Net
interest income is the difference between the interest earned on earning assets
and the interest expense incurred on interest-bearing liabilities. For
analytical and discussion purposes, net interest income is adjusted to a taxable
equivalent basis to facilitate performance comparisons between taxable and
tax-exempt assets by increasing tax-exempt income by an amount equal to the
federal income taxes that would have been paid if this income were taxable at
the statutorily applicable rate. The following table sets forth the average
balances, net interest income and expense, and average yields and rates of our
interest-earning assets and interest-bearing liabilities for the three months
ended March 31, 2004 and 2003.
Three Months Ended March 31,
2004 2003
Average Average Average Average
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
- -------------------------------------------- ------------- ----------- ---------- -- ------------- ---------- ---------
Interest-Earning Assets:
Loans $ 800,693 $ 12,744 6.37% $ 665,690 $ 12,156 7.30%
Investment securities 222,348 1,977 3.56 225,917 2,164 3.83
Other interest earning assets 11,075 80 2.89 19,951 139 2.79
------------- ----------- ---------- ------------- ---------- ---------
Total earning assets $1,034,116 14,801 5.73 $ 911,558 14,459 6.34
============= =============
Interest-bearing liabilities
Interest-bearing deposits $ 670,449 2,738 1.63 572,073 3,467 2.42
Short-term borrowings 71,918 194 1.08 40,081 87 .87
Long-term borrowings 196,956 2,561 5.20 201,013 2,592 5.16
------------- ----------- ---------- ------------- ---------- ---------
Total interest-bearing liabilities $ 939,323 5,493 2.34 $ 813,167 6,146 3.02
============= ----------- ============= ----------
Net interest income and spread $ 9,308 3.39% $ 8,313 3.32%
=========== ==========
Net interest margin 3.60% 3.65%
Note: Interest income and yields are presented on a fully tax equivalent basis using a 35% tax rate.
Net interest income increased $1.0 million (12%) during the first
quarter of 2004 over the same period in 2003 due to a $.3 million (2%) increase
in interest income and a $.7 million (11%) decrease in interest expense. The
slight increase in interest income resulted from an increase in average
interest-earning assets of $123 million (13%) during the first quarter of 2004,
which was principally offset by a 61 basis point decline in yield on such
earning assets. Approximately two-thirds of the growth in average loans and
average earning assets is attributable to strong demand in our core markets, and
the remaining one-third is attributable to the acquisition of certain branches
from The Huntington National Bank in July 2003.
9
Although average interest-bearing liabilities increased $126 million (16%)
during the first quarter of 2004, a 23% decrease in the effective rate of these
interest-bearing liabilities of 68 basis points resulted in a net decrease in
interest expense of $.7 million. Essentially all of the growth in average
interest-bearing deposits is attributable to the Huntington branch acquisition.
Other Operating Income
Other operating income increased $.4 million (12%) during the first
quarter of 2004 compared to the same period for 2003. Service charges on deposit
accounts accounted for approximately half of this increase, which is primarily
attributable to fees associated with an overdraft protection product we
introduced in 2002. Trust department income increased by $.1 million (10%)
during the current quarter, aided by solid sales and improved equity and bond
markets. The average market values of assets under management were $377 and $305
million for the first quarter of 2004 and 2003, respectively.
During the first quarter of 2004, net securities gains increased $.1
million compared to the same period for 2003. During the first quarter of 2003,
net securities gains included a $.3 million write down in Freddie Mac Preferred
equity securities exhibiting other-than-temporary impairment, which were
ultimately sold during the second quarter of 2003. There were no such impairment
losses recognized during the first quarter of 2004.
Other Operating Expense
Other operating expense for the first quarter of 2004 increased $1.3
million (18%) compared to the same period for 2003. Salaries and employee
benefits, which represent slightly more than half of total other operating
expenses, increased $.2 million (5%) during the first quarter of 2004. This
increase is attributable to increases in headcount to support our growth
objectives, including additional personnel associated with the Huntington branch
acquisition.
Occupancy and equipment expense increased $.3 million (23%) principally
due to branch expansion associated with the Huntington branch acquisition and
maintenance contracts on our new bank-wide security system.
Other expenses increased $.8 million (43%), resulting from increased
professional fees associated with compliance with the Sarbanes-Oxley Act,
business insurance costs, and amortization of core deposit intangible assets
resulting from the Huntington branch acquisition.
Applicable Income Taxes
Income tax expense for the three months ended March 31, 2004 was $1.4
million compared to $.9 million for the same period in 2003. The effective tax
rate for the first three months of 2004 increased to 34%, as compared to 28% for
the first three months of 2003 and 30% for the year ended December 31, 2003.
This increase in the effective tax rate is primarily attributable to the
liquidation of Capital Investments, which increased income tax expense by
approximately $.2 million during the first quarter of 2004.
FINANCIAL CONDITION
Balance Sheet Overview
Our total assets reached $1.15 billion at March 31, 2004, representing
an increase of $42 million (4%) from December 31, 2003. Gross Loans increased
$34 million while long-term borrowings increased $29 million, primarily from the
issuance of $31 million of junior subordinated debentures as discussed above in
Note D to the consolidated financial statements.
10
Loan Portfolio
The following table presents the composition of our loan portfolio at
the dates indicated:
(Dollars in millions) March 31, 2004 December 31, 2003
- --------------------------------------------------------------------------------
Commercial $322.5 39% $307.5 39%
Residential-Mortgage 282.1 34 264.7 33
Installment 205.7 25 201.4 26
Residential-Construction 14.2 2 16.1 2
Lease Financing 1.8 -- 2.3 --
------ ---- ------ ----
Total Loans $826.3 100% $792.0 100%
====== ==== ====== ====
During the first quarter of 2004, our loan portfolio grew $34 million
(4%). The key contributors to this growth were commercial loans ($15 million)
and residential mortgage loans ($17 million). Our commercial loan portfolio grew
5% during the quarter, which is primarily attributable to new customer
relationships in our core markets. At March 31, 2004, approximately 83% of the
commercial loan portfolio was collateralized by real estate.
Our residential-mortgage portfolio grew 7% during the quarter, which is
primarily attributable to our competitively priced adjustable rate mortgage
products as an alternative to the fixed rates offered in the secondary market.
Risk Elements of Loan Portfolio
The following table presents the risk elements of our loan portfolio at
the dates indicated. We have no knowledge of any potential problem loans other
than those listed in this table.
(Dollars in thousands) March 31, 2004 December 31, 2003
- --------------------------------------------------------------------------------
Non-accrual loans $ 2,722 $ 2,774
Accruing loans past due 90 days or more 1,266 1,236
------- -------
Total $ 3,988 $ 4,010
======= =======
Total as a percentage of total loans .48% .51%
======= ===========
Allowance and Provision for Loan Losses
The allowance for loan losses is based on our continuing evaluation of
the quality of the loan portfolio, assessment of current economic conditions,
diversification and size of the portfolio, adequacy of collateral, past and
anticipated loss experience, and the amount of non-performing loans. We utilize
the methodology outlined in the FDIC Statement of Policy on Allowance of Loan
and Lease Losses. To determine an appropriate allowance, we first segregate the
loan portfolio into two pools, non-homogeneous (i.e. commercial) and homogeneous
(i.e. consumer) loans. Each loan pool is then analyzed with general allowances
and specific allocations being made as appropriate. For general allowances,
historical loss activity, modified by current qualitative factors, are used in
the estimate of losses in the current portfolio. Specific allocations are
considered for individual loans that are identified in our internal grading
system as those which possess certain qualities or characteristics that may lead
to collection and loss issues.
11
The following table presents a summary of the activity in the allowance
for loan losses for the three months ended March 31 (dollars in thousands):
2004 2003
- --------------------------------------------------------------------------------
Balance, January 1 $ 5,974 $ 6,068
Gross credit losses (347) (614)
Recoveries 146 90
-------- --------
Net credit losses (201) (524)
-------- --------
Provision for loan losses 45 656
-------- --------
Balance at end of period $ 5,818 $ 6,200
======== ========
Allowance for Loan Losses to loans outstanding .70% .90%
======== ========
Net charge-offs to average loans outstanding
during the period, annualized .10% .31%
======== ========
Although the balance of our total loans increased $34 million during
the first quarter of 2004, our annualized net charge off experience relative to
total average loans outstanding declined to .10% for this period, as compared to
..31% for the first quarter of 2003 and .17% for the year ended December 31,
2003.
Net charge offs relating to the installment loan portfolio represent
greater than 90% of our total net charges for the first quarter of 2004 and for
fiscal years 2003 and 2002. Generally, installment loans are charged off after
they are 120 days contractually past due. The quality of the installment loan
portfolio has improved dramatically, as loans past due 30 days or more were $1.9
million or .96 % of the installment portfolio at March 31, 2004. This compares
favorably to $2.7 million or 1.41% at December 31, 2003 and $2.5 million or
1.51% at March 31, 2003.
This improvement in installment loan delinquencies, as well as our
overall loss experience, has been considered in our assessment of the allowance
for loan losses. As a result of our evaluation of the loan portfolio using the
factors and methodology summarized above, the allowance for loan losses
decreased slightly to $5.8 million at March 31, 2004, compared to $6.0 million
at December 31, 2003. We believe that the allowance at March 31, 2004 is
adequate to provide for probable losses inherent in our loan portfolio.
The provision for loan losses was less than $.1 million for the first
quarter of 2004, as compared to $.7 million for the same period of 2003. Amounts
to be recorded for the provision for loan losses in future periods will depend
upon trends in the loan balances, including the composition of the loan
portfolio, changes in loan quality and loss experience trends, and potential
recoveries on previously charged-off loans.
12
Investment Securities
Our entire investment securities portfolio is categorized as
available-for-sale, which is carried at market value. The following table
presents the composition of our securities portfolio at the dates indicated:
(Dollars in millions) March 31, 2004 December 31, 2003
- --------------------------------------------------------------------------------
U.S. government and agencies $ 78.9 37% $ 75.7 34%
Mortgage-backed securities 89.5 42 89.1 40
Obligations of states
and political subdivisions 27.8 13 29.3 13
Corporate and other debt securities 13.7 7 18.3 8
Other securities 2.6 1 11.2 5
----- --- ------ ---
Total Investment Securities $212.5 100% $223.6 100%
====== ==== ====== ====
The slight decrease in our securities portfolio was attributed to the
utilization of certain money market investments included in other securities to
fund loan growth during the quarter.
Deposits
The following table presents the composition of our deposits at the
dates indicated:
(Dollars in millions) March 31, 2004 December 31, 2003
- --------------------------------------------------------------------------------
Noninterest-bearing demand deposits $103.4 14% $ 99.2 13%
Interest-bearing demand deposits 249.4 33 254.1 34
Savings deposits 64.8 8 61.0 8
Time deposits less than $.1 204.0 27 218.4 29
Time deposits $.1 or more 141.8 19 117.5 16
----- --- ------ ----
Total Deposits $763.4 100% $750.2 100%
====== ==== ====== ====
Deposits grew less than 2% during the first quarter of 2004. This
slight increase related to an increase in brokered certificates of deposit of
$100,000 or more to fund loan growth during the quarter.
Borrowed Funds
The following table presents the composition of our borrowings at the
dates indicated:
(In millions) March 31, 2004 December 31, 2003
- --------------------------------------------------------------------------------
Federal funds purchased $ - $ 5.8
Securities sold under
agreements to repurchase 71.7 66.0
----- -----
Total short-term borrowings $ 71.7 $ 71.8
====== ======
FHLB advances $166.3 $168.0
Junior subordinated debt 54.6 23.7
------ ------
Total long-term borrowings $220.9 $191.7
====== ======
In March 2004, we issued $30.9 million of junior subordinated
debentures to FUST I and FUST II. See Note D to the consolidated financial
statements above for further information on this issuance.
We intend to use the net proceeds from this recent offering for general
corporate purposes, including the possible redemption on or after September 30,
2004 of the 9.375% junior subordinated debentures issued by the Corporation to
Capital Trust in 1999. If we elect to redeem these 9.375% junior subordinated
debentures on September 30, 2004, we anticipate that we will have to expense
approximately
13
$.9 million of pretax unamortized issuance costs. Using the blended initial
weighted average rate of the Trust Preferred Securities recently issued by FUST
I and FUST II, it would take approximately 12 months of interest savings to
offset this expense.
Liquidity and Capital
We derive liquidity through increased customer deposits, maturities in
the investment portfolio, loan repayments and income from earning assets. To the
extent that deposits are not adequate to fund customer loan demand, liquidity
needs can be met in the short-term funds markets through arrangements with our
correspondent banks or through the purchase of brokered certificates of deposit.
The Bank is also a member of the Federal Home Loan Bank of Atlanta, which
provides another source of liquidity. Finally, as evidenced by the issuance of
the Trust Preferred Securities as discussed above in Note D to the consolidated
financial statements, we may from time to time access capital markets to meet
some of our liquidity needs. Management knows of no known trends or demands,
commitments, events or uncertainties that will materially affect our ability to
maintain liquidity at satisfactory levels.
The following table presents our capital ratios at March 31, 2004:
Actual For
at Capital To Be
March 31, Adequacy Well
2004 Purposes Capitalized
- ----------------------------------------- ------------- ---------- -------------
Total Capital (to risk-weighted assets) 15.16% 8.00% 10.00%
Tier 1 Capital (to risk-weighted assets) 11.50 4.00 6.00
Tier 1 Capital (to average assets) 8.62 3.00 5.00
We are categorized as "well capitalized" under federal banking
regulatory capital requirements. If we elect to redeem all of the 9.375% junior
subordinated debentures issued to the Capital Trust on or after September 30,
2004, which in turn would require the Capital Trust the redeem an equal amount
of its trust preferred securities, our total capital will be reduced by
approximately $23.0 million. If this redemption had occurred on March 31, 2004,
and assuming no other changes, we estimate that our total capital ratio would
have been 12.42%, with no material impact on the ratio of Tier 1 capital to
risk-weighted assets or the ratio of Tier 1 capital to average assets. See Note
D to the consolidated financial statements for details.
We paid a cash dividend of $.18 per share on February 1, 2004. On March
17, 2004, we declared another dividend of an equal amount, to be paid on May 1,
2004 to shareholders of record at April 16, 2004.
Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
Loan commitments are made to accommodate the financial needs of our
customers. Letters of credit commit us to make payments on behalf of customers
when certain specified future events occur. The credit risks inherent in loan
commitments and letters of credit are essentially the same as those involved in
extending loans to customers, and these arrangements are subject to our normal
credit policies. Loan commitments and letters of credit totaled $75.0 and $1.2
million at March 31, 2004. We are not party to any other off-balance sheet
arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our primary market risk is interest rate fluctuation and we have
procedures in place to evaluate and mitigate these risks. This market risk and
our procedures are described in our Annual Report on Form 10-K for the year
ended December 31, 2003 under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operation - Interest Rate Sensitivity".
Management believes that there have been no material changes in our market risks
or in the procedures used to evaluate and mitigate these risks since December
31, 2003.
14
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our reports filed under the
Securities Exchange Act of 1934 with the SEC, such as this Quarterly Report, is
recorded, processed, summarized and reported within the time periods specified
in those rules and forms, and that such information is accumulated and
communicated to our management, including the Chief Executive Officer ("CEO")
and the Chief Financial Officer ("CFO"), as appropriate, to allow for timely
decisions regarding required disclosure. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, control may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate.
An evaluation of the effectiveness of these disclosure controls as of
March 31, 2004 was carried out under the supervision and with the participation
of our management, including the CEO and the CFO. Based on that evaluation,
management, including the CEO and the CFO, has concluded that our disclosure
controls and procedures are effective.
During the first quarter of 2004, there was no change in our internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits furnished with this quarterly report are listed in
the Exhibit Index that follows the signatures, which index is
incorporated herein by reference.
15
(b) Reports on Form 8-K
On February 24, 2004, we furnished in Item 9 of a Current Report
on Form 8-K preliminary unaudited net income and earnings per
share for the quarter and year ended December 31, 2003.
On March 2, 2004, we reported in Item 5 of a Current Report on
Form 8-K that First United Capital Investments, Inc. would be
liquidated during the first quarter of 2004 and that First United
Securities, Inc. will cease its investment activities and be
wound up during 2004. In Item 12 of this Current Report on Form
8-K, we also furnished results of operations for the quarter and
year ended December 31, 2003.
On March 31, 2004, we reported in Item 5 of a Current Report on
Form 8-K the completion of a $10 million private placement of
Floating Rate Trust Preferred Securities and a $20 million
private placement of Fixed/Floating Rate Trust Preferred
Securities through our Connecticut statutory trust subsidiaries.
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST UNITED CORPORATION
Date: May 3, 2004 /s/ William B. Grant
----------------------------------------
William B. Grant, Chairman of the Board
and Chief Executive Officer
Date May 3, 2004 /s/ Robert W. Kurtz
----------------------------------------
Robert W. Kurtz, President and Chief
Financial Officer
16
EXHIBIT INDEX
Exhibit Description
3.1 Amended and Restated Articles of Incorporation (incorporated by
reference to Exhibit 3.1 of the Corporation's Quarterly Report on
Form 10-Q for the period ended June 30, 1998)
3.2 Amended and Restated By-Laws (incorporated by reference to Exhibit
3(ii) of the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1997)
10.1 First United Bank & Trust Supplemental Executive Retirement Plan
("SERP") (incorporated by reference to Exhibit 10.1 of the
Corporation's Quarterly Report on Form 10-Q for the period ended
June 30, 2003)
10.2 Form of SERP Participation Agreement between the Bank and each of
William B. Grant, Robert W. Kurtz, Jeannette R. Fitzwater, Phillip
D. Frantz, Eugene D. Helbig, Jr., Steven M. Lantz, Robin M.
Murray, Frederick A. Thayer, IV (incorporated by reference to
Exhibit 10.2 of the Corporation's Quarterly Report on Form 10-Q
for the period ended June 30, 2003)
10.3 Endorsement Split Dollar Agreement between the Bank and William B.
Grant (incorporated by reference to Exhibit 10.3 of the
Corporation's Quarterly Report on Form 10-Q for the period ended
June 30, 2003)
10.4 Endorsement Split Dollar Agreement between the Bank and Robert W.
Kurtz (incorporated by reference to Exhibit 10.4 of the
Corporation's Quarterly Report on Form 10-Q for the period ended
June 30, 2003)
10.5 Endorsement Split Dollar Agreement between the Bank and Jeannette
R. Fitzwater (incorporated by reference to Exhibit 10.5 of the
Corporation's Quarterly Report on Form 10-Q for the period ended
June 30, 2003)
10.6 Endorsement Split Dollar Agreement between the Bank and Phillip D.
Frantz (incorporated by reference to Exhibit 10.6 of the
Corporation's Quarterly Report on Form 10-Q for the period ended
June 30, 2003)
10.7 Endorsement Split Dollar Agreement between the Bank and Eugene D.
Helbig, Jr. (incorporated by reference to Exhibit 10.7 of the
Corporation's Quarterly Report on Form 10-Q for the period ended
June 30, 2003)
10.8 Endorsement Split Dollar Agreement between the Bank and Steven M.
Lantz (incorporated by reference to Exhibit 10.8 of the
Corporation's Quarterly Report on Form 10-Q for the period ended
June 30, 2003)
10.9 Endorsement Split Dollar Agreement between the Bank and Robin M.
Murray (incorporated by reference to Exhibit 10.9 of the
Corporation's Quarterly Report on Form 10-Q for the period ended
June 30, 2003)
10.10 Endorsement Split Dollar Agreement between the Bank and Frederick
A. Thayer, IV (incorporated by reference to Exhibit 10.10 of the
Corporation's Quarterly Report on Form 10-Q for the period ended
June 30, 2003)
10.11 First United Corporation Executive and Director Deferred
Compensation Plan (incorporated by reference to Exhibit 10.10 of
the Corporation's Quarterly Report on Form 10-Q for the period
ended September 30, 2003)
31.1 Certifications of the CEO pursuant to Section 302 of the
Sarbanes-Oxley Act (filed herewith)
31.2 Certifications of the CFO pursuant to Section 302 of the
Sarbanes-Oxley Act (filed herewith)
32.1 Certification of the CEO pursuant to 18 U.S.C.ss.1350 (furnished
herewith)
32.2 Certification of the CFO pursuant to 18 U.S.C.ss.1350 (furnished
herewith)