EXHIBIT 99.1
RISK FACTORS
The following factors should be considered carefully in evaluating an
investment in shares of common stock of First United Corporation. When we refer
to "we", "us", or "our" in these Risk Factors, we mean First United Corporation
and, as the context requires, its subsidiaries.
OUR FUTURE DEPENDS ON THE SUCCESSFUL GROWTH OF OUR SUBSIDIARIES
Our primary business activity for the foreseeable future will be to act as
the holding company of First United Bank & Trust and our other direct and
indirect subsidiaries. Therefore, our future profitability will depend on the
success and growth of these subsidiaries. In the future, part of our growth may
come from buying other banks and buying or establishing other companies. Such
entities may not be profitable after they are purchased or established, and they
may lose money, particularly at first. A new bank or company may bring with it
unexpected liabilities, bad loans, or bad employee relations, or the new bank or
company may lose customers.
THE MAJORITY OF OUR BUSINESS IS CONCENTRATED IN MARYLAND AND WEST VIRGINIA; A
SIGNIFICANT AMOUNT OF OUR BUSINESS IS CONCENTRATED IN REAL ESTATE LENDING
Because most of our loans are made to Western Maryland and Northeastern
West Virginia borrowers, a decline in local economic conditions may have a
greater effect on our earnings and capital than on the earnings and capital of
larger financial institutions whose loan portfolios are geographically diverse.
Further, we make many real estate secured loans, which are in greater demand
when interest rates are low and economic conditions are good. Even when economic
conditions are favorable and interest rates are low, these conditions may not
continue. Additionally, the market values of the real estate securing these
loans may deteriorate, and we may lose money if a borrower fails to repay a real
estate loan.
FIRST UNITED BANK & TRUST MAY EXPERIENCE LOAN LOSSES IN EXCESS OF ITS ALLOWANCE
The risk of credit losses on loans varies with, among other things,
general economic conditions, the type of loan being made, the creditworthiness
of the borrower over the term of the loan and, in the case of a collateralized
loan, the value and marketability of the collateral for the loan. Management of
First United Bank & Trust maintains an allowance for credit losses based upon,
among other things, historical experience, an evaluation of economic conditions
and regular reviews of delinquencies and loan portfolio quality. Based upon such
factors, management makes various assumptions and judgments about the ultimate
collectability of the loan portfolio and provides an allowance for loan losses
based upon a percentage of the outstanding balances and for specific loans when
their ultimate collectability is considered questionable. If management's
assumptions and judgments prove to be incorrect and the allowance for loan
losses is inadequate to absorb future losses, or if the bank regulatory
authorities require us to increase the allowance for loan losses as a part of
its examination process, our earnings and capital could be significantly and
adversely affected. Although management uses the best information available to
make determinations with respect to the allowance for loan losses, future
adjustments may be necessary if economic conditions differ substantially from
the assumptions used or adverse developments arise with respect to our
non-performing or performing loans. Material additions to the allowance for loan
losses would result in a decrease in our net income and capital, and could have
a material adverse effect on our financial condition.
INTEREST RATES AND OTHER ECONOMIC CONDITIONS WILL IMPACT RESULTS OF OPERATIONS
Our results of operations may be materially and adversely affected by
changes in prevailing economic conditions, including declines in real estate
values, rapid changes in interest rates and the monetary and fiscal policies of
the federal government. Our profitability is in part a function of the spread
between the interest rates earned on assets and the interest rates paid on
deposits and other interest-bearing liabilities (i.e., net interest income),
including advances from the Federal Home Loan Bank of Atlanta. Interest rate
risk arises from mismatches (i.e., the interest sensitivity gap) between the
dollar amount of repricing or maturing assets and liabilities and is measured in
terms of the ratio of the interest rate sensitivity gap to total assets. More
assets repricing or maturing than liabilities over a given time period is
considered asset-sensitive and is reflected as a positive gap, and more
liabilities repricing or maturing than assets over a given time period is
considered liability-sensitive and is reflected as negative gap. An
asset-sensitive position (i.e., a positive gap) could enhance earnings in a
rising interest rate environment and could negatively impact earnings in a
falling interest rate environment, while a liability-sensitive position (i.e., a
negative gap) could enhance earnings in a falling interest rate environment and
negatively impact earnings in a rising interest rate environment. Fluctuations
in interest rates are not predictable or controllable. We have attempted to
structure our asset and liability management strategies to mitigate the impact
on net interest income of changes in market interest rates, but there can be no
assurance that these attempts will be successful in the event of such changes.
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THE MARKET VALUE OF OUR INVESTMENTS COULD DECLINE
As of December 31, 2004, we had classified 100% of our investment
securities as available-for-sale pursuant to Statement of Financial Accounting
Standards ("SFAS") No. 115 relating to accounting for investments. SFAS No. 115
requires that unrealized gains and losses in the estimated value of the
available-for-sale portfolio be "marked to market" and reflected as a separate
item in shareholders' equity (net of tax) as accumulated other comprehensive
income. There can be no assurance that future market performance of our
investment portfolio will enable us to realize income from sales of securities.
Shareholders' equity will continue to reflect the unrealized gains and losses
(net of tax) of these investments. Moreover, there can be no assurance that the
market value of our investment portfolio will not decline, causing a
corresponding decline in shareholders' equity.
Management believes that several factors will affect the market values of
our investment portfolio. These include, but are not limited to, changes in
interest rates or expectations of changes, the degree of volatility in the
securities markets, inflation rates or expectations of inflation and the slope
of the interest rate yield curve (the yield curve refers to the differences
between shorter-term and longer-term interest rates; a positively sloped yield
curve means shorter-term rates are lower than longer-term rates). Also, the
passage of time will affect the market values of our investment securities, in
that the closer they are to maturing, the closer the market price should be to
par value. These and other factors may impact specific categories of the
portfolio differently, and management cannot predict the effect these factors
may have on any specific category.
OUR ABILITY TO PAY DIVIDENDS IS LIMITED
Our current ability to pay dividends to shareholders is largely dependent
upon the receipt of dividends from First United Bank & Trust. Both federal and
state laws impose restrictions on the ability of First United Bank & Trust to
pay dividends. Federal law prohibits the payment of a dividend by an uninsured
depository institution if the depository institution is considered
"undercapitalized" or if the payment of the dividend would make the institution
"undercapitalized". This policy statement is applicable only to troubled
institutions. For a Maryland state-chartered bank or trust company, dividends
may be paid out of undivided profits or, with the prior approval of the
Commissioner, from surplus in excess of 100% of required capital stock. If
however, the surplus of a Maryland bank is less than 100% of its required
capital stock, cash dividends may not be paid in excess of 90% of net earnings.
In addition to these specific restrictions, bank regulatory agencies also have
the ability to prohibit proposed dividends by a financial institution which
would otherwise be permitted under applicable regulations if the regulatory body
determines that such distribution would constitute an unsafe or unsound
practice. Because of these limitations, there can be no guarantee that we will
declare dividends in any fiscal quarter.
OUR STOCK IS NOT HEAVILY TRADED
The shares of our common stock are listed on the Nasdaq National Market
and are not heavily traded. Securities that are not heavily traded can be more
volatile than stock trading in an active public market. Factors such as our
financial results, the introduction of new products and services by us or our
competitors, and various factors affecting the banking industry generally may
have a significant impact on the market price of our common stock. Management
cannot predict the extent to which an active public market for our securities
will develop or be sustained in the future. In recent years, the stock market
has experienced a high level of price and volume volatility, and market prices
for the securities of many companies have experienced wide price fluctuations
that have not necessarily been related to their operating performance.
Therefore, our shareholders may not be able to sell their shares at the volumes,
prices, or times that they desire.
OUR STOCK IS NOT INSURED
Investments in our securities are not deposits and are not insured against
loss by the government.
WE OPERATE IN A COMPETITIVE MARKET
We operate in a competitive environment, competing for loans, deposits,
and customers with commercial banks, savings associations and other financial
entities. Competition for deposits comes primarily from other commercial banks,
savings associations, credit unions, money market and mutual funds and other
investment alternatives. Competition for loans comes primarily from other
commercial banks, savings associations, mortgage banking firms, credit unions
and other financial intermediaries. Competition for other products, such as
insurance and securities products, comes from other banks, securities and
brokerage companies, insurance companies, insurance agents and brokers, and
other nonbank financial service providers in our market area. Many of these
competitors are much larger in terms of total assets and capitalization, have
greater access to capital markets, and/or offer a broader range of financial
services than those that we offer. In addition, banks with a larger
capitalization and financial intermediaries not subject to bank regulatory
restrictions have larger lending limits and are thereby able to serve the needs
of larger customers. Finally, our growth and profitability will depend upon our
ability to attract and retain skilled managerial, marketing and technical
personnel. Competition for qualified personnel in the financial services
industry is intense, and there can be no assurance that we will be successful in
attracting and retaining such personnel.
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THE BANKING INDUSTRY IS HEAVILY REGULATED; SIGNIFICANT REGULATORY CHANGES COULD
ADVERSELY AFFECT OUR OPERATIONS
Our operations will be impacted by current and future legislation and by
the policies established from time to time by various federal and state
regulatory authorities. First United Corporation is subject to supervision by
the Federal Reserve Board. First United Bank & Trust is subject to supervision
and periodic examination by the Maryland Commissioner of Financial Regulation
and the Federal Deposit Insurance Corporation. Banking regulations, designed
primarily for the safety of depositors, may limit a financial institution's
growth and the return to its investors by restricting such activities as the
payment of dividends, mergers with or acquisitions by other institutions,
investments, loans and interest rates, interest rates paid on deposits,
expansion of branch offices, and the offering of securities or trust services.
First United Corporation and First United Bank & Trust are also subject to
capitalization guidelines established by federal law and could be subject to
enforcement actions to the extent that either is found by regulatory examiners
to be undercapitalized. It is not possible to predict what changes, if any, will
be made to existing federal and state legislation and regulations or the effect
that such changes may have on our future business and earnings prospects.
Management also cannot predict the nature or the extent of the effect on our
business and earnings of future fiscal or monetary policies, economic controls,
or new federal or state legislation. Further, the cost of compliance with
regulatory requirements may adversely affect our ability to operate profitably.
WE MAY BE ADVERSELY AFFECTED BY RECENT LEGISLATION
The Gramm-Leach-Bliley Act was signed into law on November 12, 1999. Among
other things, this law repealed restrictions on banks affiliating with
securities firms. It also permits bank holding companies that become financial
holding companies to engage in additional financial activities, including
insurance and securities underwriting and agency activities, merchant banking,
and insurance company portfolio investment activities that are currently not
permitted for bank holding companies. Although First United Corporation is a
financial holding company, this law may increase the competition we face from
larger banks and other companies. It is not possible to predict the full effect
that this law will have on us.
In addition, current banking laws facilitate interstate branching and
merger activity among banks, and interstate banking is now an accepted element
of competition. As a result, we may face an even greater degree of competition
in the banking industry, and we may be brought into competition with
institutions with which we do not presently compete. From time to time other
changes are proposed to laws affecting the banking industry, and these changes
could have a material effect on our business and prospects. Our future
profitability may be adversely affected by increased competition resulting from
this legislation.
WE MAY BE SUBJECT TO CLAIMS
Our customers may sue us for losses due to alleged breaches of fiduciary
duties, errors and omissions of employees, officers and agents, incomplete
documentation, our failure to comply with applicable laws and regulations, or
many other reasons. Also, our employees may knowingly or unknowingly violate
laws and regulations. Management may not be aware of any violations until after
their occurrence. This lack of knowledge may not insulate us from liability.
Claims and legal actions may result in legal expenses and liabilities that may
reduce our profitability and hurt our financial condition.
WE MAY NOT BE ABLE TO KEEP PACE WITH DEVELOPMENTS IN TECHNOLOGY
We use various technologies in conducting our businesses, including
telecommunication, data processing, computers, automation, internet-based
banking, and debit cards. Technology changes rapidly. Our ability to compete
successfully with other financial institutions may depend on whether we can
exploit technological changes. We may not be able to exploit technological
changes, and any investment we do make may not make us more profitable.
OUR ARTICLES OF INCORPORATION AND BY-LAWS MAY DISCOURAGE A CORPORATE TAKEOVER
The Amended and Restated Articles of Incorporation of First United
Corporation and its By-Laws contain certain provisions designed to enhance the
ability of the Board of Directors to deal with attempts to acquire control of
the corporation. These provisions provide for the classification of the Board of
Directors into three classes; directors of each class generally serve for
staggered three-year periods. No director may be removed except for cause, and
then only by the affirmative vote of either a majority of the entire Board of
Directors or a majority of the outstanding voting stock. In addition, Maryland
law contains anti-takeover provisions that apply to First United Corporation.
Although these provisions do not preclude a takeover, they may have the effect
of discouraging a future takeover attempt that would not be approved by the
Board of Directors, but pursuant to which shareholders might receive a
substantial premium for their shares over then-current market prices. As a
result, shareholders who might desire to participate in such a transaction might
not have the opportunity to do so. Such provisions will also render the removal
of the Board of Directors and of management more difficult and, therefore, may
serve to perpetuate current management. As a result of the foregoing, such
provisions could potentially adversely affect the market price of our common
stock.
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