FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarter ended June 30, 2001 Commission file number 0-14237 First United Corporation (Exact name of registrant as specified in its charter) Maryland 52-1380770 (State or other jurisdiction of (I. R. S. Employer incorporation or organization) Identification no.) 19 South Second Street, Oakland, Maryland 21550-0009 (address of principal executive offices) (zip code) (301) 334-4715 Registrant's telephone number, including area code Not applicable Former name, address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common stock, $.01 Par value--6,080,568 shares outstanding as of June 30, 2001 Preferred stock, No par value--No shares outstanding as of June 30, 2001. -01- INDEX FIRST UNITED CORPORATION PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - June 30, 2001 (unaudited) and December 31, 2000. Consolidated Statements of Income (unaudited) - For the three and six months ended June 30, 2001 and 2000. Consolidated Statements of Cash Flows (unaudited) - For the six months ended June 30, 2001 and 2000. Notes to Unaudited Consolidated Financial Statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. PART II. OTHER INFORMATION Item 1. Legal Proceedings. Item 2. Changes in Securities. Item 3. Defaults upon Senior Securities. Item 4. Submission of Matters to a Vote of Security Holders. Item 5. Other Information. Item 6. Exhibits and Reports on Form 8-K. SIGNATURES -02- FIRST UNITED CORPORATION Consolidated Balance Sheets June 30, December 31 Assets 2001 2000 (unaudited) -------------------------- (in thousands) Cash and due from banks $15,805 $15,521 Federal funds sold 6,224 11,400 Interest-bearing deposits in banks 1,645 20,534 Investment securities: U.S. Treasury Securities and Obligations of other U.S. Government Agencies 40,734 74,532 Obligations of State and Local Government 25,318 19,674 Other investments 80,522 58,652 ------------------------ Total investment securities 146,574 152,858 Federal Home Loan Bank stock, at cost 5,950 5,950 Loans and Leases 618,634 614,647 Reserve for possible credit losses (5,144) (5,094) ------------------------ Net loans 613,490 609,553 Bank premises and equipment 11,251 10,831 Accrued interest receivable and other assets 31,661 20,942 ------------------------ Total Assets $832,600 $847,589 ============================ -03- FIRST UNITED CORPORATION Consolidated Balance Sheets June 30, December 31, 2001 2000 (unaudited) Liabilities and Shareholders' Equity ----------------------- (in thousands) Liabilities Non-interest bearing deposits $ 54,916 $51,339 Interest bearing deposits 557,091 598,638 ----------------------- Total deposits 612,007 649,977 Reserve for taxes, accrued interest, and other liabilities 13,930 9,105 Federal Home Loan Bank borrowings and other borrowed funds 137,238 122,000 Dividends payable 1,003 996 ----------------------- Total Liabilities 764,178 782,078 Shareholders' Equity Preferred stock -no par value Authorized and unissued; 2,000 Shares Capital Stock -par value $.01 per share: Authorized 25,000 shares; issued and outstanding 6,081 shares at June 30, 2001, and December 31, 2000 61 61 Surplus 20,199 20,199 Retained earnings 47,422 45,132 Accumulated comprehensive income 740 119 ---------------------- Total Shareholders' Equity 68,422 65,511 ---------------------- Total Liabilities and Shareholders' Equity $832,600 $847,589 ====================== -04- FIRST UNITED CORPORATION Consolidated Statements Of Income (in thousands, except per share data) Six Months Ended June 30, 2001 2000 ------------------- (unaudited) Interest income Interest and fees on loans and leases $ 26,829 $ 25,560 Interest on investment securities: Taxable 4,528 4,631 Exempt from federal income tax 504 663 ------------------ 5,032 5,294 Interest on federal funds sold 294 92 ------------------ Total interest income 32,155 30,946 Interest expense Interest on deposits: Savings 225 327 Interest-bearing transaction accounts 2,163 2,441 Time, $100,000 or more 4,016 3,138 Other time 7,501 6,711 Interest on Federal Home Loan Bank borrowings and other borrowed funds 4,113 3,956 ------------------ Total interest expense 18,018 16,573 ------------------ Net interest income 14,137 14,373 Provision for possible credit losses 1,082 1,513 ------------------ Net interest income after provision for possible credit losses 13,055 12,860 Other operating income Trust department income 1,368 1,000 Service charges on deposit accounts 1,178 1,025 Insurance premium income 508 460 Securities gains (losses) 76 (124) Other income 1,543 1,200 -------------------- Total other operating income 4,673 3,561 -05- Other operating expenses Salaries and employees benefits 6,154 5,579 Occupancy expense of premises 645 539 Equipment expense 897 904 Data processing expense 480 545 Deposit assessments and related fees 88 88 Other expense 3,235 3,186 -------------------- Total other operating expenses 11,499 10,841 -------------------- Income before income taxes 6,229 5,580 Applicable income taxes 1,928 1,773 -------------------- Net income $4,301 $3,807 ==================== Earnings per share $0.71 $0.63 ==================== Dividends per share $0.33 $0.32 ==================== -06- FIRST UNITED CORPORATION Consolidated Statements Of Income (in thousands, except per share data) Three Months Ended June 30, 2001 2000 ------------------- (unaudited) Interest income Interest and fees on loans and leases $ 13,277 $ 13,196 Interest on investment securities: Taxable 2,194 2,187 Exempt from federal income tax 275 301 -------------------- 2,469 2,488 Interest on federal funds sold 105 15 -------------------- Total interest income 15,851 15,699 Interest expense Interest on deposits: Savings 110 164 Interest-bearing transaction accounts 865 1,274 Time, $100,000 or more 1,855 1,523 Other time 3,764 3,383 Interest on Federal Home Loan Bank borrowings and other borrowed funds 2,061 2,114 -------------------- Total interest expense 8,655 8,458 ------------------- Net interest income 7,196 7,241 Provision for possible credit losses 547 950 -------------------- Net interest income after provision for possible credit losses 6,649 6,291 Other operating income Trust department income 662 500 Service charges on deposit accounts 611 516 Insurance premium income 279 280 Securities (losses) 23 (80) Other income 817 569 -------------------- Total other operating income 2,392 1,785 -07- Other operating expenses Salaries and employees benefits 3,072 2,830 Occupancy expense of premises 310 265 Equipment expense 451 467 Data processing expense 239 262 Deposit assessments and related fees 47 53 Other expense 1,642 1,596 -------------------- Total other operating expenses 5,761 5,473 -------------------- Income before income taxes 3,280 2,603 Applicable income taxes 996 797 -------------------- Net income $2,284 $1,806 ==================== Earnings per share $0.38 $0.30 ==================== Dividends per share $0.165 $0.16 ==================== -08- FIRST UNITED CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Six Months Ended June 30, 2001 2000 -------------------- (unaudited) Operating activities Net Income $ 4,301 $ 3,807 Adjustments to reconcile net income to net cash provided by operating activities: Provision for possible credit losses 1,082 1,513 Provision for depreciation 753 787 Net accretion and amortization of investment security discounts and premiums 63 (14) Realized (gain) loss on sale of investment securities (76) 124 Increase in accrued interest and other assets (11,217) (1,425) Increase in reserve for taxes accrued interest and other liabilities 4,825 312 -------------------- Net cash (used) provided by operating activities (269) 5,104 Investing activities Proceeds from maturities of available-for- sale securities 98,979 150,513 Purchases of available-for-sale securities (72,669) (122,229) Net increase in loans (5,018) (46,262) Purchases of premises and equipment (1,173) (986) ------------------- Net cash provided (used) in investing activities 20,119 (18,964) Financing activities Increase in Federal Home Loan Bank borrowings and other borrowed money 15,238 22,945 Net (decrease) increase in demand deposits, NOW accounts and savings accounts (20,485) 4,974 Net (decrease) increase in certificates of deposits (17,485) (11,281) Cash dividends paid or declared (2,010) (1,948) Acquisition and retirement of Common Stock - (70) ------------------- Net cash (used) provided by financing activities (24,742) 14,620 Cash and cash equivalents at beginning of the year 26,921 21,494 Increase in cash and cash equivalents (4,892) 760 -------------------- Cash and cash equivalents at end of period $22,029 $22,254 ==================== -09- FIRST UNITED CORPORATION Note to Unaudited Consolidated Financial Statements June 30, 2001 Note A -- Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation, consisting of normal recurring items have been included. Operating results for the three and six month period ended June 30, 2001, are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. The enclosed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2000. Earnings per share are based on the weighted average number of shares outstanding of 6,081 for the three and six months ended June 30, 2001 and 2000. Note B - Accumulated Comprehensive Income Accumulated comprehensive income represents the unrealized gains and losses on the company's available-for-sale securities, net of income taxes. During the first six months of 2001 and 2000, total comprehensive income, net income plus the change in unrealized gains (losses) on available-for-sale securities, amounted to $4,922 thousand and $3,380 thousand, net of income taxes, respectively. Note C - Accounting Pronouncement In June 2001, Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("Statement No. 142"), was issued. In accordance with Statement No. 142, goodwill and intangible assets determined to have indefinite lives will no longer be amortized, but instead be subject to an annual impairment test. Other intangible assets will continue to be amortized over their estimated useful lives. The effective date for Statement No. 142 is for fiscal years beginning after December 15, 2001. The impact on the consolidated financial statements of the implementation of Statement No. 142 is in the process of being evaluated by the Corporation. -10- Part I. Financial Information Item II. Management's Discussion and Analysis of Financial Condition and Results of Operations Consolidated net income for the six months ended June 30, 2001 totaled $4.30 million, which is $.49 million more than was recorded for the six months ended June 30, 2000. This translates into $.71 per share for the current six month period. For the same period of 2000, each share earned $.63. Annualized Return on Average Equity (ROAE) increased from 12.34% for the six months ended June 30, 2000, to 12.87% for the six months ended June 30, 2001. The "efficiency ratio" is a key measuring tool for profitability and operating efficiency. The calculation of the efficiency ratio is noninterest expense divided by net operating revenue,(net interest income plus other operating income) excluding nonrecurring items and securities gains and losses. A lower ratio equals higher profitability and operating efficiencies. The Corporation's efficiency ratio was 59.81% for the period ended June 30, 2001. This represents a decline in efficiency from year-end 2000 when the ratio was 59.36%. Fee income from our Business Manager product and Trust Services has increased 46.70% or $.53 million for the six months ended June 30, 2001, compared to the same period in 2000. Driven by these two income sources, other operating income increased 31.23% to $4.67 million in comparison to June 30, 2000. Other operating expense for the first six months of 2001 was $11.50 million compared to $10.84 million for the same period in 2000. This 6.07% increase is a direct result of salaries and employee benefits increasing from $5.58 million in 2000 to $6.15 million in 2001. In the first six months of 2001, net loans grew $3.94 million to a total of $613.49 million. The growth for the same period of 2000 was $45.70 million, bringing the total to $610.47 million. Commercial loans increased $20.92 million, including an increase of $14.02 million in commercial mortgages and $4.94 million in commercial installment loans. In contrast, the indirect auto installment loan portfolio decreased $17.51 million as a direct result of Management's decision in the year 2000 to slow loan growth by increasing the credit quality standards of the portfolio as well as maintaining higher rates on installment loans in order to maximize yield. Other installment loans decreased $.79 million. Mortgage loans, excluding commercial mortgages, decreased $.27 million. Home equity loans and leases have decreased $.14 million and $1.14 million, respectively. As a result of our loan growth, interest income for the six months ended June 30, 2001, was $32.16 million compared to $30.95 million for the same period in 2000. This total represents an increase of $1.21 million or 3.91%. Total investment securities, interest bearing deposits in banks, and Federal Home Loan Bank stock has decreased a total of $25.17 million or 14.04% since December 31, 2000. At December 31, 2000, the Corporation had $20.53 million in excess funds invested at the Federal Home Loan Bank of Atlanta. In December 2000, the Corporation purchased $20.10 million of 90-day brokered deposits as part of a plan for the Trust Department to invest -11- approximately $28.12 million of its liquid assets in investments outside of the Bank. Funding for the remaining $8.02 million of the plan was completed with a new $10.00 million convertible advance from the Federal Home Loan Bank of Atlanta in January 2001. The outflow of deposits occurred in January 2001 as discussed in the following paragraph. Declining interest rates resulted in $29.14 million of agency securities being called during the first and second quarters of 2001. To properly collateralize our municipal deposits, $19.40 million of the calls were replaced. Late in the fourth quarter of 2000, the Corporation sold $14.88 million of mortgage-backed securities and $1.94 million of municipal securities to obtain funding for a Bank Owned Life Insurance ("BOLI") policy. These funds were held in short-term investments as the Corporation awaited the purchase of the policy. In the first quarter of 2001, the Corporation purchased $10.00 million of a BOLI policy. The cash surrender value of the policy is reported as an other asset on the accompanying consolidated balance sheets. The remaining $8.00 million policy is expected to be purchased in the third quarter of 2001. The corporation's interest expense year to date was $1.45 million higher than was incurred for the same period in 2000. The increase in expense can be attributed to deposit growth of $19.74 million from June 30, 2000 to June 30, 2001. The deposits of the Corporation have decreased $37.97 million since December 31, 2000. When the $20.10 million of brokered deposits matured in March 2001, the Corporation elected to not renew. Also, the Trust Depart- ment's deposits held at the Bank have decreased $31.73 million since December 2000. Most of the decrease relates to the $28.12 million transaction discussed in the preceding paragraph. Excluding these transactions, core deposits grew $15.77 million or 2.76% for the six months ended June 30, 2001. Net interest income for the first six months of 2001 decreased 1.64% from the same period in 2000, to a total of $14.14 million. The result was a Corporate net interest margin of 3.75% in comparison to the net interest margin of 3.79% for the year ending 2000. During the first and second quarters of 2001, the Corporation had more assets available to reprice than liabilities. Therefore, when the Federal Reserve decreased rates 275 basis points in the first half of 2001, the loans and investments in the portfolio repriced more quickly than deposits, causing the margin to decrease. Annualized Return on Average Assets (ROAA) has increased 8.33% to 1.04% for the six months ended June 30, 2001, compared to 0.96% for the six months ended June 30, 2000. The provision for possible credit losses was $1.08 million for the first six months of 2001 compared to $1.51 million for the same period in 2000. Net charge-offs for the first six months were $1.03 million, which equates to 0.34% of average net loans of $611.28 million. For the same period of 2000, net charge-offs were $.86 million or .30% of the June 30, 2000, average net loans of $586.05 million. The over 30-day delinquency ratio is 1.37% of gross loans, a number which compares very favorably with our peers. Non-performing loans were .40% of gross loans as of June 30, 2001, and our loan loss reserve was 0.83% of gross loans representing 206.75% of non-performing loans. -12- Summary of Loan Loss Experience ANALYSIS OF THE RESERVE FOR POSSIBLE CREDIT LOSSES June 30, 2001 ---------------- Balance at the Beginning of the period $5,094 Charge-offs: Domestic: Commercial, financial and agricultural 116 Real estate - mortgage 40 Installment loans to individuals 1,072 ---------------- 1,228 ---------------- Recoveries: Domestics: Commercial, financial and agricultural 18 Real estate - mortgage 3 Installment loans to individuals 175 --------------- 196 --------------- Net Charge-offs 1,032 --------------- Provision for Possible Credit Losses 1,082 --------------- Balance at end of period $5,144 =============== Ratio of net charge-offs during the period to average Loans outstanding during the period, annualized .34% =============== Risk Elements of Loan Portfolio The following table provides a comparison of the Risk Elements of the Loan Portfolio in the format prescribed by Item III-C of Industry Guide 3. The Bank has no foreign loans or loans defined as troubled debt restructurings. Further, the Bank has no potential problem loans other than those in the table below. As of June 30, 2001, First United's non-accrual loans increased $.16 million from the year end total of $1.07 million. June 30 December 31 2001 2000 ---------------------- Non-accrual loans $1,228 $1,066 Accruing loans past due 90 days or more 1,260 1,448 -13- Information with respect to non-accrual loans at June 30, 2001 and December 31, 2000, are as follows: Non-accrual Loans $1,228 $1,066 Interest income that would have been recorded under original terms 24 19 Interest income recorded during the period 10 9 Shareholders' equity remained strong at $68.42 million, a 4.44% increase from December 31, 2000, which was $65.51 million. Risk based capital, was 15.52%, which is greater than the 14.55% reported at December 31, 2000. Both are in excess of the regulatory minimum of 8.00%. The Corporation paid a cash dividend of $.165 on May 1, 2000. On June 20, 2001, the Corporation declared another dividend of an equal amount, to be paid August 1, 2001, to shareholders of record at July 18, 2001. Part II. OTHER INFORMATION Item 1. Legal Proceedings. None. Item 2. Changes in Securities and Use of Proceeds. None. Item 3. Defaults upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. First United Corporation's annual meeting of Shareholders' was held on April 24, 2001. The only item ratified by 2001 proxy vote was the election of six directors. Item 5. Other Information. Item 6. Exhibits and Reports on Form 8-K. -14- SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST UNITED CORPORATION Date 8/13/01 /s/ WILLIAM B. GRANT ---------- ---------------------------------------- William B. Grant, Chairman of the Board and Chief Executive Officer Date 8/13/01 /s/ Robert W. Kurtz ---------- ---------------------------------------- Robert W Kurtz, President and Chief Financial Officer -15- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST UNITED CORPORATION Date 8/13/01 ---------- ---------------------------------------- William B. Grant, Chairman of the Board and Chief Executive Officer Date 8/13/01 ---------- --------------------------------------- Robert W. Kurtz, President and Chief Financial Officer -16-