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 March 31, 2002 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. * 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 March 31,2002. Preferred stock, No par value--No shares outstanding as of March 31, 2002. INDEX FIRST UNITED CORPORATION PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - March 31, 2002 (Unaudited) and December 31, 2001. Consolidated Statements of Income (Unaudited) - Three months ended March 31, 2002 and 2001. Consolidated Statements of Cash Flows (Unaudited) - Three months ended March 31, 2002 and 2001. 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 FIRST UNITED CORPORATION Consolidated Balance Sheets March 31, December 31, 2002 2001 (unaudited) ___________________________ Assets (in thousands) Cash and due from banks $17,201 $22,827 Federal funds sold 9,790 9,875 Interest-bearing deposits in banks 4,808 1,167 Investment securities: U.S. Treasury Securities - 301 Obligations of other US Government Agencies 33,227 30,358 Obligations of State and Local Government 27,410 25,915 Other investments 72,322 74,118 ____________________________ Total investment securities 132,959 130,692 Federal Home Loan Bank stock, at cost 5,950 5,950 Loans and Leases 595,988 607,136 Reserve for probable credit losses (5,845) (5,752) ____________________________ Net loans 590,143 601,384 Bank premises and equipment 11,643 11,527 Accrued interest receivable and other assets 31,944 34,691 ____________________________ Total Assets $804,438 $818,113 ============================ Liabilities and Shareholders' Equity Liabilities Non-interest bearing deposits $ 58,684 $ 64,366 Interest bearing deposits 543,451 552,403 ____________________________ Total deposits 602,135 616,769 Reserve for taxes, accrued interest, and other liabilities 8,565 9,132 Federal Home Loan Bank borrowings and other borrowed funds 120,504 120,104 Dividends payable 1,032 1,032 ____________________________ Total Liabilities 732,236 724,038 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 March 31, 2002, 6,081 outstanding at December 31, 2001 61 61 Surplus 20,199 20,199 Retained earnings 51,546 50,254 Accumulated comprehensive income 396 563 _____________________________ Total Shareholders' Equity 72,202 71,076 Total Liabilities and Shareholders' Equity $804,438 $818,113 ============================= FIRST UNITED CORPORATION Consolidated Statement of Income (in thousands, except per share data) Three Months Ended March 31, 2002 2001 (unaudited) ____________________________ Interest income Interest and fees on loans and leases $ 12,102 $ 13,552 Interest on investment securities: Taxable 1,649 2,334 Exempt from federal income tax 313 229 ____________________________ 1,962 2,563 Interest on federal funds sold 25 189 ____________________________ Total interest income 14,089 16,304 Interest expense Interest on deposits: Savings 64 115 Interest-bearing transaction accounts 312 1,298 Time, $100,000 or more 1,104 2,161 Other time 3,022 3,737 Interest on Federal Home Loan Bank borrowings and other borrowed funds 1,890 2,052 ____________________________ Total interest expense 6,392 9,363 Net interest income 7,697 6,941 Provision for probable credit losses 656 535 Net interest income after provision for probable credit losses 7,041 6,406 Other operating income Trust department income 682 706 Service charges on deposit accounts 585 567 Insurance premium income 260 229 Security (losses)gains - 53 Other income 925 726 ____________________________ Total other operating income 2,452 2,281 Other operating expenses Salaries and employees benefits 3,450 3,082 Occupancy expense of premises 311 335 Equipment expense 494 446 Data processing expense 299 241 Deposit assessments and related fees 44 41 Other expense 1,745 1,593 ____________________________ Total other operating expenses 6,343 5,738 ____________________________ Income before income taxes 3,150 2,949 Applicable income taxes 822 932 ____________________________ Net income $2,328 $2,017 Earnings per share $0.38 $0.33 Dividends per share $0.17 $0.16 FIRST UNITED CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Three Months Ended March 31, 2002 2001 ____________________________ (Unaudited) Operating activities Net Income $ 2,328 $ 2,017 Adjustments to reconcile net income to netcash provided by operating activities: Provision for possible credit losses 656 535 Provision for depreciation 436 377 Net accretion and amortization of investment security discounts and premiums (82) 69 Realized gain on sale of investment securities - (52) Decrease in accrued interest and other assets 2,747 6,476 Decrease in reserve for taxes, accrued interest and other liabilities (567) (762) _____________________________ Net cash provided by (used in) operating activities 5,518 (4,292) Investing activities Proceeds from maturities of available-for-sale securities 13,046 96,325 Purchases of available-for-sale securities (15,395) (66,403) Net increase in loans 10,585 (45) Purchases of premises and equipment (552) (440) _____________________________ Net cash provided by investing activities 7,684 29,437 Financing activities Increase in Federal Home Loan Bank borrowings and other borrowed money 400 10,000 Net increase (decrease) in demand deposits, NOW accounts and savings accounts 625 (22,486) Net decrease in certificates of deposits (15,259) (17,807) Cash dividends paid or declared (1,040) (1,005) _____________________________ Net cash used in financing activities (15,273) (31,298) Cash and cash equivalents at beginning of the year 33,869 26,921 Decrease in cash and cash equivalents (2,070) (6,153) Cash and cash equivalents at end of period $31,799 $20,768 FIRST UNITED CORPORATION Note to Unaudited Consolidated Financial Statements March 31, 2002 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 month period ended March 31, 2002, are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. The enclosed consolidated financial state- ments 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, 2001. Earnings per share are based on the weighted average number of shares outstanding of 6,081 for the three months ended March 31, 2002 and 2001. 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 three months of 2002 and 2001, total comprehensive income, net income plus the change in unrealized gains (losses) on available-for-sale securities, amounted to $2.16 million and $2.66 million, net of income taxes, respectively. Part I. Financial Information Item II. Management's Discussion and Analysis of Financial Condition and Results of Operations Consolidated net income for the quarter ended March 31, 2002 totaled $2.33 million, which is $.31 million more than was recorded for the first quarter of 2001. This translates into $.38 per share for the first quarter of 2002 compared to $.33 per share for the first quarter of 2001. Return on Average Equity (ROAE) decreased from 13.26%, at December 31, 2001, to 13.06% as of March 31, 2002. Return on Average Equity was 12.25% as of March 31, 2001. The "efficiency ratio" is a key measuring tool for profitability and operating efficiency. A lower ratio equals higher profitability and operating efficiencies. The Corporation's efficiency ratio was 61.31% for the period ended March 31, 2002. This represents a slight decline in efficiency from year-end 2001 when the ratio was 58.58%. This decrease can be attributed to an increase in salaries and benefits as noted below. Because the Corporation purchased an additional policy late in 2001, income received from the Bank Owned Life Insurance ("BOLI") policies increased $.18 million in the first quarter of 2002 compared to the first quarter of 2001. This increase resulted in other operating income increasing 7.46% in comparison to March 31, 2001. Other operating income for the first quarter of 2002 was $2.45 million compared to $2.28 million for the same period in 2001. Other operating expense for the first quarter of 2002 was $6.34 million compared to $5.74 million for the same period in 2001. This 10.45% increase is a direct result of salaries and employee benefits increasing from $ 3.08 million in 2001 to $3.45 million in 2002. This represents an increase of 12.01%, primarily due to salary increases. In the first quarter of 2002, net loans decreased $11.24 million to a total of $590.14 million. The decrease for the same quarter of 2001 was $.49 million, bringing the total to $609.06 million at March 31, 2001. During the first quarter of 2002, Commercial lending experienced a net decrease of $2.51 million. Commercial mortgages increased $2.05 million. However, commercial installment loans declined $1.19 million, and commercial lines of credit de- creased $3.36 million. Residential mortgages experienced high payback from increased refinancings due to decreasing market rates, decreasing $10.32 million. Installment loans, excluding commercial installments, decreased $1.08 million. Home equity loans increased $1.27 million. The declining loan balances combined with decreasing market rates experienced in 2001 and 2002 resulted in a decrease in interest income from $16.30 million at March 31, 2001 to $14.09 million at March 31, 2002. This total represents a decrease of $2.21 million or 13.56%. The Corporation's interest expense year to date was $2.97 million lower than was recorded for the same period in 2001. The decrease in expense can be attributed to declining interest rates in 2001 and the first quarter of 2002. The deposits of the Corporation have decreased $14.63 million since December 31, 2001 from $616.77 million to $602.14 million. The Corporation elected not to renew $4.50 million of $14.50 million of brokered deposits that matured in February 2002. The remainder of the certificate of deposit portfolio de- creased $10.26 million as Management maintained the lower rates that began in 2001. Savings balances increased $2.95 million as customers displayed a pref- erence for liquid investments over certificates of deposit. Demand deposits decreased $3.38 million. Net interest income for the first three months of 2002 increased 9.91% from the same period in 2001, to a total of $7.04 million. The result was a Corp- orate net interest margin of 3.97% at March 31, 2002, in comparison to the net interest margin of 3.87% for the year ending 2001. During the first quarter of 2002, Management continued managing the interest rate risk of the loan and deposit portfolios by maintaining lower deposit rates achieved in 2001 while not lowering loan rates. Return on Average Assets (ROAA) has increased 5.40% t o 1.17% at March 31, 2002 compared to 1.11% at December 31, 2001. The provision for probable credit losses was $0.66 million for the first three months of 2002 compared to $.54 million for the same period in 2001. Net charge-offs for the first three months were $0.56 million, which, on an annualized basis, equates to 0.37% of our average net loan balance of $595.51 million. For the same period of 2001, net charge-offs were $.63 million or 0.41% on an annualized basis of the March 31, 2001 average net loan balance of $611.46 million. The 30-day or more delinquency ratio was 0.98% of gross loans as of March 31, 2002. As of March 31, 2001, this ratio was 1.17% of gross loans. Nonperforming loans were 0.43% of total gross loans as of March 31, 2002,and 0.40% of total gross loans as of March 31, 2001. As of March 31, 2002, the Corporation's loan loss reserve was 0.99% of total gross loans representing 229.31% of nonperforming loans. As of March 31, 2001, the loan loss reserve was 0.82% of total gross loans and 177.19% of nonperforming loans. Summary of Loan Loss Experience ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES March 31, 2002 Balance at the Beginning of the period $5,752 Charge-offs: Domestic: Commercial, financial and agricultural 158 Real estate - mortgage 22 Installment loans to individuals 503 ______ 683 Recoveries: Domestics: Commercial, financial and agricultural 6 Real estate - mortgage 3 Installment loans to individuals 111 ______ 120 ______ Net Charge-offs 563 Additions charged to operations 656 ______ Balance at end of period $5,845 Ratio of net charge-offs during the period to average loans outstanding during the period, annualized .37% 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 Corporation has no foreign loans or loans defined as troubled debt re- structurings. Further, the Corporation has no potential problem loans other than those in the table below. First United's non-accrual loans decreased $1.47 million in the first quarter of 2002 from the year end total of $3.20 million. March 31 December 31 2002 2001 Non-accrual loans $1,725 $3,196 Accruing loans past due 90 days or more 824 1,230 Information with respect to non-accrual loans at March 31, 2002 and December 31, 2001 is as follows: Non-accrual Loans $1,725 $3,196 Interest income that would have been recorded under original terms 25 48 Interest income recorded during the period 1 6 Shareholders' equity was $72.20 million at March 31, 2002, a 1.58% increase from December 31, 2001, which was $71.07 million. Risk based capital, which is an expression of the Corporation's stability and security was 16.11%, which is greater than the 15.54% reported at December 31, 2001. Both are in excess of the regulatory minimum of 8.00%. The Corporation paid a cash dividend of $.17 on February 1, 2002. On March 20, 2002, the Corporation declared another dividend of an equal amount, to be paid May 1, 2002, to shareholders of record at April 19, 2002. 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. None. Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K. The Corporation filed Form 8-K on April 23, 2002, to record statements made by management at the annual shareholders' meeting. SIGNATURES Pursuant to the requirement of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST UNITED CORPORATION Date 5/10/01 /s/ WILLIAM B. GRANT ___________________________________________________________ William B. Grant, Chairman of the Board and Chief Executive Officer Date 5/10/01 /s/ Robert W. Kurtz ___________________________________________________________ Robert W Kurtz, President and Chief Financial Officer