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 September 30, 1995 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) 334-9471 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--6,194,376 shares outstanding as of September 30, 1995 Preferred stock, No par value--No shares outstanding as of September 30, 1995. -01- INDEX FIRST UNITED CORPORATION PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - September 30, 1995 (Unaudited), December 31, 1994, and September 30, 1994 (Unaudited). Consolidated Statements of Income (Unaudited) - Three months ended September 30, 1995 and 1994 and nine months ended September 30, 1995 and 1994. Consolidated Statement of Cash Flows (Unaudited) - Nine months ended September 30, 1995 and 1994. 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 Sheet (In Thousands) Sept. 30, Dec. 31, Sept. 30, ASSETS 1995 1994 1994 (Unaudited) (*) (Unaudited) ----------------------------- Cash and Due From Banks $12,958 $14,536 $16,503 Investments: Available-for-Sale: U.S. Treasury Securities 11,583 21,252 21,406 Obl. of Other U S Gov. Agen. 31,972 29,975 35,199 Obl. of St. and Loc. Govt 3,871 2,663 0 Other Investments 26,750 21,450 21,105 -------------------------- Total Available-for-Sale 74,176 75,340 77,710 Held-to-Maturity: Obl. of Other U S Govt Agen 2,800 3,800 3,800 Obl. of St. and Loc. Govt 4,483 5,294 9,195 Other Investments 9,751 11,185 14,658 --------------------------- Total Held-to-Maturity 17,034 20,279 27,653 --------------------------- Total Investment Securities 91,210 95,619 105,363 Federal Funds Sold 1,110 0 315 Loans 362,188 335,725 324,769 Reserve for Poss. Credit Loss (2,184) (2,350) (2,322) --------------------------- Net Loans 360,004 333,375 322,447 Bank Premises and Equipment 9,978 9,354 8,919 Acc. Int. Rec. and Other Assets 6,108 6,156 6,571 ---------------------------- TOTAL ASSETS $482,368 $459,040 $460,118 ============================ * The balance sheet at December 31, 1994 has been derived from the audited financial statements at that date. See notes to unaudited consolidated financial statements. () Indicates Deduction -03- FIRST UNITED CORPORATION Consolidated Balance Sheet Sept. 30, Dec. 31, Sept. 30, 1995 1994 1994 (Unaudited) (*) (Unaudited) LIABILITIES ---------------------------- Deposits Non-int. Bearing Deposits $ 48,426 $ 43,090 $ 48,233 Interest Bearing Deposits 371,499 348,560 358,284 --------------------------- Total Deposits 419,925 391,650 406,517 Reserve for Taxes, Int., & Other Liabilities 3,914 4,886 2,624 Fed funds purchased & other borrowed money 4,000 11,373 0 Dividends Payable 743 0 743 ---------------------------- TOTAL LIABILITIES 428,582 407,909 409,884 SHAREHOLDER'S EQUITY Preferred Stock -No Par Value Authorized and Unissued; 2,000 Shares Capital Stock -Par Value $.01 per Share: Authorized 12,000 shares; Issued and Outstanding 6,194 shares at September 30, 1995, 6,192 outstanding at December 31, 1994, and September 30, 1994, respectively. 62 62 62 Surplus 23,186 23,141 23,141 Retained Earnings 30,490 29,435 27,898 Unrealized Gains(Losses) on Available for Sale Securities net of taxes 48 (1,507) (867) --------------------------- TOTAL SHAREHOLDER'S EQUITY 53,786 51,131 50,234 --------------------------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $482,368 $459,040 $460,118 ============================ -04- * The balance sheet at December 31, 1994 has been derived from the audited financial statements at that date. See Notes to unaudited consolidated financial statements. () Indicates Deduction -05- FIRST UNITED CORPORATION Consolidated Statement Of Income (In Thousands, except per share data) Three Months Ended September 30, 1995 1994 ------------------- (Unaudited) INTEREST INCOME Interest and fees on loans $ 8,057 $ 7,131 Interest on investment securities: Taxable 1,255 1,072 Exempt from federal income tax 113 117 -------------------- $1,368 $ 1,189 Interest on federal funds sold 73 (18) -------------------- TOTAL INTEREST INCOME $ 9,498 $ 8,302 INTEREST EXPENSE Interest on deposits: Savings $ 522 $ 871 Interest-bearing transaction acct. 708 606 Time, $100,000 or more 402 148 Other time 2,173 1,162 Interest on Fed Funds purchased & other borrowed money 5 72 -------------------- TOTAL INTEREST EXPENSE $ 3,810 $2,859 NET INTEREST INCOME $ 5,688 $5,443 Provision for possible credit losses 0 2 --------------------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE CREDIT LOSSES $ 5,688 $ 5,441 OTHER OPERATING INCOME Trust department income $233 $213 Service charges on deposit accts. 417 160 Insurance premium income 84 100 Security gains 0 20 Other income 344 501 -------------------- Total Other Operating Income $1,078 $ 994 -06- Three Months Ended September 30, 1995 1994 ------------------- OTHER OPERATING EXPENSES Salaries and Employees Benefits $2,327 $2,294 Occupancy Expense of Premises 97 170 Equipment Expense 321 311 Data Processing Expense 154 201 Deposit Assess. and Related Fees (17) 274 Restructuring Expense 266 0 Other Expense 1,166 936 --------------------- Total Other Operating Expenses $ 4,314 $ 4,186 INCOME BEFORE TAX $2,452 $2,249 Applicable Income Taxes (850) (725) ---------------------- NET INCOME $1,602 $1,524 ====================== NET INCOME PER SHARE $0.26 $0.25 ====================== Average Common Shares Outstanding 6,192 6,192 ====================== See Notes to Unaudited consolidated financial statements. -07- FIRST UNITED CORPORATION Consolidated Statement Of Income (In Thousands, except per share data) Nine Months Ended September 30, 1995 1994 ------------------- (Unaudited) INTEREST INCOME Interest and fees on loans $ 23,412 $20,990 Interest on investment securities: Taxable 3,652 2,766 Exempt from federal income tax 342 398 -------------------- $3,994 $ 3,164 Interest on federal funds sold 159 77 -------------------- TOTAL INTEREST INCOME $27,565 $24,231 INTEREST EXPENSE Interest on deposits: Savings $ 1,569 $1,782 Interest-bearing transaction acct. 1,926 1,462 Time, $100,000 or more 1,162 775 Other time 6,007 3,878 Interest on Fed Funds purchased & other borrowed money 99 104 -------------------- TOTAL INTEREST EXPENSE $10,763 $8,001 NET INTEREST INCOME $16,802 $16,230 Provision for possible credit losses 0 165 --------------------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE CREDIT LOSSES $16,802 $16,065 OTHER OPERATING INCOME Trust department income $702 $647 Service charges on deposit accts. 1,169 974 Insurance premium income 209 233 Security (losses)gains (19) 23 Other income 953 996 -------------------- Total Other Operating Income $3,014 $2,873 -08- Nine Months Ended September 30, 1995 1994 ------------------- (Unaudited) OTHER OPERATING EXPENSES Salaries and Employees Benefits $6,837 $6,547 Occupancy Expense of Premises 562 675 Equipment Expense 918 847 Data Processing Expense 447 431 Deposit Assess. and Related Fees 507 762 Restructuring Expense 1,085 0 Other Expense 3,414 2,748 --------------------- Total Other Operating Expenses $13,770 $12,010 INCOME BEFORE TAX $6,046 $6,928 Applicable Income Taxes (2,015) (2,242) ---------------------- NET INCOME $4,031 $4,686 ====================== NET INCOME PER SHARE $0.65 $0.76 ====================== Average Common Shares Outstanding 6,192 6,192 ====================== See Notes to Unaudited consolidated financial statements. -09- FIRST UNITED CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS OF DOLLARS) Nine Months Ended September 30, 1995 1994 -------------------- (Unaudited) OPERATING ACTIVITIES Net Income $ 4,031 $ 4,686 Adjustments to reconcile net income to net cash provided by operating activities: Provision for possible credit losses 0 165 Provision for depreciation 809 643 Net accretion & amortization of investment security discounts & premiums 352 551 (Increase)in acc. interest & other receivables. (19) (1,959) (Decrease) Increase in accrued interest & other payables (229) 3,114 -------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 3,992 $ 7,200 -------------------- INVESTING ACTIVITIES Proceeds from maturities of available-for- sale securities $ 76,031 $ 44,286 Purchases of available-for-sale securities (71,877) (56,835) Proceeds form maturities of held-to-maturity securities 5,549 2,171 Purchases of held-to-maturity securities (4,076) (10,607) Net (increase) decrease in loans (26,629) 8,412 Purchases of premises & equipment (1,433) (1,536) ------------------- NET CASH USED IN INVESTING ACTIVITIES $(22,435) $(14,109) ------------------- FINANCING ACTIVITIES Decrease in Fed Fund Purchased and Other Borrowed Money $ (7,373) 0 Net increase in demand deposits, NOW accounts and savings accounts 4,913 24,478 Net increase (decrease) in certificates of deposits 23,362 (13,512) Cash dividends paid or declared (2,972) (2,104) Proceeds form issuance of capital stock 45 130 -10- Nine Months Ended September 30, 1995 1994 -------------------- (Unaudited) NET CASH PROVIDED BY -------------------- FINANCING ACTIVITIES $ 17,975 $ 8,992 -------------------- Cash and cash equivalents at beg. of qtr. $ 14,536 $ 14,735 (Decrease) increase in cash & cash equiv. $ (468) $ 2,083 -------------------- Cash & cash equivalents at end of period $ 14,068 $ 16,818 ==================== See Notes to unaudited consolidated financial statements. -11- FIRST UNITED CORPORATION Note to Unaudited Consolidated Financial Statements September 30, 1995 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 nine month periods ended September 30, 1995, are not necessarily indicative of the results that may be expected for the year ending December 31, 1995. 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, 1994. Earnings per share are based on the weighted average number of shares outstanding of 6,192 for the nine months ended September 30, 1995 and 1994. -12- Part I. Financial Information Item II. Management's Discussion and Analysis Consolidated net earnings for the quarter totaled $1.602 million, which is $.078 million more than was recorded for the third quarter of 1994. Translated into per share amounts, this equates to $.26 per share for the second quarter of 1995 versus $.25 per share in 1994. Year to date consolidated net earnings totaled $4.031 million versus $4.686 million in 1994 or $.65 and $.76 per share respectively. The decrease in earnings can be attributed to the following items: second quarter 1995 early retirement one time charge of $.82 million and increases in other expenses relating to costs associated with subsidiary bank consolidation which are discussed in more detail below. In keeping with the Corporation's ongoing efforts to maintain or increase profitability in an increasingly competitive marketplace and to make the most productive use of employees, the Corporation offered a voluntary early retirement plan to select employees. There were eleven employees eligible to participate in the plan, and all eleven eligible employees opted to participate in the plan. As of September 30, 1995, all eleven employees had left employment of the Company. The cost of the plan was covered by a special one-time charge to earnings. To carry out this plan, the Board of Directors authorized a one-time pre-tax charge of $0.82 million against second quarter earnings. The charge is comprised largely of additional pension expense of $0.43 million, severance pay and one-time health insurance charges related to the eleven retirees. While the charge is expected to lower 1995 pre-tax earnings by approximately $.13 per share, management believes the overall expense reduction resulting from this action will better position the Corporation for profitable growth in the years ahead. As we implement our restructuring plan, we will realize cost savings of increasing magnitude. These savings will further improve our profitability and enable us to implement our ambitious marketing and new product programs more aggressively. We also expect that they will help us sustain our strong dividend payment record. During the third quarter the Corporation began realizing some savings associated with the program. -13- While the above mentioned items negatively impacted net earnings in 1995, it is anticipated that the results of this restructuring will improve the Corporation's market share and, enhance customer service and profitability in the future. The efficiency ratio, which is a key measuring tool for profitability and operating efficiency was -68.29% as of September 30, 1995 versus -62.59% at September 30, 1994. The one-time charge associated with the voluntary early retirement plan is the largest cause in the deterioration of the efficiency ratio. If the ratio is calculated adjusting for the one-time charge, the efficiency ratio would have been -62.91%. The other above mentioned reasons for the decline in net income also impacted negatively on the efficiency ratio. The unrealized gain on available for sale securities was created by two factors. First, interest rates have declined substantially over the first nine months of the year. This has caused the market price of all fixed income securities to increase. Second, the securities in the available for sale portfolio have gotten closer to their maturity dates. As this occurs, market value and book value converge lessening the market gain or loss to book value. Interest expense increased $2.76 million or 34.52% over the first nine months of 1994. Throughout much of the first three quarters of 1995 the Corporation experienced rising deposit costs, and a slight increase in the level of average interest bearing deposits. The Corporation also conducted a deposit campaign in early 1995 which caused an increase in the interest expense. The rising interest costs were the result of action by the Federal Reserve Bank in the first quarter and also by competitive forces in all of the Corporation's market areas. The Corporation also conducted a deposit campaign which was successful in raising $16 million in new deposits in the first quarter. The reason for the deposit campaign was to not only increase our deposit base, but also to reduce our external borrowing which totaled $11.4 million as of December 31, 1994. The precise timing of gathering deposits is critical in the management of the Corporation's liquidity and interest margins. In managing the Corporation's liquidity and interest margins, the Corporation utilizes a diverse line of products at all of its subsidiaries. Net interest income for the first three quarters of 1995 increased 3.52% from the same period in 1994 to $16.80 million. Even though interest expense has increased, the Asset/Liability Committee (ALCO) has been able to achieve an interest margin of 5.22% versus 5.40% for the same period in 1994. The 5.22% net -14- interest margin is within the expectations of the Corporation, as deposit costs have increased faster than asset yields during 1995. This is the opposite of what occurred in 1994. The ALCO committee was also able to achieve a Return on Average Assets (ROAA) of 1.14% versus 1.44% during the same period in 1994. After adjusting for the one-time restructuring charge of $1.085 million in 1995, the ROAA would be 1.33%. Thus far in 1995, the Corporation experienced excellent loan growth. Total gross loans amounted to $362.19 million, which represents a growth of $37.42 million over September 30, 1994, and a growth of $26.46 million over December 31, 1994. The Corporation also experienced strong deposit growth so far in 1995. Deposits as of September 30, 1995 totaled $419.93 million versus $406.52 million at September 30, 1994 and $391.65 million at December 31, 1994. The growth in deposits was experienced primarily in consumer Certificates of Deposit from within our various market areas. The Reserve for Possible Credit Losses amounted to $2.18 million at September 30, 1995, which amounts to 0.60% of total gross loans. First United's loan review process continues to keep the loan portfolio under close scrutiny. Net charge offs for the third quarter totaled $.163 million. This represents 0.04% of our gross loan total of $362.19 million. Because of the low level of losses, the Corporation did not make a loan loss provision in the first three quarters of 1995. The Corporation also credits excellent underwriting standards and training to the excellent credit quality of the portfolio. First United opened its newest supermarket community office on March 8, 1995. This office is located in the new Martin's Food Store on Dual Highway in Hagerstown. This is the third supermarket office opened by the First United family of community banks. Myersville Bank's Riverside Center office has made a great contribution to the Corporation by assisting in growing its deposits and loans. To date, the Corporation is pleased with the growth of the customer base within this office. The Corporation, in an effort to control costs, closed its Thayer Center office May 13, 1995 and transferred the customer relationship to the Oakland Main Office which is located in close proximity to the Thayer Center office. -15- In another effort to control costs the Corporation closed the Citizens office in Westernport, MD on August 25, 1995 and transferred the relationship to the Tri Towns office in Piedmont, WV which is located less than one half a mile away. As a result of this transfer, the carrying value of the fixed assets related to the Citizns branch was written down by $.266 million to reflect its current market value. Management is currently exploring disposition options related to this property. The Corporation also completed the consolidation of First United Bank of West Virginia into First United National Bank & Trust on August 25, 1995. The Corporation recently received approval to merge Myersville Bank into First United National Bank & Trust. It is anticipated that the consolidation will occur sometime during the fourth quarter of this year. Once completed, additional efficiencies will be realized throughout the Corporation. The Corporation also received a refund of $.255 million from the FDIC in the third quarter as a result of the FDIC fund reducing its required funding level. This amount was recorded as a reduction in insurance premiums. Under the new FDIC assessment schedule, First United National Bank & Trust will pay $.04 per $100 of insured deposits. Another strong quality of First United is its capital position. Shareholder equity increased to $53.79 million, a 7.07% increase from the balance at September 30, 1994, which was $50.23 million. Because of the Corporation's strong and consistent earnings, the capital of the Corporation continues to grow. Risk based capital, which is an expression of your Corporation's stability and security, was a hardy 16.19% versus 17.92% on September 30, 1994, far surpassing the regulatory minimum of 8%. During the current year, the Corporation paid a $.12 per share dividend on February 1, 1995, May 1, 1995, and August 1, 1995. The Board of Directors also declared a $.12 per share dividend on September 27, 1995 payable November 1, 1995 to shareholders of record on October 23, 1995. -16- Part II. OTHER INFORMATION Item 1. Legal Proceedings. None. Item 2. Changes in 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. The Company did not file any reports on Form 8-K for the quarter ending September 30, 1995. -17- 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 11/02/95 /s/ RICHARD G. STANTON ---------- ---------------------------------------- Richard G. Stanton, Chairman of the Board, President, and Chief Executive Officer Date 11/02/95 /s/ ROBERT W. KURTZ ---------- ---------------------------------------- Robert W. Kurtz, Executive Vice President and Treasurer -18- 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 11/02/95 ---------- ---------------------------------------- Richard G. Stanton, Chairman of the Board, President and Chief Executive Officer Date 11/02/95 ---------- --------------------------------------- Robert W. Kurtz, Executive Vice President and Treasurer -19-