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, 1996 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--6,506,281 shares outstanding as of June 30, 1996 Preferred stock, No par value--No shares outstanding as of June 30, 1996. -01-
INDEX FIRST UNITED CORPORATION PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - June 30, 1996 (Unaudited), December 31, 1995, and June 30, 1995 (Unaudited). Consolidated Statements of Income (Unaudited) - Six months ended June 30, 1996 and 1995 and three months ended June 30, 1996 and 1995. Consolidated Statement of Cash Flows (Unaudited) - Six months ended June 30, 1996 and 1995. 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) June 30, Dec. 31, June 30, Assets 1996 1995 1995 (Unaudited) (*) (Unaudited) ----------------------------- Cash and due from banks $15,767 $16,011 $18,367 Investment securities: Available-for-sale: U.S. Treasury Securities 17,651 11,375 10,030 Obl. of other U S Gov. Agen. 35,057 36,424 28,393 Obl. of St. and Loc. Govt 5,824 4,023 3,839 Other investments 22,436 21,835 22,566 -------------------------- Total available-for-sale 80,968 73,657 64,828 Held-to-maturity: Obl. of other U S Govt Agen 1,497 800 3,800 Obl. of St. and Loc. Govt 5,458 4,546 5,157 Other investments 14,186 17,148 10,805 --------------------------- Total held-to-maturity 21,141 22,494 19,762 --------------------------- Total investment securities 101,109 96,151 84,590 Federal funds sold 2,020 0 1,700 Loans 359,420 360,584 349,777 Reserve for poss. credit losses (2,172) (2,120) (2,203) --------------------------- Net loans 357,248 358,464 347,574 Bank premises and equipment 9,195 9,605 9,787 Acc. int. Rec. and other assets 6,056 6,938 5,230 ---------------------------- Total Assets $492,395 $487,169 $467,248 ============================ * The balance sheet at December 31, 1995 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 June 30, Dec. 31, June 30, 1996 1995 1995 (Unaudited) (*) (Unaudited) Liabilities ------------------------------ Deposits Non-int. bearing deposits $ 48,058 $ 49,541 $ 46,981 Interest bearing deposits 383,396 374,753 362,697 --------------------------- Total deposits 431,454 424,294 409,678 Reserve for taxes, int., & Other liabilities 4,003 4,371 3,696 Fed funds purchased & other borrowed money 585 3,000 300 Dividends payable 0 0 0 ---------------------------- Total Liabilities 436,042 431,665 413,674 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 6,506 shares at June 30, 1996, 6,194 outstanding at December 31, 1995, and 6,192 outstanding at June 30, 1995 65 62 62 Surplus 27,314 23,184 23,141 Retained earnings 29,527 32,065 30,377 Unrealized (loss)gain on available-for-sale securities net of taxes (553) 193 (6) --------------------------- Total Shareholder's Equity 56,353 55,504 53,574 --------------------------- Total Liabilities and Shareholder's Equity $492,395 $487,169 $467,248 ============================ -04-
* The balance sheet at December 31, 1995 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) Six Months Ended June 30, 1996 1995 ------------------- (Unaudited) Interest income Interest and fees on loans $ 16,149 $ 15,355 Interest on investment securities: Taxable 2,756 2,397 Exempt from federal income tax 252 229 -------------------- 3,008 2,626 Interest on federal funds sold 80 86 -------------------- Total interest income 19,237 18,067 Interest expense Interest on deposits: Savings 917 1,047 Interest-bearing transaction acct. 1,355 1,218 Time, $100,000 or more 901 760 Other time 4,670 3,834 Interest on fed funds purchased & other borrowed money 57 94 -------------------- Total interest expense 7,900 6,953 -------------------- Net interest income 11,337 11,114 Provision for possible credit losses 198 0 -------------------- Net interest income after provision for possible credit losses 11,139 11,114 Other operating income Trust department income 600 469 Service charges on deposit accts. 838 752 Insurance premium income 143 125 Other income 698 590 -------------------- Total other operating income 2,279 1,936 -06-
Six Months Ended June 30, 1996 1995 ------------------- (Unaudited) Other operating expenses Salaries and employees benefits 4,456 4,510 Occupancy expense of premises 637 465 Equipment expense 688 597 Data processing expense 269 293 Deposit assess. and related fees 47 524 Other expense 2,464 3,067 --------------------- Total other operating expenses 8,561 9,456 --------------------- Income before income taxes 4,857 3,594 Applicable income taxes (1,640) (1,165) --------------------- Net income $3,217 $2,429 ===================== Earnings per share $0.49 $0.37 ===================== Per share data has been restated to reflect the 5% stock dividend paid on March 29, 1996. See Notes to Unaudited consolidated financial statements. -07-
FIRST UNITED CORPORATION Consolidated Statement Of Income (In Thousands, except per share data) Three Months Ended June 30, 1996 1995 ------------------- (Unaudited) Interest income Interest and fees on loans $ 8,056 $ 7,884 Interest on investment securities: Taxable 1,446 1,161 Exempt from federal income tax 133 121 -------------------- 1,579 1,282 Interest on federal funds sold 17 54 -------------------- Total interest income 9,652 9,220 Interest expense Interest on deposits: Savings 455 520 Interest-bearing transaction acct. 661 635 Time, $100,000 or more 432 376 Other time 2,348 2,033 Interest on fed funds purchased & other borrowed money 32 25 -------------------- Total interest expense 3,928 3,589 -------------------- Net interest income 5,724 5,631 Provision for possible credit losses 99 (30) -------------------- Net interest income after provision for possible credit losses 5,625 5,661 Other operating income Trust department income 300 235 Service charges on deposit accts. 443 403 Insurance premium income 67 63 Other income 389 286 -------------------- Total other operating income 1,199 987 -08-
Three Months Ended June 30, 1996 1995 ------------------- (Unaudited) Other operating expenses Salaries and employees benefits 2,238 2,181 Occupancy expense of premises 360 288 Equipment expense 352 304 Data processing expense 130 132 Deposit assess. and related fees 28 261 Other expense 1,277 1,985 --------------------- Total other operating expenses 4,385 5,151 --------------------- Income before income taxes 2,439 1,497 Applicable income taxes (821) (467) --------------------- Net income $1,618 $1,030 ===================== Earnings per share $0.25 $0.16 ===================== Per share data has been restated to reflect the 5% stock dividend paid on March 29, 1996. See Notes to Unaudited consolidated financial statements. -09-
FIRST UNITED CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) Six Months Ended June 30, 1996 1995 -------------------- (Unaudited) Operating activities Net Income $ 3,217 $ 2,429 Adjustments to reconcile net income to net cash provided by operating activities: Provision for possible credit losses 198 0 Provision for depreciation 642 540 Net accretion & amortization of investment security discounts & premiums 221 262 Realized (loss)/gain on sale of investment securities 12 (19) Decrease(increase)decrease in acc. interest & other receivables. 882 926 Increase(decrease)in accrued interest & other payables (368) (1,190) -------------------- Net cash provided by operating activities 4,804 2,948 Investing activities Proceeds from maturities of available-for- sale securities 26,874 57,218 Purchases of available-for-sale securities (32,019) (44,669) Proceeds form maturities of held-to-maturity securities 2,588 3,810 Purchases of held-to-maturity securities (4,380) (4,072) Net decrease (increase)in loans 1,018 (14,199) Purchases of premises & equipment (232) (973) ------------------- Net cash used in investing activities (6,151) (2,885) -10-
Six Months Ended June 30, 1996 1995 -------------------- (Unaudited) Financing activities (Decrease)in Fed Fund Purchased and Other Borrowed Money $ (2,415) 0 Net (decrease) increase in demand deposits, NOW accounts and savings accounts 1,101 9,654 Net increase in certificates of deposits 6,059 4,515 Cash dividends paid or declared (1,651) (619) Proceeds from issuance of capital stock 29 130 Net cash (used) provided by ------------------- financing activities 3,123 13,680 Cash and cash equivalents at beg. of year 16,011 14,735 (Decrease) increase in cash & cash equiv. 1,776 1,353 -------------------- Cash & cash equivalents at end of period $ 17,787 $ 16,088 ==================== See Notes to unaudited consolidated financial statements. -11-
FIRST UNITED CORPORATION Note to Unaudited Consolidated Financial Statements June 30, 1996 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 six month period ended June 30, 1996, are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. 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, 1995. On January 17, 1996, the Board of Directors declared a 5% stock dividend to shareholders of record on March 15, 1996, payable March 29, 1996. Earnings and dividends per share for prior periods have been restated to reflect the stock dividend. Earnings per share are based on the weighted average number of shares outstanding of 6,506 and 6,505 for the six months ended June 30, 1996 and 1995, as restated for the 5% stock dividend discussed above. Note B -- Recently Issued Accounting Guidance In March 1995, the FASB issued Statements No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". The Corporation was required to adopt Statement No. 121 on January 1, 1996. The Corporation has completed the analysis of Statement No. 121 and has determined that the effect of implementing this Statement was immaterial to the Corporation's financial position and results of operations. -12-
Part I. Financial Information Item II. Management's Discussion and Analysis of Financial Condition and Results of Operations Consolidated net income for the quarter totaled $1.618 million, which is $.59 million more than was recorded for the second quarter of 1995. This translates into $.25 per share for the current period. For the same quarter of 1995, each share earned $.16. Return on average equity (ROAE) increased from 10.47 percent, at December 31, 1995, to 11.61 percent as of June 30, 1996. The increase in income was the result of the corporation efforts to improve efficiencies through consolidation of duplicate functions and the results of the corporation's 1995 restructuring process, which was designed to position First United for continued profitable growth. Consolidated net income for the six month period ended June 30, 1996 totaled $3.217 million, which is $.79 million more than was recorded for the same period of 1995. This translates into $.49 per share for the year. For the same period of 1995, each share earned $.37 The "efficiency ratio" is a key measuring tool for profitability and operating efficiency. The calculation for 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 -61.68 percent for the period ended June 30, 1996. This represents an improvement from year end 1995 when the ratio was -67.33. The improvement in our efficiency ratio was the result of an increase in other operating income and a decrease in other operating expenses. Income from fiduciary services increased by $131,000 to $600,000 in the second quarter of 1996 compared to the second quarter of 1995. The reduction in salaries and employee benefits expense from $4.510 million in June, 1995 to $4.456 million in June, 1996 was the result of the benefits gained from an early retirement program offered to eleven employees during 1995. Also as a result of the Corporation's well capitalized position we were not assessed a FDIC fee. This will result in annual savings of approximately $.800 million before taxes. Other Operating income and Other Operating expense in 1996 were $2.28 million and $8.56 million compared to $1.94 million and $9.46 million in 1995. The corporation's interest expense as of June 30, 1996 was $.947 higher than was recorded for the same period in 1995. Interest expense increased $.339 million from the same quarter last year. As interest rates continue to rise, it is of utmost importance that we take advantage of increasing our deposit base, which is a less expensive source of funding to support loan growth versus other sources. The Corporation conducted a very -13-
successful deposit campaign during the first quarter of 1995 which increased deposits $16 million dollars. Through several different deposit campaigns the Corporation has been able to keep the majority of these deposits. Since December 31,1995, total deposits have increased $7.160 million to $431.454 million. Net interest income for the first six months of 1996 increased 0.22 percent from the same period in 1995, to $11.139 million. Although interest expense has increased, the Corporation's Asset/Liability Management Committee has made a concerted effort to obtain an optimal return on average assets (ROAA), as a result ROAA was 1.32 percent at June 30, 1996 compared to 1.05 percent at June 30, 1995. This improvement is due to the significant improvement in net income. The result was a Corporate net interest margin of 5.05 percent in comparison to the net interest margin of 5.19 percent at the end of year 1995. The 5.05 percent net interest margin, while not as favorable as the comparable period in 1995, is within the expectations of the Corporation, as deposit costs increase and market conditions continue to cause us to revaluate our margin on loans. The provision for possible credit losses was $0.198 million for the first six months of 1996 compared to no charge for the same period in 1995. Net charge-offs for the first six months were $0.147 million, which equates to 0.04 percent of our net loan total of $357.248 million. First United Corporation continues to place strong emphasis on maintaining a top quality loan portfolio, achieved through stringent underwriting standards and a consistent loan review process. Shareholders' equity increased to $56.353 million, a 5.19 percent increase from the second quarter of 1995, which was $53.574 million. Risk based capital, which is an expression of the Corporation's stability and security was 16.57 percent, which is excess of the regulatory minimum of 8.00 percent. On January 17, 1996, the Board of Directors declared a five percent stock dividend payable on March 29, 1996, to shareholders on record at March 15, 1996. The Corporation paid cash dividends of $.13 on February 1, 1996 and May 1, 1996. On July 3, 1996, the Corporation declared another dividend of equal amount, to be paid August 1, 1996, to shareholders on record at July 18, 1996. On July 31, 1996, the Board of Directors ratified to implement a stock buy back program. The Corporation has authority to repurchase up to 5% of the outstanding shares of First United Corporation at a price management deems appropriate. -14-
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 period ending June 30, 1996. -15-
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 07/25/96 /s/ WILLIAM B. GRANT ---------- ---------------------------------------- William B. Grant, Chairman of the Board and Chief Executive Officer Date 07/25/96 /s/ Philip D. Frantz ---------- ---------------------------------------- Philip D. Frantz, Sr. Vice President and Treasurer -16-
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 07/25/96 ---------- ---------------------------------------- William B. Grant, Chairman of the Board and Chief Executive Officer Date 07/25/96 ---------- --------------------------------------- Philip D. Frantz, Sr. Vice President and Treasurer -17-