UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
| x |
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the fiscal year ended
December
31, 2007
OR
| o |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
transition period from _____________ to _____________
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 incorporation or organization)
|
(I.R.S.
Employer
Identification
Number)
|
|
|
|
|
19
South
Second
Street, Oakland, Maryland
|
21550
-0009
|
|
(Address
of
principal executive offices)
|
(Zip
Code)
|
Registrant’s telephone number, including area code: (800) 470-4356
Securities
registered pursuant to Section 12(b) of the Act:
|
Title
of
Each
Class:
|
Name
of Each Exchange on
Which
Registered:
|
|
Common
Stock,
par value $.01 per share
|
NASDAQ
Global
Select
Market
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes
o
No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes
o
No
x
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 such shorter period that the registrant was required
to
file such reports), and (2) has been subject to such filing requirements for
the
past 90 days. Yes
x
No
o
Indicate
by check mark if disclosures of delinquent filers pursuant to Item 405 of
Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
(See
definition of “accelerated filer”, “large accelerated filer”, and “smaller
reporting company” in Rule 12b-2 of the Exchange Act). (check one):
Large
accelerated filer
o
Accelerated
filer
x
Non-accelerated
filer
o
Smaller
reporting company
o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).Yes
o
No
x
The
aggregate market value of the registrant’s outstanding voting and non-voting
common equity held by non-affiliates as of June 30, 2007:
$122,106,302.
The
number of shares of the registrant’s common stock outstanding as of February 28,
2008:
6,129,674
Documents
Incorporated by Reference
Portions
of the registrant’s definitive proxy statement for the 2008 Annual Meeting of
Shareholders to be filed with the SEC pursuant to Regulation 14A are
incorporated by reference into Part III of this Annual Report on Form
10-K.
First
United Corporation
Table
of Contents
|
PART
I
|
||||
|
ITEM
1.
|
Business
|
3
|
||
|
ITEM
1A.
|
Risk
Factors
|
11
|
||
|
ITEM
1B.
|
Unresolved
Staff Comments
|
15
|
||
|
ITEM
2.
|
Properties
|
15
|
||
|
ITEM
3.
|
Legal
Proceedings
|
15
|
||
|
ITEM
4.
|
Submission
of Matters to a Vote of Security Holders
|
15
|
||
|
PART
II
|
|
|||
|
ITEM
5.
|
Market
for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases
of
Equity
Securities
|
16
|
||
|
|
||||
|
ITEM
6.
|
Selected
Financial Data
|
19
|
||
|
ITEM
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
|
20
|
||
|
ITEM
7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
41
|
||
|
ITEM
8.
|
Financial
Statements and Supplementary Data
|
42
|
||
|
ITEM
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosur
e
|
70
|
||
|
ITEM
9A.
|
Controls
and Procedures
|
70
|
||
|
ITEM
9B.
|
Other Information |
73
|
||
|
|
||||
|
PART
III
|
|
|||
|
|
||||
|
ITEM
10.
|
Directors,
Executive Officers and Corporate Governance
|
73
|
||
|
ITEM
11.
|
Executive
Compensation
|
73
|
||
|
ITEM
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder
Matters
|
73
|
||
|
ITEM
13.
|
Certain
Relationships and Related Transactions and Director
Independence
|
73
|
||
|
ITEM
14.
|
Principal
Accountant Fees and Services
|
73
|
||
|
PART
IV
|
|
|||
|
ITEM
15.
|
Exhibits
and Financial Statement Schedules
|
73
|
||
|
SIGNATURES
|
74
|
|||
|
EXHIBITS
|
75
|
|||
Forward-Looking
Statements
This
Annual Report of First United Corporation (the “Corporation” on a parent only
basis and “we”, “our” or “us”, on a consolidated basis) filed on Form 10-K may
contain forward-looking statements within the meaning of The Private Securities
Litigation Reform Act of 1995. Readers of this report should be aware of the
speculative nature of “forward-looking statements”. Statements that are not
historical in nature, including those that include the words “anticipate”,
“estimate”, “should”, “expect”, “believe”, “intend”, and similar expressions,
are based on current expectations, estimates and projections about, among other
things, the industry and the markets in which the Corporation operates, and
they
are not guarantees of future performance. Whether actual results will conform
to
expectations and predictions is subject to known and unknown risks and
uncertainties, including risks and uncertainties discussed in this report;
general economic, market, or business conditions; changes in interest rates,
deposit flow, the cost of funds, and demand for loan products and financial
services; changes in our competitive position or competitive actions by other
companies; changes in the quality or composition of loan and investment
portfolios; the ability to manage growth; changes in laws or regulations or
policies of federal and state regulators and agencies; and other circumstances
beyond our control. Consequently, all of the forward-looking statements made
in
this document are qualified by these cautionary statements, and there can be
no
assurance that the actual results anticipated will be realized, or if
substantially realized, will have the expected consequences on our business
or
operations. For a more complete discussion of these and other risk factors,
see
Item 1A of Part I of this report. Except as required by applicable laws, the
Corporation does not intend to publish updates or revisions of forward-looking
statements it makes to reflect new information, future events or
otherwise.
General
The
Corporation is a Maryland corporation chartered in 1985 and a financial holding
company registered under the federal Bank Holding Company Act of 1956, as
amended (the “BHC Act”). The Corporation’s primary business is serving as the
parent company of First United Bank & Trust, a Maryland trust company (the
“Bank”), First United Insurance Group, LLC, a Maryland insurance agency (the
“Insurance Group”), OakFirst Loan Center, Inc., a West Virginia finance company,
and OakFirst Loan Center, LLC, a Maryland finance company, (together with
OakFirst Loan Center, Inc. the “OakFirst Loan Centers”). OakFirst Loan Center,
Inc. has one subsidiary, First United Insurance Agency, Inc., which is a
Maryland insurance agency.
At
December 31, 2007, the Corporation had assets of approximately $1.48 billion,
net loans of approximately $1.04 billion, and deposits of approximately $1.09
billion. Shareholders’ equity at December 31, 2007 was approximately $105
million.
The
Corporation maintains an Internet site at www.mybankfirstunited.com on which
it
makes available, free of charge, its Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the
foregoing as soon as reasonably practicable after these reports are
electronically filed with, or furnished to, the Securities and Exchange
Commission (the “SEC”).
Banking
Products and Services
The
Bank
operates 26 banking offices, one call center and 35 Automated Teller Machines
(“ATM’s”) in the following Maryland Counties: Garrett, Allegany, Washington and
Frederick; and in the following West Virginia Counties: Mineral, Berkeley,
Hardy
and Monongalia. The Bank is an independent community bank providing a complete
range of retail and commercial banking services to businesses and individuals
in
its market areas. Services offered are essentially the same as those offered
by
the regional institutions that compete with the Bank and include checking,
savings, and money market deposit accounts, business loans, personal loans,
mortgage loans, lines of credit, and consumer-oriented financial services
including IRA and employee benefit accounts. In addition, the Bank provides
full
brokerage services through a networking arrangement with PrimeVest Financial
Services, Inc., a full service broker-dealer. The Bank also provides safe
deposit and night depository facilities, and a complete line of insurance
products and trust services. The Bank’s deposits are insured by the Federal
Deposit Insurance Corporation (the “FDIC”).
Lending
Activities
—
The
majority of the Corporation’s lending activities are conducted through the
Bank.
The
Bank’s commercial loans are primarily secured by real estate, commercial
equipment, vehicles or other assets of the borrower. Repayment is often
dependent on the successful operation of the borrower and may be affected by
adverse conditions in the local economy or real estate market. The financial
condition and cash flow of commercial borrowers is therefore carefully analyzed
during the loan approval process, and continues to be monitored by obtaining
business financial statements, personal financial statements and income tax
returns. The frequency of this ongoing analysis depends upon the size and
complexity of the credit and collateral that secures the loan. It is also the
Bank’s general policy to obtain personal guarantees from the principals of the
commercial loan borrowers.
Commercial
real estate loans are primarily those secured by land for residential and
commercial development, agricultural purpose properties, service industry
buildings such as restaurants and motels, retail buildings and general purpose
business space. The Bank attempts to mitigate the risks associated with these
loans through low loan to value ratio standards, thorough financial analyses,
and management’s knowledge of the local economy in which the Bank
lends.
The
risk
of loss associated with commercial real estate construction lending is
controlled through conservative underwriting procedures such as loan to value
ratios of 80% or less, obtaining additional collateral when prudent, and closely
monitoring construction projects to control disbursement of funds on
loans.
The
Bank’s residential mortgage portfolio is evenly distributed between variable and
fixed rate loans. Many loans are booked at fixed rates in order to meet the
Bank’s requirements under the Community Reinvestment Act. Other fixed rate
residential mortgage loans are originated in a brokering capacity on behalf
of
other financial institutions, for which the Bank receives a fee. As with any
consumer loan, repayment is dependent on the borrower’s continuing financial
stability, which can be adversely impacted by job loss, divorce, illness, or
personal bankruptcy. Residential mortgage loans exceeding an internal
loan-to-value ratio require
private
mortgage insurance. Title insurance protecting the Bank’s lien priority, as well
as fire and casualty insurance, is also required.
Home
equity lines of credit, included within the residential mortgage portfolio,
are
secured by the borrower’s home and can be drawn on at the discretion of the
borrower. These lines of credit are at variable interest rates.
The
Bank
also provides residential real estate construction loans to builders and
individuals for single family dwellings. Residential construction loans are
usually granted based upon “as completed” appraisals and are secured by the
property under construction. Site inspections are performed to determine
pre-specified stages of completion before loan proceeds are disbursed. These
loans typically have maturities of six to 12 months and may have a fixed or
variable rate. Permanent financing for individuals offered by the Bank includes
fixed and variable rate loans with three, five or seven year adjustable rate
mortgages.
A
variety
of other consumer loans are also offered to customers, including indirect and
direct auto loans, and other secured and unsecured lines of credit and term
loans. Careful analysis of an applicant’s creditworthiness is performed before
granting credit, and on-going monitoring of loans outstanding is performed
in an
effort to minimize risk of loss by identifying problem loans early.
An
allowance for loan losses is maintained to provide for anticipated losses from
our lending activities. A complete discussion of the factors considered in
determination of the allowance for loan losses is included in Item 7 of Part
II
of this report.
Additionally,
we meet the lending needs of under-served customer groups within our market
areas in part through OakFirst Loan Center, Inc., located in Martinsburg, West
Virginia, and OakFirst Loan Center, LLC, located in Hagerstown,
Maryland.
Deposit
Activities—
The
Bank
offers a full array of deposit products including checking, savings and money
market accounts, regular and IRA certificates of deposit, Christmas Savings
accounts, College Savings accounts, and Health Savings accounts. The Bank also
offers the CDARS program to municipalities, providing them up to $50 million
of
FDIC insurance. In addition, we offer our commercial customers packages which
include Treasury Management, Cash Sweep and various checking opportunities.
Trust
Services
—
The
Bank’s Trust Department offers a full range of trust services, including
personal trust, investment agency accounts, charitable trusts, retirement
accounts including IRA roll-overs, 401(k) accounts and defined benefit plans,
estate administration and estate planning.
Information
about our income from and assets related to our banking business may be found
in
the consolidated statements of financial condition and the consolidated
statements of income and the related notes thereto included in Item 8 of Part
II
of this annual report. At December 31, 2007, 2006 and 2005, the total market
value of assets under the supervision of the Bank’s Trust Department was
approximately $547 million, $502 million and $468 million, respectively. Trust
Department revenues for these years may be found in the consolidated statements
of income under the heading “Other operating income”, which is included in
Item 8 of Part II of this annual report.
Insurance
Activities
We
offer
a full range of insurance products and services to customers in our market
areas
through the Insurance Group and First United Insurance Agency, Inc. Information
about income from insurance activities for each of the years ended December
31,
2007, 2006 and 2005 may be found under “Other Operating Income” in the
consolidated statements of income included in Item 8 of Part II of this annual
report.
COMPETITION
The
banking business, in all of its phases, is highly competitive. Within our market
areas, we compete with commercial banks, (including local banks and branches
or
affiliates of other larger banks), savings and loan associations and credit
unions for loans and deposits, with consumer finance companies for loans, with
insurance companies and their agents for insurance products, and with other
financial institutions for various types of products and services. There is
also
competition for commercial and retail banking business from banks and financial
institutions located outside our market areas.
The
primary factors in competing for deposits are interest rates, personalized
services, the quality and range of financial services, convenience of office
locations and office hours. The primary factors in competing for loans are
interest rates, loan origination fees, the quality and range of lending services
and personalized services.
To
compete with other financial services providers, we rely principally upon local
promotional activities, personal relationships established by officers,
directors and employees with its customers, and specialized services tailored
to
meet its customers’ needs. In those instances in which we are unable to
accommodate a customer’s needs, we attempt to arrange for those services to be
provided by other financial services providers with which we have a
relationship.
The
following table sets forth deposit data for the Maryland and West Virginia
Counties in which the Bank maintains offices as of June 30, 2007, the most
recent date for which comparative information is available.
|
Offices
(in
Market)
|
Deposits
(in thousands)
|
Market
Share
|
||||||||
|
Allegany
County, Maryland:
|
||||||||||
|
Susquehanna
Bank
|
5
|
$
|
232,809
|
36.74
|
%
|
|||||
|
Manufacturers
& Traders Trust Company
|
7
|
184,858
|
29.17
|
%
|
||||||
|
First
United Bank & Trust
|
4
|
122,520
|
19.34
|
%
|
||||||
|
Farmers
& Mechanics Bank
|
3
|
58,626
|
9.25
|
%
|
||||||
|
Standard
Bank
|
2
|
34,816
|
5.49
|
%
|
||||||
Source:
FDIC Deposit Market Share Report
|
Frederick
County, Maryland:
|
||||||||||
|
Farmers
& Mechanics Bank
|
19
|
1,123,266
|
35.39
|
%
|
||||||
|
Branch
Banking & Trust Co.
|
12
|
612,184
|
19.29
|
%
|
||||||
|
Bank
of America NA
|
5
|
230,392
|
7.26
|
%
|
||||||
|
Frederick
County Bank
|
4
|
225,110
|
7.09
|
%
|
||||||
|
Manufacturers
& Traders Trust Company
|
6
|
191,286
|
6.03
|
%
|
||||||
|
Woodsboro
Bank
|
7
|
161,077
|
5.07
|
%
|
||||||
|
Chevy
Chase Bank FSB
|
6
|
142,747
|
4.50
|
%
|
||||||
|
SunTrust
Bank
|
3
|
124,268
|
3.91
|
%
|
||||||
|
Middletown
Valley Bank
|
4
|
108,302
|
3.41
|
%
|
||||||
|
First
United Bank & Trust
|
3
|
99,719
|
3.14
|
%
|
||||||
|
Sandy
Spring Bank
|
4
|
67,427
|
2.12
|
%
|
||||||
|
Provident
Bank of Maryland
|
2
|
38,029
|
1.20
|
%
|
||||||
|
Damascus
Community Bank
|
2
|
19,508
|
0.61
|
%
|
||||||
|
Columbia
Bank
|
2
|
17,540
|
0.55
|
%
|
||||||
|
Sovereign
Bank
|
3
|
11,835
|
0.37
|
%
|
||||||
|
First
Tennessee Bank NA
|
1
|
1,683
|
0.05
|
%
|
||||||
Source:
FDIC Deposit Market Share Report
|
Garrett
County, Maryland:
|
||||||||||
|
First
United Bank & Trust
|
5
|
549,343
|
73.59
|
%
|
||||||
|
Manufacturers
& Traders Trust Co.
|
5
|
103,420
|
13.85
|
%
|
||||||
|
Susquehanna
Bank
|
2
|
67,208
|
9.00
|
%
|
||||||
|
Clear
Mountain Bank
|
1
|
22,396
|
3.00
|
%
|
||||||
|
Miners
& Merchants Bank
|
1
|
4,126
|
0.55
|
%
|
||||||
Source:
FDIC Deposit Market Share Report
|
Washington
County, Maryland:
|
||||||||||
|
Susquehanna
Bank
|
10
|
507,796
|
26.84
|
%
|
||||||
|
Hagerstown
Trust Co.
|
11
|
417,008
|
22.04
|
%
|
||||||
|
Manufacturers
& Traders Trust Company
|
12
|
396,283
|
20.94
|
%
|
||||||
|
Sovereign
Bank
|
4
|
193,993
|
10.25
|
%
|
||||||
|
Farmers
& Mechanics Bank
|
6
|
180,030
|
9.52
|
%
|
||||||
|
First
United Bank & Trust
|
3
|
62,755
|
3.32
|
%
|
||||||
|
First
National Bank of Greencastle
|
3
|
50,976
|
2.69
|
%
|
||||||
|
Chevy
Chase Bank FSB
|
2
|
36,123
|
1.91
|
%
|
||||||
|
Citizens
National Bank of Berkeley Springs
|
1
|
28,012
|
1.48
|
%
|
||||||
|
Orrstown
Bank
|
1
|
8,093
|
0.43
|
%
|
||||||
|
Centra
Bank
|
2
|
6,203
|
0.33
|
%
|
||||||
|
Jefferson
Security Bank
|
1
|
4,751
|
0.25
|
%
|
||||||
Source:
FDIC Deposit Market Share Report
|
Berkeley
County, West Virginia:
|
||||||||||
|
Branch
Banking & Trust Co.
|
5
|
321,383
|
31.53
|
%
|
||||||
|
Centra
Bank Inc.
|
3
|
195,658
|
19.19
|
%
|
||||||
|
First
United Bank & Trust
|
5
|
123,396
|
12.10
|
%
|
||||||
|
Susquehanna
Bank
|
4
|
112,274
|
11.01
|
%
|
||||||
|
City
National Bank of West Virginia
|
3
|
110,416
|
10.83
|
%
|
||||||
|
Jefferson
Security Bank
|
2
|
59,338
|
5.82
|
%
|
||||||
|
Citizens
National Bank of Berkeley Springs
|
3
|
51,156
|
5.02
|
%
|
||||||
|
Bank
of Charles Town
|
2
|
36,879
|
3.62
|
%
|
||||||
|
Summit
Community Bank
|
1
|
8,905
|
0.87
|
%
|
||||||
Source:
FDIC Deposit Market Share Report
|
Hardy
County, West Virginia:
|
||||||||||
|
Summit
Community Bank, Inc.
|
2
|
255,061
|
62.67
|
%
|
||||||
|
Capon
Valley Bank
|
3
|
105,042
|
25.81
|
%
|
||||||
|
Pendleton
Community Bank, Inc.
|
1
|
20,698
|
5.09
|
%
|
||||||
|
First
United Bank & Trust
|
1
|
14,486
|
3.56
|
%
|
||||||
|
Grant
County Bank
|
1
|
11,694
|
2.87
|
%
|
||||||
Source:
FDIC Deposit Market Share Report
|
Mineral
County, West Virginia:
|
||||||||||
|
Branch
Banking & Trust Co.
|
2
|
78,164
|
31.59
|
%
|
||||||
|
First
United Bank & Trust
|
2
|
76,834
|
31.05
|
%
|
||||||
|
Manufacturers
& Traders Trust Co.
|
2
|
51,300
|
20.73
|
%
|
||||||
|
Grant
County Bank
|
1
|
41,172
|
16.64
|
%
|
||||||
Source:
FDIC Deposit Market Share Report
Source:
FDIC Deposit Market Share Report
For
further information about competition in our market areas, see the Risk Factor
entitled “
We
operate in a competitive environment
”
in
Item
1A of Part I of this annual report.
SUPERVISION
AND REGULATION
The
following is a summary of the material regulations and policies applicable
to
the Corporation and its subsidiaries and is not intended to be a comprehensive
discussion. Changes in applicable laws and regulations may have a material
effect on our business.
General
The
Corporation is a financial holding company registered with the Board of
Governors of the Federal Reserve System (the “FRB”) under the BHC Act and, as
such, is subject to the supervision, examination and reporting requirements
of
the BHC Act and the regulations of the FRB.
The
Bank
is a Maryland trust company subject to the banking laws of Maryland and to
regulation by the Commissioner of Financial Regulation of Maryland, who is
required by statute to make at least one examination in each calendar year
(or
at 18-month intervals if the Commissioner determines that an examination is
unnecessary in a particular calendar year). The Bank also has offices in West
Virginia, and the operations of these offices are subject to West Virginia
laws
and to supervision and examination by the West Virginia Division of Banking.
As
a member of the FDIC, the Bank is also subject to certain provisions of federal
law and regulations regarding deposit insurance and activities of insured
state-chartered banks, including those that require examination by the FDIC.
In
addition to the foregoing, there are a myriad of other federal and state laws
and regulations that affect, impact or govern the business of banking, including
consumer lending, deposit-taking, and trust operations.
All
non-bank subsidiaries of the Corporation are subject to examination by the
FRB,
and, as affiliates of the Bank, are subject to examination by the FDIC and
the
Commissioner of Financial Regulation of Maryland. In addition, OakFirst Loan
Center, Inc. is subject to licensing and regulation by the West Virginia
Division of Banking, OakFirst Loan Center, LLC is subject to licensing and
regulation by the Commissioner of Financial Regulation of Maryland, and the
Insurance Group and First United Insurance Agency, Inc. are each subject to
licensing and regulation by various state insurance authorities. Retail sales
of
insurance products by these insurance affiliates are also subject to the
requirements of the Interagency Statement on Retail Sales of Nondeposit
Investment Products promulgated in 1994 by the FDIC, the FRB, the Office of
the
Comptroller of the Currency, and the Office of Thrift Supervision.
Regulation
of Financial Holding Companies
In
November 1999, the federal Gramm-Leach-Bliley Act (the “GLBA”) was signed into
law. GLBA revises the BHC Act and repeals the affiliation provisions of the
Glass-Steagall Act of 1933, which, taken together, limited the securities,
insurance and other non-banking activities of any company that controls an
FDIC
insured financial institution. Under GLBA, a bank holding company can elect,
subject to certain qualifications, to become a “financial holding company.” GLBA
provides that a financial holding company may engage in a full range of
financial activities, including insurance and securities sales and underwriting
activities, and real estate development, with new expedited notice procedures.
Maryland law generally permits state-chartered banks, including the Bank, to
engage in the same activities, directly or through an affiliate, as national
banking associations. GLBA permits certain qualified national banking
associations to form financial subsidiaries, which have broad authority to
engage in all financial activities except insurance underwriting, insurance
investments, real estate investment or development, or merchant banking. Thus,
GLBA has the effect of broadening the permitted activities of the Corporation
and the Bank.
The
Corporation and its affiliates are subject to the provisions of Section 23A
and
Section 23B of the Federal Reserve Act. Section 23A limits the amount of loans
or extensions of credit to, and investments in, the Corporation and its non-bank
affiliates by the Bank. Section 23B requires that transactions between the
Bank
and the Corporation and its non-bank affiliates be on terms and under
circumstances that are substantially the same as with
non-affiliates.
Under
FRB
policy, the Corporation is expected to act as a source of strength to the Bank,
and the FRB may charge the Corporation with engaging in unsafe and unsound
practices for failure to commit resources to a subsidiary bank when required.
In
addition, under the Financial Institutions Reform, Recovery and Enforcement
Act
of 1989 (“FIRREA”), depository institutions insured by the FDIC can be held
liable for any losses incurred by, or reasonably anticipated to be incurred
by,
the FDIC in connection with (i) the default of a commonly controlled
FDIC-insured depository institution or (ii) any assistance provided by the
FDIC
to a commonly controlled FDIC-insured depository institution in danger of
default. Accordingly, in the event that any insured subsidiary of the
Corporation causes a loss to the FDIC, other insured subsidiaries of the
Corporation could be required to compensate the FDIC by reimbursing it for
the
estimated amount of such loss. Such cross guaranty liabilities generally are
superior in priority to obligations of a financial institution to its
shareholders and obligations to other affiliates.
Federal
Banking Regulation
Federal
banking regulators, such as the FRB and the FDIC, may prohibit the institutions
over which they have supervisory authority from engaging in activities or
investments that the agencies believe are unsafe or unsound banking practices.
Federal banking regulators have extensive enforcement authority over the
institutions they regulate to prohibit or correct activities that violate law,
regulation or a regulatory agreement or which are deemed to be unsafe or unsound
practices. Enforcement actions may include the appointment of a conservator
or
receiver, the issuance of a cease and desist order, the termination of deposit
insurance, the imposition of civil money penalties on the institution, its
directors, officers, employees and institution-affiliated parties, the issuance
of directives to increase capital, the issuance of formal and informal
agreements, the removal of or restrictions on directors, officers, employees
and
institution-affiliated parties, and the enforcement of any such mechanisms
through restraining orders or other court actions.
The
Bank
is subject to certain restrictions on extensions of credit to executive
officers, directors, and principal shareholders or any related interest of
such
persons, which generally require that such credit extensions be made on
substantially the same terms as are available to third parties dealing with
the
Bank and not involve more than the normal risk of repayment. Other laws tie
the
maximum amount that may be loaned to any one customer and its related interests
to capital levels.
As
part
of the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”),
each federal banking regulator adopted non-capital safety and soundness
standards for institutions under its authority. These standards include internal
controls, information systems and internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, and compensation,
fees and benefits. An institution that fails to meet those standards may be
required by the agency to develop a plan acceptable to meet the standards.
Failure to submit or implement such a plan may subject the institution to
regulatory sanctions. We believe that the Bank meets substantially all standards
that have been adopted. FDICIA also imposes new capital standards on insured
depository institutions.
The
Community Reinvestment Act (“CRA”) requires the FDIC, in connection with its
examination of financial institutions within its jurisdiction, to evaluate
the
record of those financial institutions in meeting the credit needs of their
communities, including low and moderate income neighborhoods, consistent with
principles of safe and sound banking practices. These factors are also
considered by all regulatory agencies in evaluating mergers, acquisitions and
applications to open a branch or facility. As of the date of its most recent
examination report, the Bank has a CRA rating of “Satisfactory”.
The
Bank’s deposits are insured to a maximum of $100,000 per depositor through the
Deposit Insurance Fund, which is administered by the FDIC, and the Bank is
required to pay semi-annual deposit insurance premium assessments to the FDIC.
The Bank paid $.2 million in FDIC premiums during 2007. The Deposit Insurance
Fund was created pursuant to the
Federal
Deposit Insurance Reform Act of
2005,
which was signed into law on February 8, 2006. Under this new law, (i) the
current $100,000 deposit insurance coverage will be indexed for inflation (with
adjustments every five years, commencing January 1, 2011), and (ii) deposit
insurance coverage for retirement accounts was increased to $250,000 per
participant subject to adjustment for inflation. In addition, the FDIC will
be
given greater latitude in setting the assessment rates for insured depository
institutions which could be used to impose minimum assessments.
For
a
discussion of the regulatory capital requirements and related restrictions
to
which the Corporation and the Bank are subject, see the “Capital Requirements”
discussion that immediately follows.
Capital
Requirements
FDICIA
established a system of prompt corrective action to resolve the problems of
undercapitalized institutions. Under this system, the federal banking regulators
are required to rate supervised institutions on the basis of five capital
categories: “well capitalized,” “adequately capitalized,” “undercapitalized,”
“significantly undercapitalized,” and “critically undercapitalized;” and to take
certain mandatory actions (and are authorized to take other discretionary
actions) with respect to institutions in the three undercapitalized categories.
The severity of the actions will depend upon the category in which the
institution is placed. A depository institution is “well capitalized” if it has
a total risk based capital ratio of 10% or greater, a Tier 1 risk based capital
ratio of 6% or greater, and a leverage ratio of 5% or greater and is not subject
to any order, regulatory agreement, or written directive to meet and maintain
a
specific capital level for any capital measure. An “adequately capitalized”
institution is defined as one that has a total risk based capital ratio of
8% or
greater, a Tier 1 risk based capital ratio of 4% or greater and a leverage
ratio
of 4% or greater (or 3% or greater in the case of a bank with a composite CAMEL
rating of 1).
FDICIA
generally prohibits a depository institution from making any capital
distribution, including the payment of cash dividends, or paying a management
fee to its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to growth
limitations and are required to submit capital restoration plans. For a capital
restoration plan to be acceptable, the depository institution’s parent holding
company must guarantee (subject to certain limitations) that the institution
will comply with such capital restoration plan.
Significantly
undercapitalized depository institutions may be subject to a number of other
requirements and restrictions, including orders to sell sufficient voting stock
to become adequately capitalized and requirements to reduce total assets and
stop accepting deposits from correspondent banks. Critically undercapitalized
depository institutions are subject to the appointment of a receiver or
conservator, generally within 90 days of the date such institution is determined
to be critically undercapitalized.
Further
information about our capital resources is provided in the “Capital Resources”
section of Item 7 of Part II of this annual report. Information about the
capital ratios of the Corporation and of the Bank as of December 31, 2007 may
be
found in Note 2 to the Consolidated Financial Statements, which is included
in
Item 8 of Part II of this annual report.
USA
PATRIOT ACT
Congress
adopted the USA PATRIOT Act (the “Patriot Act”) on October 26, 2001 in response
to the terrorist attacks that occurred on September 11, 2001. Under the Patriot
Act, certain financial institutions, including banks, are required to maintain
and prepare additional records and reports that are designed to assist the
government’s efforts to combat terrorism. The Patriot Act includes sweeping
anti-money laundering and financial transparency laws that require additional
regulations, including, among other things, standards for verifying client
identification when opening an account and rules to promote cooperation among
financial institutions, regulators and law enforcement entities in identifying
parties that may be involved in terrorism or money laundering.
Federal
Securities Law
The
shares of the Corporation’s common stock are registered with the Securities and
Exchange Commission (the “SEC”) under Section 12(b) of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”), and listed on the Nasdaq Stock
Market’s Global Market. The Corporation is subject to information reporting
requirements, proxy solicitation requirements, insider trading restrictions
and
other requirements of the Exchange Act, including the requirements imposed
under
the federal Sarbanes-Oxley Act of 2002. Among other things, loans to and other
transactions with insiders are subject to restrictions and heightened
disclosure, directors and certain committees of the Board must satisfy certain
independence requirements, and the Corporation is generally required to comply
with certain corporate governance requirements.
Governmental
Monetary and Credit Policies and Economic Controls
The
earnings and growth of the banking industry and ultimately of the Bank are
affected by the monetary and credit policies of governmental authorities,
including the FRB. An important function of the FRB is to regulate the national
supply of bank credit in order to control recessionary and inflationary
pressures. Among the instruments of monetary policy used by the FRB to implement
these objectives are open market operations in U.S. Government securities,
changes in the federal funds rate, changes in the discount rate of member bank
borrowings, and changes in reserve requirements against member bank deposits.
These means are used in varying combinations to influence overall growth of
bank
loans, investments and deposits and may also affect interest rates charged
on
loans or paid on deposits. The monetary policies of the FRB authorities have
had
a significant effect on the operating results of commercial banks in the past
and are expected to continue to have such an effect in the future. In view
of
changing conditions in the national economy and in the money markets, as well
as
the effect of actions by monetary and fiscal authorities, including the FRB,
no
prediction can be made as to possible future changes in interest rates, deposit
levels, loan demand or their effect on the business and earnings of the
Corporation and its subsidiaries.
SEASONALITY
Management
does not believe that our business activities are seasonal in nature. Deposit,
loan, and insurance demand may vary depending on local and national economic
conditions, but management believes that any variation will not have a material
impact on our planning or policy-making strategies.
EMPLOYEES
At
December 31, 2007, we employed approximately 472 individuals, of whom 423 were
full-time employees
.
ITEM
1A.
RISK
FACTORS
The
following factors should be considered carefully in evaluating an investment
in
shares of common stock of the Corporation.
Risks
Relating to the Corporation and its Affiliates
The
Corporation’s future depends on the successful growth of its
subsidiaries.
The
Corporation’s primary business activity for the foreseeable future will be to
act as the holding company of the Bank and its other direct and indirect
subsidiaries. Therefore, the Corporation’s future profitability will depend on
the success and growth of these subsidiaries. In the future, part of the
Corporation’s 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, including construction and land development
loans, all of which are in greater demand when interest rates are low and
economic conditions are good. There can be no guarantee that good economic
conditions or low interest rates will continue to exist. Moreover, the market
values of the real estate securing our loans may deteriorate due to a number
of
unpredictable factors, which could cause us to lose money in the event a
borrower failed to repay a loan and we were forced to foreclose on the property.
Additionally, the FRB and the FDIC, along with the other federal banking
regulators, issued final guidance on December 6, 2006 entitled “Concentrations
in Commercial Real Estate Lending, Sound Risk Management Practices” directed at
institutions that have particularly high concentrations of commercial real
estate loans within their lending portfolios. This guidance suggests that
institutions whose commercial real estate loans exceed certain percentages
of
capital should implement heightened risk management practices appropriate to
their concentration risk and may be required to maintain higher capital ratios
than institutions with lower concentrations in commercial real estate lending.
Based on our commercial real estate concentration as of December 31, 2007,
we
may be subject to further supervisory analysis during future examinations.
Although we continuously evaluate our concentration and risk management
strategies, we cannot guarantee that any risk management practices we implement
will be effective to prevent losses relating to our commercial real estate
portfolio. Management cannot predict the extent to which this guidance will
impact our operations or capital requirements.
The
Bank 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 loan 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 could result in a material 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 our 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.
The
market value of our investments could decline.
As
of
December 31, 2007, 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.
We
operate in a competitive environment.
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 non-bank 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.
In
addition, current banking laws facilitate interstate branching, merger activity
among banks, and expanded activities. Since September 1995, certain bank holding
companies have been authorized to acquire banks throughout the United States.
Since June 1, 1997, certain banks have been permitted to merge with banks
organized under the laws of different states. As a result, interstate banking
is
now an accepted element of competition in the banking industry and the
Corporation may be brought into competition with institutions with which it
does
not presently compete. Moreover, as discussed above, the GLBA revised the BHC
Act in 2000 and repealed the affiliation provisions of the Glass-Steagall Act
of
1933, which, taken together, limited the securities, insurance and other
non-banking activities of any company that controls an FDIC insured financial
institution. These laws may increase the competition we face in our market
areas
in the future, although management cannot predict the degree to which such
competition will impact our financial conditions or results of
operations.
The
loss of key personnel could disrupt our operations and result in reduced
earnings.
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.
Our current executive officers provide valuable services based on their many
years of experience and in-depth knowledge of the banking industry. Due to
the
intense competition for financial professionals, these key personnel would
be
difficult to replace and an unexpected loss of their services could result
in a
disruption to the continuity of operations and a possible reduction in earnings.
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. The Corporation is subject to supervision by the FRB. The Bank
is
subject to supervision and periodic examination by the Maryland Commissioner
of
Financial Regulation, the West Virginia Division of Banking, and the FDIC.
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. The Corporation and the Bank 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.
As
discussed above the GLBA repealed restrictions on banks affiliating with
securities firms and it also permitted 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 the 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.
The
Sarbanes-Oxley Act of 2002 requires management of publicly traded companies
to
perform an annual assessment of their internal controls over financial reporting
and to report on whether the system is effective as of the end of the Company’s
fiscal year. Disclosure of significant deficiencies or material weaknesses
in
internal controls could cause an unfavorable impact to shareholder value by
affecting the market value of our stock.
The
Patriot Act reinforced the importance of implementing and following procedures
required by the Bank Secrecy Act and money laundering issues. Non-compliance
with this act or failure to file timely and accurate documentation could expose
the company to adverse publicity as well as fines and penalties assessed by
regulatory agencies.
We
may be subject to claims and the costs of defensive
actions.
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.
Risks
Relating to the Corporation’s Common Stock
The
Corporation’s ability to pay dividends is limited.
The
Corporation’s ability to pay dividends to shareholders is largely dependent upon
the receipt of dividends from the Bank. Both federal and state laws impose
restrictions on the ability of the Bank to pay dividends. Federal law generally
prohibits the payment of a dividend by a troubled institution. Under Maryland
law, a state-chartered commercial bank may pay dividends only 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.
Shares
of the Corporation’s common stock are not insured.
Shares
of
the Corporation’s common stock do not represent deposits and investments in
these shares are not insured against loss by the government.
Shares
of the Corporation’s common stock are not heavily traded.
The
shares of the Corporation’s common stock are listed on the NASDAQ Global Select
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.
The
Corporation’s Articles of Incorporation and By-Laws may discourage a corporation
takeover.
The
Amended and Restated Articles of Incorporation and By-Laws of the Corporation
contain certain provisions designed to enhance the ability of the Board of
Directors to deal with attempts to acquire control of the corporation. First,
the Board of Directors is classified into three classes. Directors of each
class
serve for staggered three-year periods, and 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. Second,
the Board has the authority to classify and reclassify unissued shares of stock
of any class or series of stock by setting, fixing, eliminating, or altering
in
any one or more respects the preferences, rights, voting powers, restrictions
and qualifications of, dividends on, and redemption, conversion, exchange,
and
other rights of, such securities. The Board could use this authority, along
with
its authority to authorize the issuance of securities of any class or series,
to
issue
shares
having terms favorable to management to a person or persons affiliated with
or
otherwise friendly to management.
In
addition to the foregoing, Maryland law contains anti-takeover provisions,
such
as restrictions on “control share acquisitions” and “business combinations” with
certain interested stockholders that apply to the Corporation.
Although
these provisions do not preclude a takeover, they may have the effect of
discouraging a 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. Such provisions could potentially
adversely affect the market price of our common stock.
ITEM
1B.
UNRESOLVED
STAFF COMMENTS
None.
ITEM
2.
PROPERTIES
The
headquarters of the Corporation and the Bank occupies approximately 29,000
square feet at 19 South Second Street, Oakland, Maryland, a 30,000 square feet
operations center located at 12892 Garrett Highway, Oakland Maryland and 8,500
square feet at 102 South Second Street, Oakland, Maryland. These premises are
owned by the Corporation. The Bank owns 20 of its banking offices and
leases six. The Corporation also leases five offices of non-bank subsidiaries.
Total rent expense on the leased offices and properties was $.53 million in
2007.
ITEM
3.
LEGAL
PROCEEDINGS
We
are at
times, in the ordinary course of business, subject to legal actions. Management,
upon the advice of counsel, believes that losses, if any, resulting from current
legal actions will not have a material adverse effect on our financial
condition.
None.
PART
II
Shares
of
the Corporation’s common stock are listed on the NASDAQ Global Select Market
under the symbol “FUNC”. As of February 28, 2008, the Corporation had 2,033
shareholders of record. The high and low sales prices for, and the cash
dividends declared on, the shares of the Corporation’s common stock for each
quarterly period of 2007 and 2006 are set forth below.
|
2007
|
High
|
Low
|
Dividends
Declared
|
|||||||
|
1
st
Quarter
|
$
|
23.49
|
$
|
21.72
|
$
|
.195
|
||||
|
2
nd
Quarter
|
24.00
|
19.26
|
.195
|
|||||||
|
3
rd
Quarter
|
21.50
|
17.95
|
.195
|
|||||||
|
4
th
Quarter
|
21.95
|
18.70
|
.200
|
|||||||
|
2006
|
High
|
Low
|
Dividends
Declared
|
|||||||
|
1
st
Quarter
|
$
|
22.83
|
$
|
20.29
|
$
|
.190
|
||||
|
2
nd
Quarter
|
23.35
|
20.29
|
.190
|
|||||||
|
3
rd
Quarter
|
22.00
|
20.31
|
.190
|
|||||||
|
4
th
Quarter
|
22.79
|
21.05
|
.195
|
|||||||
Cash
dividends are typically declared on a quarterly basis and are at the discretion
of the Corporation’s Board of Directors. Dividends to shareholders are generally
dependent on the ability of the Corporation’s subsidiaries, especially the Bank,
to declare dividends to the Corporation. The ability of these entities to
declare dividends are limited by federal and state banking laws and/or state
corporate laws. Further information about these limitations may be found in
Note
13 to the Consolidated Financial Statements and in Item 1A of Part I under
the
caption “
The
Corporation’s ability to pay dividends is limited
”,
each
of which is incorporated herein by reference. There can be no guarantee that
dividends will be declared in any fiscal quarter.
Market
makers for the Corporation’s common stock are:
|
FERRIS
BAKER WATTS
|
SCOTT
AND STRINGFELLOW, INC.
|
|
|
12
North Liberty St.
|
909
East Main Street
|
|
|
Cumberland,
MD 21502
|
Richmond,
VA 23219
|
|
|
(301)724-7161
|
(804)643-1811
|
|
|
(800)776-0629
|
(800)552-7757
|
|
|
113
S. Potomac St.
|
||
|
Hagerstown,
MD 21740
|
||
|
(301)733-7111
|
||
|
(800)344-4413
|
First
United Corporation Stock Performance Graph
The
following graph compares the yearly percentage change in the cumulative total
return for First United Corporation common stock for the five years ended
December 31, 2007. This data is compared to the NASDAQ Composite market index
and the SNL $1 billion to $5 billion Bank Index during the same time period.
Total return numbers are calculated as change in stock price for the period
indicated with dividends being reinvested.
|
Period
Ending
|
|||||||||||||||||||
|
Index
|
12/31/02
|
|
12/31/03
|
|
12/31/04
|
|
12/31/05
|
|
12/31/06
|
|
12/31/07
|
||||||||
|
First
United Corporation
|
100.00
|
153.50
|
133.97
|
143.33
|
153.11
|
145.15
|
|||||||||||||
|
NASDAQ
Composite
|
100.00
|
150.01
|
162.89
|
165.13
|
180.85
|
198.60
|
|||||||||||||
|
SNL
Bank $1B-$5B Index
|
100.00
|
135.99
|
167.83
|
164.97
|
190.90
|
139.06
|
|||||||||||||
Equity
Compensation Plan Information
At
the
2007 Annual Meeting of Shareholders, the Corporation’s shareholders approved the
First United Corporation Omnibus Equity Compensation Plan (the “Omnibus Plan”),
which authorizes the grant of stock options, stock appreciation rights, stock
awards, stock units, performance units, dividend equivalents, and other
stock-based awards.
The
following table contains information about the Omnibus Plan as of December
31,
2007:
|
Plan
Category
|
Number
of securities to be issued upon exercise of outstanding options,
warrants,
and rights
(a)
|
Weighted-average
exercise price of outstanding options, warrants, and
rights
(b)
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected
in
column
(a))
(c)
(1)
|
|||||||
|
Equity
compensation plans approved by security holders
|
0
|
N/A
|
185,000
|
|
||||||
|
Equity
compensation plans not approved by security
holders
|
0
|
N/A
|
N/A
|
|||||||
|
Total
|
0
|
N/A
|
185,000
|
|||||||
Note:
|
(1)
|
In
addition to stock options and stock appreciation rights, the Omnibus
Plan
permits the grant of stock awards, stock units, performance units,
dividend equivalents, and other stock-based awards. Subject to the
anti-dilution provisions of the Omnibus Plan, the maximum number
of shares
for which awards may be granted to any one participant in any calendar
year is 20,000, without regard to whether an award is paid in cash
or
shares.
|
Issuer
Repurchases of Securities
|
Issuer
Purchases of Equity Securities
|
|||||||||||||
|
Period
|
Total
Number of Shares (or Units) Purchased (1)
|
Average
Price Paid per Share (or Unit)
|
Total
Number of Shares (or Units) Purchased as Part of Publicly Announced
Plans
or Programs
|
Maximum
Number of Shares that May Yet Be Purchased Under the Plans or
Programs
|
|||||||||
|
October
2007
|
4,000
|
19.97
|
4,000 | 302,200 | |||||||||
|
November
2007
|
13,000
|
19.80
|
13,000 | 289,200 | |||||||||
|
December
2007
|
8,100
|
20.97
|
8,100 | 281,100 | |||||||||
|
Total
|
25,100
|
$
|
20.20
|
25,100
|
281,100
|
||||||||
Note:
| (1) |
All
shares were purchased under First United Corporation’s
repurchase
plan that was adopted effective August 15, 2007. The adoption of
this plan
was publicly announced on August 21, 2007. The plan authorizes the
repurchase of up to 307,500 shares of common stock in open market
and/or
private transactions at such times and in such amounts per transaction
as
the Chairman and Chief Executive Officer of First United Corporation
determines to be appropriate
.
The repurchase plan will continue until all shares are repurchased,
unless
earlier terminated by First United Corporation.
|
ITEM
6.
SELECTED
FINANCIAL DATA
The
following table sets forth certain selected financial data for the five years
ended December 31, 2007 and is qualified in its entirety by the
detailed
information and financial statements, including notes thereto, included
elsewhere or incorporated by reference in this annual report.
(In
thousands, except per share data)
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||
|
Balance
Sheet Data
|
||||||||||||||||
|
Total
Assets
|
$
|
1,478,909
|
$
|
1,349,317
|
$
|
1,310,991
|
$
|
1,233,901
|
$
|
1,108,241
|
||||||
|
Net
Loans
|
1,035,962
|
957,126
|
954,545
|
904,635
|
786,051
|
|||||||||||
|
Investment
Securities
|
304,908
|
263,272
|
230,095
|
210,661
|
223,615
|
|||||||||||
|
Deposits
|
1,092,740
|
971,381
|
955,854
|
850,661
|
750,161
|
|||||||||||
|
Long-term
Borrowings
|
178,451
|
166,330
|
128,373
|
175,415
|
191,735
|
|||||||||||
|
Shareholders’
Equity
|
104,665
|
96,856
|
92,039
|
86,356
|
84,191
|
|||||||||||
|
Operating
Data
|
||||||||||||||||
|
Interest
Income
|
$
|
93,565
|
$
|
80,269
|
$
|
69,756
|
$
|
60,682
|
$
|
57,703
|
||||||
|
Interest
Expense
|
49,331
|
39,335
|
29,413
|
24,016
|
23,601
|
|||||||||||
|
Net
Interest Income
|
44,234
|
40,934
|
40,343
|
36,666
|
34,102
|
|||||||||||
|
Provision
for Loan Losses
|
2,312
|
1,165
|
1,078
|
2,534
|
833
|
|||||||||||
|
Other
Operating Income
|
15,092
|
14,041
|
14,088
|
12,971
|
11,867
|
|||||||||||
|
Other
Operating Expense
|
38,475
|
35,490
|
34,654
|
35,969
|
29,821
|
|||||||||||
|
Income
Before Tax
|
18,539
|
18,320
|
18,699
|
11,134
|
15,315
|
|||||||||||
|
Income
Tax
|
5,746
|
5,743
|
6,548
|
3,507
|
4,566
|
|||||||||||
|
Net
Income
|
$
|
12,793
|
$
|
12,577
|
$
|
12,151
|
$
|
7,627
|
$
|
10,749
|
||||||
|
Per
Share Data
|
||||||||||||||||
|
Net
Income
|
$
|
2.08
|
$
|
2.05
|
$
|
1.99
|
$
|
1.25
|
$
|
1.77
|
||||||
|
Dividends
Paid
|
.78
|
.76
|
.74
|
.72
|
.70
|
|||||||||||
|
Book
Value
|
17.05
|
15.77
|
15.04
|
14.17
|
13.83
|
|||||||||||
|
Significant
Ratios
|
||||||||||||||||
|
Return
on Average Assets
|
.90
|
%
|
.96
|
%
|
.95
|
%
|
.65
|
%
|
1.03
|
%
|
||||||
|
Return
on Average Equity
|
12.70
|
%
|
13.07
|
%
|
13.61
|
%
|
8.91
|
%
|
13.10
|
%
|
||||||
|
Dividend
Payout Ratio
|
37.50
|
%
|
37.07
|
%
|
37.44
|
%
|
58.00
|
%
|
39.65
|
%
|
||||||
|
Average
Equity to Average Assets
|
7.10
|
%
|
7.35
|
%
|
7.00
|
%
|
7.28
|
%
|
7.88
|
%
|
||||||
|
Total
Risk-based Capital Ratio
|
12.51
|
%
|
12.95
|
%
|
12.66
|
%
|
12.24
|
%
|
11.77
|
%
|
||||||
|
Tier
I Capital to Risk Weighted Assets
|
11.40
|
%
|
11.81
|
%
|
11.45
|
%
|
10.81
|
%
|
11.04
|
%
|
||||||
|
Tier
I Capital to Average Assets
|
8.91
|
%
|
9.08
|
%
|
8.64
|
%
|
8.44
|
%
|
8.72
|
%
|
||||||
ITEM
7.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This
discussion and analysis should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended December
31, 2007, which appear in Item 8 of Part II of this annual report.
Overview
The
Corporation is a financial holding company which, through the Bank and its
non-bank subsidiaries, provides an array of financial products and services
primarily
to customers in four Western Maryland counties and four Northeastern West
Virginia counties. Its principal operating subsidiary is the Bank, which
consists of a community banking network of 26 branch offices located throughout
its market areas. Our primary sources of revenue are interest income earned
from
our loan and investment securities portfolios and fees earned from financial
services provided to customers.
Consolidated
net income for 2007 totaled $12.8 million or $2.08 per share, compared to $12.6
million or $2.05 per share for 2006. The increase in net income resulted
primarily from increases in other operating income, particularly, trust
department income, insurance commissions, secondary market fees, and debit
card
income offset by a non-recurring pre-tax charge of approximately $1.6 million
($1.0 million or $.18 per share, net of tax) associated with the transfer of
certain investment securities from the available-for-sale category to the
trading category during the first quarter of 2007 and the subsequent sale of
those securities during the second quarter. During 2007, earnings on
interest-earning assets increased due to the increases in the general level
of
interest rates that occurred during the latter part of 2006 and during the
first
nine months of 2007, a restructuring of the investment portfolio and increased
average balances of our interest-earning assets. However, this increase in
interest income was substantially offset by increased interest expense paid
on
our interest-bearing liabilities due to rising interest rates and an increase
in
the related average balances. As a result of the factors impacting interest
income and expense, our net interest income in 2007 increased $3.3 million
when
compared to 2006. Our net interest margin remained stable throughout 2007
despite the rising interest rate environment. The net interest margin fell
slightly to 3.51% in 2007 from 3.52% in 2006. The provision for loan losses
was
$2.3 million in 2007, compared to $1.2 million for 2006. The increase in the
provision in 2007 was due to increased net charge offs, an increase in
non-accrual loans, loan growth and changes in economic conditions during 2007.
Our
performance ratios declined during 2007 in comparison to 2006 due to the
recognition of a $1.6 million pre-tax loss on the sale of investment securities
in conjunction with a restructuring of our investment portfolio. The proceeds
from the sale were reinvested in securities with a higher yield that should
generate an additional $.9 million of interest income annually. Our year-to-date
2007 actual performance results compared to performance results, exclusive
of
the impact of the non-recurring securities losses and the associated increase
in
interest income and taxes, are presented in the following table:
|
|
For
the years ended
|
|||||||||
|
December
31, 2007
|
December
31, 2006
|
|||||||||
|
|
Actual
|
Performance
Excluding
Securities Loss & Associated Income and Taxes
|
Actual
|
|||||||
|
Net
Income
|
$
|
12,793
|
$
|
13,435
|
$
|
12,577
|
||||
|
Earnings
Per Share
|
$
|
2.08
|
$
|
2.19
|
$
|
2.05
|
||||
|
Return
on Average Equity
|
12.70
|
%
|
13.38
|
%
|
13.07
|
%
|
||||
|
Return
on Average Assets
|
.90
|
%
|
.95
|
%
|
.96
|
%
|
||||
Operations
in 2007 were impacted by the following factors and strategic
initiatives:
Increased
Loan and Deposit Growth/Impact on Net Interest Margin
-
We
experienced a significant increase of $79.6 million in loans in 2007 when
compared to 2006. Growth in the residential mortgage portfolio of $23.7 million
was attributable to a $25 million mortgage loan purchase that was consummated
at
the end of April 2007. This purchase was offset by a slight decline in the
in-house portfolio, which resulted from a flat interest rate yield curve and
a
shift to secondary market loans due to a consumer preference for fixed-rate
mortgage loans. The Bank primarily originates fixed-rate loans for the secondary
mortgage market. The commercial portfolio increased $83.9 million as a result
of
in-house production and commercial participations with other financial
institutions. These increases were offset by a decline of $28 million in the
installment loan portfolio. Interest income in 2007 exceeded the amount
generated in prior years by $8.1 million (on a fully taxable equivalent basis)
due to the increase in the loan portfolio. Interest income on investment
securities increased by $5.2 million (on a fully taxable equivalent basis)
due
to a $45 million leverage strategy and the restructuring during the second
quarter into higher yielding investments. (Additional information on the
composition of interest income is available in Table 1 that appears on page
25).
Funding
costs in 2007 increased as a result of the rising interest rate environment
during the latter half of 2006 and the intense retail deposit competition in
our
market areas. Deposits at December 31, 2007 increased $121.4 million when
compared to deposits at December 31, 2006. Interest-bearing demand deposits
increased $130.0 million due to successful retail growth in money market
products and an increase of $85 million in brokered money market funds. This
increase was offset by a decline in time deposits of $100,000 or more and
declines in non-interest bearing demand deposits.
The
increases in the higher rate money market accounts throughout 2007 increased
deposit interest expense by approximately $10.0 million when compared to 2006.
Although net borrowings increased by $10.8 million in 2007 when compared to
2006, we realized a minimal increase in interest expense on these borrowings.
The combination of increased loan and deposit growth, rising interest rates
on
our assets and liabilities, and the increased level of debt resulted in an
increase in net interest income on a tax equivalent basis of $3.5 million (8%)
in 2007 when compared to 2006.
The
overall net interest margin declined slightly during 2007 to 3.51% from 3.52%
in
2006 on a fully taxable equivalent basis.
Other
Operating Income/Other Operating Expense
—
Other
operating income increased $1.1 million in 2007 when compared to 2006. Our
continued emphasis on generating fee-based income resulted in increases in
service charge income, trust department income, and insurance commission income.
These increases were offset by the recognition of a one-time loss of $1.6
million associated with the transfer of investment securities from the
available-for-sale category to the trading category in the first quarter of
2007
and the subsequent sale of these securities in the second quarter of 2007.
Excluding this non-recurring charge, other operating income increased $2.7
million (18.9%) for 2007 when compared to 2006.
Other
operating expenses increased 8% in 2007 when compared to 2006. The increase
is
attributable to increases in personnel expenses due to the hiring of several
regional market presidents to strengthen our presence in key market areas,
expansion of our branch network and normal merit increases. Occupancy and
equipment expenses increased due to the opening of three new branch offices
and
our new operations center. In addition, we experienced increases in other
expenses such as marketing, consulting and other miscellaneous expenses.
Dividends
—
The
Corporation continued its tradition of paying dividends to shareholders during
2007, increasing them to $0.78 per share, a 2.6% increase from $0.76 per share
in 2006. The Corporation has paid quarterly cash dividends consistently since
1985, the year in which it was formed.
Looking
Forward
—
We
will
continue to face risks and challenges in the future, including: changes in
local
economic conditions in our core geographic markets;
potential
yield compression on loan and deposit products from existing competitors and
potential new entrants in our markets; fluctuations in interest rates and
changes to existing federal and state legislation and regulations over banks
and
financial holding companies. For a more complete discussion of these risk
factors, see Item 1A of Part I of this annual report.
Critical
Accounting Policies and Estimates
This
discussion and analysis of our financial condition and results of operations
is
based upon our consolidated financial
statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure
of
contingent liabilities. (See Note 1 of the Notes to Consolidated Financial
Statements included in Item 8 of Part II of this annual report.) On an on-going
basis, management evaluates estimates, including those related to loan losses
and intangible assets. Management bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. Management believes the following critical accounting
policies affect our more significant judgments and estimates used in the
preparation of the consolidated financial statements.
Allowance
for Loan Losses
One
of
our most important accounting policies is that related to the monitoring of
the
loan portfolio. A variety of estimates impact
the
carrying value of the loan portfolio, including the calculation of the allowance
for loan losses, the valuation of underlying collateral, the timing of loan
charge-offs and the placement of loans on non-accrual status. The allowance
is
established and maintained at a level that management believes is adequate
to
cover losses resulting from the inability of borrowers to make required payment
on loans. Estimates for loan losses are arrived at by analyzing risks associated
with the specific loans and the loan portfolio, current and historical trends
in
delinquencies and charge-offs, and changes in the size and composition of the
loan portfolio. The analysis also requires consideration of the economic climate
and direction, changes in lending rates, political conditions, legislation
impacting the banking industry and economic conditions specific to Western
Maryland and Northeastern West Virginia. Because the calculation of the
allowance for loan losses relies on management’s estimates and judgments
relating to inherently uncertain events, actual results may differ from
management’s estimates.
The
allowance for loan losses is also discussed below in this Item 7 under the
caption “Allowance and Provision for Loan Losses”
and
in
Note 4 to Consolidated Financial Statements contained in Item 8 of Part II
of
this annual report.
Goodwill
and Other Intangible Assets
Statement
of Financial Accounting Standards (SFAS) No. 142, Accounting for Goodwill and
Other Intangible Assets, establishes standards for the amortization
of
acquired intangible assets and the non-amortization and impairment assessment
of
goodwill. We have $1.6 million of core deposit intangible assets and $1.1
million related to acquisitions of insurance “books of business” which are
subject to amortization. The $11.9 million in recorded goodwill is primarily
related to the acquisition of Huntington National Bank branches that occurred
in
2003, which is not subject to periodic amortization.
Goodwill
arising from business combinations represents the value attributable to
unidentifiable intangible elements in the business acquired. Our
goodwill
relates to value inherent in the banking business and the value is dependent
upon our ability to provide quality, cost effective services in a highly
competitive local market. This ability relies upon continuing investments in
processing systems, the development of value-added service features and the
ease
of use of our services.
As
such,
goodwill value is supported ultimately by revenue that is driven by the volume
of business transacted. A decline in earnings as a result of a lack of
growth
or
the inability to deliver cost effective services over sustained periods can
lead
to impairment of goodwill, which could adversely impact earnings in future
periods. SFAS No. 142 requires an annual evaluation of goodwill for impairment.
The determination of whether or not these assets are impaired involves
significant judgments. Management has completed its annual evaluation for
impairment and concluded that the recorded value of goodwill was not impaired.
However, future changes in strategy and/or market conditions could significantly
impact these judgments and require adjustments to recorded asset
balances.
Other-Than-Temporary
Impairment of Investment Securities
Securities
available-for-sale:
Securities available-for-sale are stated at fair value, with the unrealized
gains and losses, net of tax, reported as a separate component of accumulated
other comprehensive income/(loss) in shareholders’ equity.
The
amortized cost of debt securities classified as available-for-sale is adjusted
for amortization of premiums to the first call date, if applicable, or to
maturity, and for accretion of discounts to maturity, or in the case of
mortgage-backed securities, over the estimated life of the security. Such
amortization and accretion, plus interest and dividends, are included in
interest income from investments.
Management
systematically evaluates investment securities for impairment on a quarterly
basis. Declines in the fair value of available for sale securities below their
cost that are considered other than temporary declines are recognized in
earnings as realized losses in the period in which the impairment determination
is made. In estimating other-than-temporary impairment losses, management
considers (1) the length of time and the extent to which the fair value has
been
less than cost, (2) the financial condition and near-term prospects of the
issuer, and (3) the intent and ability of the Corporation to retain its
investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value. Gains and losses on the sale of securities
are recorded using the specific identification method.
Pension
Plan Assumptions
Our
pension plan costs are calculated using actuarial concepts, as discussed
within
the requirements of Statement of Financial Accounting Standards (SFAS) No.
87,
Employers
Accounting for Pensions,
SFAS No.
132 (R) and as amended by SFAS No. 158, “
Employers’
Accounting for Deferred Benefit Pension and Other Post Retirement
Plans
.”
Pension expense and the determination of our projected pension liability
are
based upon two critical assumptions: the discount rate and the expected return
on plan assets. We evaluate each of these critical assumptions annually.
Other
assumptions impact the determination of pension expense and the projected
liability including the primary employee demographics, such as retirement
patterns, employee turnover, mortality rates, and estimated employer
compensation increases. These factors, along with the critical assumptions,
are
carefully reviewed by management each year in consultation with our pension
plan
consultants and actuaries. Further information about our pension plan
assumptions, the plan’s funded status, and other plan information is included in
Note 11 to the Consolidated Financial Statements, which is included in Item
8 of
Part II of this annual report.
Recent
Accounting Pronouncements and Developments
Note
1 to
the Consolidated Financial Statements included in Item 8, Part II of this
annual
report discusses new accounting pronouncements that when adopted, may have
an
effect on our consolidated financial statements.
CONSOLIDATED
STATEMENT OF INCOME REVIEW
Net
Interest Income
Net
interest income is the largest source of operating revenue. Net interest
income
is the difference between the interest earned on
interest-earning
assets and the interest expense incurred on interest-bearing liabilities.
For
analytical and discussion purposes, net interest income is adjusted to a
taxable
equivalent basis to facilitate performance comparisons between taxable and
tax-exempt assets by increasing tax-exempt income by an amount equal to the
federal income taxes that would have been paid if this income were taxable
at
the statutorily applicable rate. The table below summarizes net interest
income
(on a taxable equivalent basis) for the years 2005-2007 (dollars in
thousands).
|
2007
|
2006
|
2005
|
||||||||
|
Interest
income
|
$
|
95,286
|
$
|
81,838
|
$
|
70,533
|
||||
|
Interest
expense
|
49,330
|
39,335
|
29,413
|
|||||||
|
Net
interest income
|
$
|
45,956
|
$
|
42,503
|
$
|
41,120
|
||||
|
Net
interest margin %
|
3.51
|
%
|
3.52
|
%
|
3.49
|
%
|
||||
Net
interest income increased $3.5 million (8%) in 2007 over the same period
in
2006, due to a $13.4 million (16%) increase in interest income offset by
a $10.0
million (25%) increase in interest expense. The increase in interest income
resulted from an increase in average interest-earning assets of $100.0 million
(8%) during 2007 when compared to 2006. The increased level of interest earning
assets is attributable to the growth that we experienced in our loan and
investment portfolios during 2007. Emphasis on adjustable rate loan products
and
the investment portfolio restructuring contributed to the increase in the
average yield on our average earning assets of 50 basis points, from 6.78%
in
2006 to 7.29% in 2007 (on a fully tax equivalent basis). The average yield
on
loans increased by 48 basis points and the yield on investment securities
as a
percentage of interest earning assets increased 90 basis points from 2006
to
2007. Interest expense increased during 2007 when compared to 2006 due to
the
higher interest rate environment, and an overall increase in average
interest-bearing liabilities of $74.2 million. Deposits increased in 2007
by
approximately $121 million due to successful retail growth in money market
products and the purchase of $85 million in brokered money market funds.
The
combined effect of the competitive retail rate environment and the volume
increases in our average interest-bearing liabilities resulted in a 62 basis
point increase in the average rate paid on our average interest-bearing
liabilities from 3.59% for 2006 to 4.21% for 2007. The net result of the
aforementioned factors was a 1 basis point decline in the net interest margin
at
December 31, 2007 to 3.51% from 3.52% at December 31, 2006.
Comparing
2006 to 2005, net interest income increased $1.4 million (3%) due to an increase
in interest income of $11.3 million, offset by an increase in interest expense
of $9.9 million. The increase in interest income resulted from an increase
in
average interest-earning assets of $28.1 million during 2006 when compared
to
2005. This increase was attributable to the growth that we experienced in
our
investment portfolio late in 2005 and throughout 2006. Emphasis on adjustable
rate loan products and the rising interest rate environment contributed to
the
increase in the average rate on our average earning assets of 80 basis points,
from 5.98% in 2005 to 6.78% in 2006 (on a fully tax equivalent basis). Interest
expense increased during 2006 when compared to 2005 due to the higher interest
rate environment, and an overall increase in average interest-bearing
liabilities of $32.3 million. Deposits increased in 2006 by $16 million due
to
an increase in brokered certificates of deposit and a successful retail
promotion of a nine month certificate of deposit. The combined effect of
the
increasing rate environment and the volume increases in our average
interest-bearing liabilities resulted in an 83 basis point increase in the
average rate paid on our average interest-bearing liabilities from 2.76%
in 2005
to 3.59% in 2006. The net result was a 3 basis point increase in net interest
margin from 3.49% at the end of 2005 to 3.52% at the end of 2006.
As
shown
below, the composition of total interest income over the three-year period
from
2005 to 2007 shows a gradual increase in interest on investments and a
corresponding decline in interest and fees on loans. This shift is attributable
to the leverage strategies implemented in the last six months of 2006 and
throughout 2007. Leverage strategies are the purchase of investment securities
funded by borrowings of matched terms and durations. The difference between
the
rate earned and the rate paid has resulted in additional earnings.
|
%
of Total Interest
Income
|
||||||||||
|
2007
|
|
2006
|
|
2005
|
||||||
|
Interest
and fees on loans
|
82
|
%
|
85
|
%
|
88
|
%
|
||||
|
Interest
on investment securities
|
18
|
%
|
15
|
%
|
12
|
%
|
||||
Table
1
sets forth the average balances, net interest income and expense and average
yields and rates for our interest-earning assets and
interest-bearing
liabilities for 2007, 2006 and 2005. Table 2 sets forth an analysis of volume
and rate changes in interest income and interest expense of our average
interest-earning assets and average interest-bearing liabilities for 2007,
2006
and 2005. Table 2 distinguishes between the changes related to average
outstanding balances (changes in volume created by holding the interest rate
constant) and the changes related to average interest rates (changes in interest
income or expense attributed to average rates created by holding the outstanding
balance constant).
Distribution
of Assets, Liabilities and Shareholders’ Equity
Interest
Rates and Interest Differential - Tax Equivalent Basis
(Dollars
in thousands)
Table
1
|
For
the Years Ended December 31
|
||||||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||
|
AVERAGE
BALANCE
|
|
INTEREST
|
|
AVERAGE
YIELD/RATE
|
|
AVERAGE
BALANCE
|
|
INTEREST
|
|
AVERAGE
YIELD/RATE
|
|
AVERAGE
BALANCE
|
|
INTEREST
|
|
AVERAGE
YIELD/RATE
|
||||||||||||
|
Assets
|
||||||||||||||||||||||||||||
|
Loans
|
$
|
1,003,854
|
$
|
77,158
|
7.69
|
%
|
$
|
957,709
|
$
|
69,049
|
7.21
|
%
|
$
|
954,784
|
$
|
61,601
|
6.45
|
%
|
||||||||||
|
Investment
Securities:
|
||||||||||||||||||||||||||||
|
Taxable
|
215,756
|
12,474
|
5.78
|
171,720
|
7,699
|
4.48
|
179,018
|
6,231
|
3.48
|
|||||||||||||||||||
|
Non
taxable
|
73,467
|
4,847
|
6.60
|
65,902
|
4,399
|
6.67
|
30,041
|
2,129
|
7.09
|
|||||||||||||||||||
|
Total
|
289,223
|
17,321
|
5.99
|
237,622
|
12,098
|
5.09
|
209,059
|
8,360
|
4.00
|
|||||||||||||||||||
|
Federal
funds sold
|
285
|
11
|
3.86
|
463
|
1
|
.21
|
1,876
|
55
|
2.93
|
|||||||||||||||||||
|
Interest-bearing
deposits with other banks
|
5,135
|
241
|
4.69
|
2,811
|
165
|
5.88
|
5,327
|
162
|
3.04
|
|||||||||||||||||||
|
Other
interest earning assets
|
9,363
|
555
|
5.93
|
9,231
|
525
|
5.68
|
8,680
|
355
|
4.09
|
|||||||||||||||||||
|
Total
earning assets
|
1,307,860
|
95,286
|
7.29
|
%
|
1,207,836
|
81,838
|
6.78
|
%
|
1,179,726
|
70,533
|
5.98
|
%
|
||||||||||||||||
|
Allowance
for loan losses
|
(6,584
|
)
|
(6,245
|
)
|
(6,975
|
)
|
||||||||||||||||||||||
|
Non-earning
assets
|
118,780
|
110,098
|
102,500
|
|||||||||||||||||||||||||
|
Total
Assets
|
$
|
1,420,056
|
$
|
1,311,689
|
$
|
1,275,251
|
||||||||||||||||||||||
|
Liabilities
and
Shareholders’ Equity
|
||||||||||||||||||||||||||||
|
Interest-bearing
demand deposits
|
$
|
321,723
|
$
|
9,336
|
2.90
|
%
|
$
|
285,250
|
$
|
6,405
|
2.25
|
%
|
$
|
293,129
|
$
|
4,896
|
1.67
|
%
|
||||||||||
|
Savings
deposits
|
42,123
|
1,445
|
3.43
|
47,779
|
462
|
.97
|
58,964
|
242
|
.41
|
|||||||||||||||||||
|
Time
deposits:
|
||||||||||||||||||||||||||||
|
Less
than $100
|
234,439
|
10,429
|
4.45
|
229,829
|
8,439
|
3.67
|
264,503
|
6,023
|
2.28
|
|||||||||||||||||||
|
$100
or more
|
317,219
|
16,132
|
5.09
|
273,305
|
12,043
|
4.41
|
187,412
|
7,943
|
4.24
|
|||||||||||||||||||
|
Short-term
borrowings
|
82,194
|
3,319
|
4.04
|
107,430
|
4,429
|
4.12
|
100,601
|
2,749
|
2.73
|
|||||||||||||||||||
|
Long-term
borrowings
|
173,208
|
8,670
|
5.01
|
153,089
|
7,557
|
4.94
|
159,748
|
7,560
|
4.73
|
|||||||||||||||||||
|
Total
interest-bearing
liabilities
|
1,170,906
|
49,331
|
4.21
|
%
|
1,096,682
|
39,335
|
3.59
|
%
|
1,064,357
|
29,413
|
2.76
|
%
|
||||||||||||||||
|
Non-interest-bearing
Deposits
|
133,509
|
107,595
|
112,860
|
|||||||||||||||||||||||||
|
Other
liabilities
|
14,885
|
11,189
|
8,734
|
|||||||||||||||||||||||||
|
Shareholders’
Equity
|
100,756
|
96,223
|
89,300
|
|||||||||||||||||||||||||
|
Total
Liabilities and
Shareholders’
Equity
|
$
|
1,420,056
|
$
|
1,311,689
|
$
|
1,275,251
|
||||||||||||||||||||||
|
Net
interest income and Spread
|
$
|
45,956
|
3.08
|
%
|
$
|
42,503
|
3.19
|
%
|
$
|
41,120
|
3.22
|
%
|
||||||||||||||||
|
Net
interest margin
|
3.51
|
%
|
3.52
|
%
|
3.49
|
%
|
||||||||||||||||||||||
NOTES:
--The
above table reflects the average rates earned or paid stated on a tax equivalent
basis assuming a tax rate of 35% for 2007, 2006 and 2005. The fully taxable
equivalent adjustments for the years ended December 31, 2007, 2006, and 2005
were $1,721, $1,569, and $776, respectively.
--The
average balances of non-accrual loans for the years ended December 31, 2007,
2006 and 2005, which were reported in the average loan balances for these
years,
were $4,167, $2,705, and $3,203, respectively.
--Net
interest margin is calculated as net interest income divided by average earning
assets.
--The
average yields on investments are based on amortized cost.
Interest
Variance Analysis (1)
(In
thousands and tax equivalent basis)
Table
2
|
2007
Compared to 2006
|
2006
Compared to 2005
|
||||||||||||||||||
|
Volume
|
Rate
|
Net
|
Volume
|
Rate
|
Net
|
||||||||||||||
|
INTEREST
INCOME:
|
|||||||||||||||||||
|
Loans
|
$
|
3,547
|
$
|
4,562
|
$
|
8,109
|
$
|
211
|
$
|
7,237
|
$
|
7,448
|
|||||||
|
Taxable
Investments
|
2,546
|
2,229
|
4,775
|
(327
|
)
|
1,795
|
1,468
|
||||||||||||
|
Non-taxable
Investments
|
499
|
(51
|
)
|
448
|
2,394
|
(124
|
)
|
2,270
|
|||||||||||
|
Federal
funds sold
|
(7
|
)
|
17
|
10
|
(4
|
)
|
(50
|
)
|
(54
|
)
|
|||||||||
|
Other
interest earning assets
|
261
|
(155
|
)
|
106
|
(227
|
)
|
400
|
173
|
|||||||||||
|
Total
interest income
|
6,846
|
6,602
|
13,448
|
2,047
|
9,258
|
11,305
|
|||||||||||||
|
INTEREST
EXPENSE:
|
|||||||||||||||||||
|
Interest-bearing
demand
deposits
|
1,058
|
1,873
|
2,931
|
(177
|
)
|
1,686
|
1,509
|
||||||||||||
|
Savings
deposits
|
(194
|
)
|
1,177
|
983
|
(108
|
)
|
328
|
220
|
|||||||||||
|
Time
deposits less than $100
|
205
|
1,785
|
1,990
|
(1,273
|
)
|
3,689
|
2,416
|
||||||||||||
|
Time
deposits $100 or more
|
2,233
|
1,856
|
4,089
|
3,785
|
315
|
4,100
|
|||||||||||||
|
Short-term
borrowings
|
(1,019
|
)
|
(91
|
)
|
(1,110
|
)
|
282
|
1,398
|
1,680
|
||||||||||
|
Long-term
borrowings
|
1,007
|
106
|
1,113
|
(329
|
)
|
326
|
(3
|
)
|
|||||||||||
|
Total
interest expense
|
3,290
|
6,706
|
9,996
|
2,180
|
7,742
|
9,922
|
|||||||||||||
|
Net
interest income
|
$
|
3,556
|
$
|
(104
|
)
|
$
|
3,452
|
$
|
(133
|
)
|
$
|
1,516
|
$
|
1,383
|
|||||
Note:
| (1) |
The
change in interest income/expense due to both volume and rate has
been
allocated to volume and rate changes in proportion to the relationship
of
the absolute dollar amounts of the change in
each.
|
Provision
for Loan Losses
The
provision for loan losses was $2.3 million for 2007, compared to $1.2 million
for 2006. The increase in the provision in 2007 is due to increased net charge
offs, an increase in the level of non-accrual loans, loan growth during 2007,
and changes in the qualitative factors used in the overall assessment of
the
adequacy of the allowance for loan losses.
The
provision for loan losses in 2006 increased by $.1 million over 2005, due
primarily to an increase in the level of non-accrual loans, offset by a decrease
in net charge-offs as a percentage of average loans to .11% in 2006 from
.15% in
2005 and minimal loan growth in 2006.
Other
Operating Income
The
following table shows the major components of other operating income for
the
past three years (in thousands) and the percentage changes during these
years:
|
|
|
|
|
|
|
2007
VS. 2006
|
|
2006
VS. 2005
|
|
|||||||
|
|
|
2007
|
|
2006
|
|
2005
|
|
%
CHANGE
|
|
%
CHANGE
|
||||||
|
Service
charges on deposit accounts
|
$
|
4,955
|
$
|
4,630
|
$
|
4,260
|
7.0
|
%
|
8.7
|
%
|
||||||
|
Other
service charge income
|
1,994
|
1,637
|
1,203
|
21.8
|
%
|
36.1
|
%
|
|||||||||
|
Trust
department income
|
4,076
|
3,671
|
3,260
|
11.0
|
%
|
12.6
|
%
|
|||||||||
|
Insurance
commissions
|
2,529
|
1,573
|
1,599
|
60.8
|
%
|
(1.6
|
%)
|
|||||||||
|
Securities
(losses)/gains
|
(1,605
|
)
|
4
|
(125
|
)
|
*
|
*
|
|||||||||
|
Bank
owned life insurance (BOLI)
|
1,114
|
848
|
819
|
31.4
|
%
|
3.5
|
%
|
|||||||||
|
Gain
on prepayment of long term
borrowings
|
—
|
—
|
868
|
|||||||||||||
|
Brokerage
commissions
|
734
|
501
|
613
|
46.5
|
%
|
(18.3
|
%)
|
|||||||||
|
Other
income
|
1,295
|
1,177
|
1,591
|
10.0
|
%
|
(26.0
|
%)
|
|||||||||
|
Total
other operating income
|
$
|
15,092
|
$
|
14,041
|
$
|
14,088
|
7.5
|
%
|
(.33
|
%)
|
||||||
*
not
meaningful
As
the
table above illustrates, other operating income increased by $1.05 million
in
2007 when compared to 2006. This is compared to a $.05 million (.33%) decrease
in 2006 over 2005.
Service
charges on deposit accounts and other service charge income increased in
2007
versus 2006 and in 2006 versus 2005. These increases are due primarily to
increased customer usage of an account overdraft product. Service charge
related
income constitutes 46%, 45%, and 39% of other operating income in 2007, 2006,
and 2005, respectively.
Trust
department income is directly affected by the performance of the equity and
bond
markets and by the amount of assets under management. Trust income has increased
steadily during the past three years as a result of successful business
development efforts in this area, resulting in increases in the average market
value of assets under management in the trust department. Assets under
management were $547 million, $502 million and $468 million for years 2007,
2006
and 2005, respectively.
Insurance
commissions also increased in 2007 due to the acquisition of two books of
business during 2007 and an increase in the amount of contingency income
received in 2007. Contingency income is received from the insurance carriers
based upon claims histories and varies from year to year.
Securities
gains (losses) are the most variable component of other operating income.
During
2007, we recorded a non-recurring pre-tax charge of approximately $1.6 million
($1.0 million or $.18 per share, net of tax) associated with the transfer
of
certain investment securities from the available-for-sale category to the
trading category during the first quarter of 2007 and the subsequent sale
of
those securities during the second quarter. This sale of securities was part
of
our overall restructuring of the investment portfolio designed to improve
overall earnings from the portfolio.
Other
Operating Expense
Other
operating expense for 2007 increased $3.0 million (8%) over 2006, compared
to an
increase of $.8 million (2%) over 2005. The following
table
shows the major components of other operating expense for the past three
years
(in thousands) and the percentage changes during these years:
|
2007
VS. 2006
|
2006
VS. 2005
|
|||||||||||||||
|
2007
|
2006
|
2005
|
%
CHANGE
|
%
CHANGE
|
||||||||||||
|
Salaries
and employee benefits
|
$
|
20,628
|
$
|
19,084
|
$
|
18,428
|
8.1
|
%
|
3.6
|
%
|
||||||
|
Other
expenses
|
10,563
|
9,900
|
9,676
|
6.7
|
%
|
2.3
|
%
|
|||||||||
|
Equipment
|
3,224
|
3,011
|
3,067
|
7.1
|
%
|
(1.8
|
%)
|
|||||||||
|
Expenses
related to prepayment
of
long-term borrowings
|
—
|
—
|
437
|
—
|
—
|
|||||||||||
|
Occupancy
|
2,388
|
2,043
|
1,642
|
16.9
|
%
|
24.4
|
%
|
|||||||||
|
Data
processing
|
1,672
|
1,452
|
1,404
|
15.2
|
%
|
3.4
|
%
|
|||||||||
|
Total
other operating expense
|
$
|
38,475
|
$
|
35,490
|
$
|
34,654
|
8.4
|
%
|
2.4
|
%
|
||||||
Salaries
and employee benefits represent approximately 54% of total other operating
expenses in 2007 and 2006, compared to 53% in 2005. Salaries and wages increased
by $1.5 million in 2007
over
2006,
and $.7 million in 2006 over 2005. The increase in 2007 is attributable to
the
hiring of several market area presidents
to
strengthen our presence in key market areas, expansion of our branch network
and
normal merit increases.
Other
expenses increased slightly by $.7 million in 2007 when compared to 2006
due to
increases in marketing, insurance, and contribution expenses. We experienced
cost savings in 2006 associated with corporate restructurings that occurred
during 2005. Comparing 2006 to 2005, other expenses increased by $.2 million
due
to
reduced professional fees associated with various compliance costs in 2005,
such
as the Sarbanes-Oxley Act.
Expenses
related to early redemption of long-term borrowings consisted of $.4 million
in
early payment penalties in 2005.
Occupancy
and equipment expenses increased by $.6 million from 2006 to 2007 and $.3
million from 2005 to 2006. These increases relate to the growth and expansion
of
the Bank’s retail network and the opening of our operations center during
2007.
Applicable
Income Taxes
Income
tax expense amounted to $5.7 million in 2007 and 2006 and $6.5 million in
2005.
The
resulting
effective tax rates were 31.0%, 31.3% and 35.0% for 2007, 2006 and 2005,
respectively. The minor decrease in the effective tax rate from 2006 to 2007
is
due to the purchase of additional tax exempt municipal securities and earnings
from Bank Owned Life Insurance in 2007. The decrease in the effective tax
rate
for 2006 reflects the effects of management’s efforts during late 2005 and early
2006 to restructure the composition of the investment portfolio to include
more
tax exempt municipal securities.
CONSOLIDATED
BALANCE SHEET REVIEW
Overview
Our
total
assets reached $1.48 billion at December 31, 2007, representing an increase
of
$130 million (9.6%) from year-end 2006.
The
total
interest-earning asset mix at December 31, 2007 shows a comparable percentage
of
loans and investments as a percentage of total assets over the past three
years,
as illustrated below:
|
Year
End Percentage of Total Assets
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Net
loans
|
70
|
%
|
71
|
%
|
73
|
%
|
||||
|
Investments
|
21
|
%
|
20
|
%
|
18
|
%
|
||||
The
year-end total liability mix shows a steady reliance on deposits as a source
of
funding during the three year period and reduced reliance on borrowings,
as
illustrated below:
|
Year
End Percentage of Total Liabilities
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Total
deposits
|
80
|
%
|
78
|
%
|
78
|
%
|
||||
|
Total
borrowings
|
19
|
%
|
21
|
%
|
21
|
%
|
||||
Loan
Portfolio
Through
the Bank and the OakFirst Loan Centers, we are actively engaged in originating
loans to customers primarily in Garrett, Allegany, Washington, and Frederick
Counties in Maryland; Mineral, Hardy, Berkeley, Monongalia Counties in West
Virginia; and the surrounding regions of West Virginia and Pennsylvania.
We have
policies and procedures designed to mitigate credit risk and to maintain
the
quality of our loan portfolio. These policies include underwriting standards
for
new credits as well as continuous monitoring and reporting policies for asset
quality and the adequacy of the allowance for loan losses. These policies,
coupled with ongoing training efforts, have provided effective checks and
balances for the risk associated with the lending process. Lending authority
is
based on the type of the loan, and the experience of the lending
officer.
Commercial
loans are collateralized primarily by real estate, and to a lesser extent,
by
equipment and vehicles. Unsecured commercial loans represent an insignificant
portion of total commercial loans. Residential mortgage loans are collateralized
by the related property. Any residential mortgage loan exceeding
a
specified
internal
loan-to-value ratio requires private mortgage insurance. Installment loans
are
typically collateralized, with loan-to-value ratios which are established
based
on the financial condition of the borrower. We will also make unsecured consumer
loans to qualified borrowers meeting our underwriting standards. Additional
information about our loans and underwriting policies can be found in Item
1 of
Part I of this annual report under the caption “Banking Products and Services”.
Table
3
sets forth the
composition
of our
loan portfolio. Historically, our policy has been to make the majority of
our
loan commitments in our market areas. We had no foreign loans in our portfolio
as of December 31 for all of the periods presented.
Summary
of Loan Portfolio
(Dollars
in thousands)
Table
3
|
Loans
Outstanding as of December 31
|
||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||
|
Commercial
|
$
|
492,302
|
$
|
408,361
|
$
|
404,681
|
$
|
373,893
|
$
|
307,523
|
||||||
|
Real
Estate - Mortgage
|
384,420
|
359,601
|
337,559
|
319,033
|
264,730
|
|||||||||||
|
Consumer
Installment
|
153,593
|
181,574
|
193,275
|
199,862
|
201,419
|
|||||||||||
|
Real
Estate - Construction
|
12,951
|
14,120
|
25,446
|
18,196
|
16,093
|
|||||||||||
|
Lease
Financing
|
—
|
—
|
—
|
466
|
2,260
|
|||||||||||
|
Total
Loans
|
$
|
1,043,266
|
$
|
963,656
|
$
|
960,961
|
$
|
911,450
|
$
|
792,025
|
||||||
During
2007, gross loans increased by $80 million, or 8.3%, over 2006. This growth
was
focused in our commercial ($84 million) and residential mortgage ($25 million)
loan portfolios, offset by a decline in installment ($28 million) and
residential - construction ($1 million), and remains consistent with
management’s objectives over the past several years. Continued efforts were made
to increase the percentage of loans in the portfolio with adjustable interest
rates. At December 31, 2007, adjustable interest rate loans maturing within
one
to five years were 55% of total loans, compared to 53% at December 31,
2006.
Commercial
loans increased 20.6% in 2007, following a 1% increase in 2006. Origination
of
new commercial loans remained high in 2007, similar to 2006, as our lenders
continued to identify new customer opportunities, expand existing customer
relationships in all of our market areas, while maintaining existing standards
of credit worthiness. During 2007, we expanded our commercial loan
participations with other financial institutions and experienced a slow down
in
loan payback. Most new commercial loans were priced on a variable rate basis,
resetting monthly, which proved to be very popular with business borrowers.
Commercial loans secured by real estate were 81% of total commercial loans
at
the end of 2007, compared to 82% at the end of 2006 and 80% at the end of
2005.
Residential
mortgage loans increased by $25 million, or 7%, in 2007 when compared to
2006.
This follows a 7% increase in 2006 over 2005. This g
rowth
in
the residential mortgage portfolio in 2007 is attributable to a $25 million
mortgage loan purchase that was consummated at the end of April 2007. This
purchase was offset by a slight decline in the in-house portfolio, which
resulted from a flat interest rate yield curve and a consumer preference
for
locking in fixed-rate mortgage loans. The Bank primarily originates fixed-rate
loans for the secondary mortgage market.
Fixed-interest
rate loans made up 42% of the total loan portfolio at the end of 2007, compared
to 59% of total loans at the end of 2006 and 33% at the end of 2005.
Consumer
installment loans in 2007 decreased by $28 million, or 15.4%, when compared
to
2006. This decrease reflects management’s continued shift toward more commercial
loans with less emphasis on the highly competitive consumer loan market and
indirect car dealer loans. Specifically, less focus was placed on generating
new
indirect
auto loans during 2006 and 2005. Indirect auto loans comprise the largest
percentage of installment loans, 85% at the end of 2007, and 85% and 84%
at the
end of 2006 and 2005, respectively. The remaining lease financing portfolio
was
repaid in 2005 and we discontinued this line of business.
The
following
table
sets
forth the remaining maturities, based upon contractual dates, for selected
loan
categories as of December 31, 2007(in thousands):
Maturities
of Loan Portfolio at December 31, 2007
Table
4
|
Maturing
Within
One
Year
|
After
One
But
Within
Five
Years
|
Maturing
After
Five
Years
|
Total
|
||||||||||
|
Commercial
|
$
|
264,832
|
$
|
195,273
|
$
|
32,197
|
$
|
492,302
|
|||||
|
Real
Estate - Mortgage
|
86,758
|
131,039
|
166,623
|
384,420
|
|||||||||
|
Installment
|
9,005
|
15,014
|
129,574
|
153,593
|
|||||||||
|
Real
Estate - Construction
|
—
|
12,951
|
—
|
12,951
|
|||||||||
|
Total
Loans
|
$
|
360,595
|
$
|
354,277
|
$
|
328,394
|
$
|
1,043,266
|
|||||
|
Classified
by Sensitivity to Change in Interest Rates
|
|||||||||||||
|
Fixed-Interest
Rate Loans
|
$
|
46,762
|
$
|
97,649
|
$
|
298,385
|
$
|
442,796
|
|||||
|
Adjustable-Interest
Rate Loans
|
313,833
|
256,628
|
30,009
|
600,470
|
|||||||||
|
Total
Loans
|
$
|
360,595
|
$
|
354,277
|
$
|
328,394
|
$
|
1,043,266
|
|||||
It
is our
policy to place a loan on non-accrual status, except for consumer loans,
whenever there is substantial doubt about the ability of a borrower to pay
principal or interest on the outstanding credit. Management considers such
factors as payment history, the nature of the collateral securing the loan,
and
the overall economic situation of the borrower when making a non-accrual
decision. Management closely monitors the status of all non-accrual loans.
A
non-accruing loan is restored to accrual status when principal and interest
payments have been brought current, it becomes well secured, or is in the
process of collection and the prospects of future contractual payments are
no
longer in doubt. Generally, consumer installment loans are not placed on
non-accrual status, but are charged off after they are 120 days contractually
past due. Table 5 sets forth the historical amounts of non-accrual, past-due
and
restructured loans (in thousands) for the past five years:
Risk
Elements of Loan Portfolio
Table
5
|
At
December 31
|
||||||||||||||||
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
||||||||
|
Non-Accrual
Loans
|
$
|
5,443
|
$
|
3,190
|
$
|
2,393
|
$
|
3,439
|
$
|
2,774
|
||||||
|
Accruing
Loans Past Due 90 Days or More
|
3,260
|
619
|
989
|
1,105
|
1,236
|
|||||||||||
|
Restructured
Loans
|
0
|
522
|
532
|
544
|
554
|
|||||||||||
|
Other
Real Estate Owned
|
825
|
23
|
133
|
226
|
177
|
|||||||||||
Interest
income not recognized as a result of placing loans on a non-accrual status
was
$.2 million during 2007 and 2006 and $.05 million in 2005.
Allowance
for Loan Losses
An
allowance for loan losses is maintained to absorb losses from the loan
portfolio. The allowance for loan losses is based on management’s continuing
evaluation of the quality of the loan portfolio, assessment of current economic
conditions, diversification and size of the portfolio, adequacy of collateral,
past and anticipated loss experience, and the amount of non-performing
loans.
We
use
the methodology outlined in FDIC Statement of Policy on Allowance for Loan
Losses. The starting point for this methodology is to segregate the loan
portfolio into two pools, non-homogeneous (i.e., commercial) and homogeneous
(i.e., consumer and residential mortgage) loans. Each loan pool is analyzed
with
general allowances and specific allocations being made as appropriate. For
general allowances, the previous eight quarters of loss activity are used
in the
estimation of losses in the current portfolio. These historical loss amounts
are
modified by the following qualitative factors: levels of and trends in
delinquency rates and non-accrual loans; trends in volumes and terms of loans;
effects of changes in lending policies; experience, ability, and depth of
management; national and local economic trends and conditions; and
concentrations of credit in the determination of the general allowance. The
qualitative factors are updated each quarter by information obtained from
internal, regulatory, and governmental sources. Specific allocations of the
allowance for loan losses are made for those loans on the “Watchlist” in which
the collateral value is less than the outstanding loan balance with the
allocation being the dollar difference between the two. The Watchlist represents
loans, identified and closely monitored by management, which possess certain
qualities or characteristics that may lead to collection and loss issues.
Allocations are not made for loans that are cash secured, for the Small Business
Administration and Farm Service Agency guaranteed portion of loans, or for
loans
that are sufficiently collateralized.
The
allowance for loan losses is based on estimates, and actual losses will vary
from current estimates. These estimates are reviewed quarterly, and as
adjustments, either positive or negative, become necessary, a corresponding
increase or decrease is made in the allowance for loan losses. The methodology
used to determine the adequacy of the allowance for loan losses is consistent
with prior years. An estimate for probable losses related to unfunded lending
commitments, such as letters of credit and binding but unfunded loan commitments
is also prepared. This estimate is computed in a manner similar to the
methodology described above, adjusted for the probability of actually funding
the commitment.
The
balance of the allowance for loan losses increased to $7.3 million at December
31, 2007, from $6.5 million at December 31, 2006. Several factors contributed
to
the $.8 million increase in the balance of the allowance in 2007, including:
a
71% increase in the balance of non-accrual loans (from $3.2 million in 2006
to
$5.4 million in 2007); changes to the qualitative factors which are reviewed
quarterly; an increase in impaired loans from $.1 million in 2006 to $6.9
million in 2007; and an increase in the percentage of net charge-offs to
average
outstanding loans from .11% in 2006 to .15% in 2007. Non-accrual loans and
impaired loans consist primarily of real estate acquisition and development
loans that have experienced a slowdown in the level of sales activity during
the
current year. All of these types of credit facilities were thoroughly reviewed
by management during the fourth quarter of 2007 as to the adequacy of the
collateral, the valuation of collateral, and other credit quality attributes.
Collateral valuations were also subject to a sensitivity and shock analysis
in
order to identify loans that may not have sufficient collateral in the event
of
a significant decline in the market value of the collateral. As a result
of this
extensive review, some specific allocations of the allowance were made to
several A&D loans. At December 31, 2007, the balance of the allowance was
equal to .70% of total loans, which was five times the amount of net charge-offs
for the year.
Performing
loans considered potential problem loans, as defined and identified by
management, amounted to $5.4 million at December 31, 2007. Loans are identified
as potential problem loans when management has concerns regarding the borrowers'
ability to comply with the loan repayment terms, and when the loan is classified
as substandard and is one or two payments past due. Management believes that
most of these loans have sufficient collateral and do not present a significant
risk of loss.
During
2007 there was significant coverage in the media regarding the topic of
“sub-prime” loans and the resulting increase in loan delinquencies and
foreclosures. A sub-prime loan is defined generally as loan to a borrower
with a
weak credit record or a reduced repayment capacity. These borrowers typically
pose a higher risk of default and foreclosure. We generally do not make
sub-prime loans. If credit is extended to a sub-prime borrower, the decision
to
lend is based on the presence of facts and circumstances that management
believes mitigate the risks inherent in this type of loan. As of December
31,
2007, management believes that our exposure to sub-prime loans is very
minimal.
The
balance of the allowance for loan losses increased to $6.5 million at December
31, 2006, from $6.4 million at December 31, 2005. Several factors contributed
to
the $.1 million increase in the balance of the allowance in 2006, including:
a
33% increase in the balance of non-accrual loans (from $2.4 million in 2005
to
$3.2 million in 2006); changes to the qualitative factors which are reviewed
quarterly; a decrease in impaired loans from $.2 million in 2005 to $.1 million
in 2006; and a decrease in the percentage of net charge-offs to average
outstanding loans from .15% in 2005 to .11% in 2006, due to a decline in
the
amount of commercial and installment loan charge-offs during 2006. At December
31, 2006, the balance of the allowance was equal to .68% of total loans,
which
was six times the amount of net charge-offs for the year.
As
a
result of management’s evaluation of the loan portfolio using the factors and
methodology described above, management believes the allowance for loan losses
is adequate as of December 31, 2007.
Table
6
presents the activity in the allowance for loan losses by major loan
category
for the past five years.
A
nalysis
of Activity in the Allowance for Loan Losses
(Dollars
in thousands)
Table
6
|
For
the Years Ended December 31
|
||||||||||||||||
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
||||||||
|
Balance
at Beginning of Period
|
$
|
6,530
|
$
|
6,416
|
$
|
6,814
|
$
|
5,974
|
$
|
6,068
|
||||||
|
Loans
Charged Off:
|
||||||||||||||||
|
Commercial
|
540
|
359
|
557
|
808
|
17
|
|||||||||||
|
Real
Estate - Mortgage
|
103
|
89
|
162
|
153
|
147
|
|||||||||||
|
Installment
|
1,171
|
1,127
|
1,171
|
1,244
|
1,556
|
|||||||||||
|
Deposit
Overdrafts
|
408
|
—
|
—
|
—
|
—
|
|||||||||||
|
|
|
|
|
|||||||||||||
|
Total
Charged Off
|
2,222
|
1,575
|
1,890
|
2,205
|
1,720
|
|||||||||||
|
Recoveries
of Loans:
|
||||||||||||||||
|
Commercial
|
45
|
110
|
8
|
22
|
50
|
|||||||||||
|
Real
Estate - Mortgage
|
17
|
11
|
59
|
67
|
17
|
|||||||||||
|
Installment
|
380
|
403
|
347
|
422
|
425
|
|||||||||||
|
Deposit
Overdrafts
|
242
|
—
|
—
|
—
|
—
|
|||||||||||
|
Total
Recoveries
|
684
|
524
|
414
|
511
|
492
|
|||||||||||
|
|
|
|
|
|
||||||||||||
|
Net
Loans Charged Off
|
1,538
|
1,051
|
1,476
|
1,694
|
1,228
|
|||||||||||
|
Provision
for Loan Losses
|
2,312
|
1,165
|
1,078
|
2,534
|
833
|
|||||||||||
|
Huntington
Branch Acquisition
|
||||||||||||||||
|
Loan
Loss Reserve
|
—
|
—
|
—
|
—
|
301
|
|||||||||||
|
Balance
at the End of Period
|
$
|
7,304
|
$
|
6,530
|
$
|
6,416
|
$
|
6,814
|
$
|
5,974
|
||||||
|
Loans
at End of Period
|
$
|
1,043,266
|
$
|
963,656
|
$
|
960,961
|
$
|
911,450
|
$
|
792,025
|
||||||
|
Daily
Average Balance of
Loans
|
$
|
1,003,854
|
$
|
957,709
|
$
|
954,784
|
$
|
861,255
|
$
|
727,532
|
||||||
|
Allowance
for Loan Losses to Loans
Outstanding
|
.70
|
%
|
.68
|
%
|
.67
|
%
|
.75
|
%
|
.75
|
%
|
||||||
|
Net
Charge Offs to Average Loans
Outstanding
|
.15
|
%
|
.11
|
%
|
.15
|
%
|
.20
|
%
|
.17
|
%
|
||||||
Table
7
presents management’s allocation of the allowance for loan losses by major loan
category in comparison to that loan category’s percentage of total
loans.
Changes in the allocation over time reflect changes in the composition of
the
loan portfolio risk profile and refinements to the methodology of determining
the allowance. Specific allocations in any particular category may be
reallocated in the future as needed to reflect current conditions.
Accordingly,
the entire allowance is considered available to absorb losses in any
category.
Allocation
of the Allowance for Loan Losses
(In
thousands at December 31)
Table
7
|
2007
|
|
%
of Total Loans
|
|
2006
|
|
%
of Total Loans
|
|
2005
|
|
%
of Total Loans
|
|
2004
|
|
%
of Total Loans
|
|
2003
|
|
%
of Total Loans
|
|||||||||||||
|
Commercial
|
$
|
3,825
|
47
|
%
|
$
|
2,983
|
42
|
%
|
$
|
2,777
|
42
|
%
|
$
|
3,050
|
41
|
%
|
$
|
2,166
|
39
|
%
|
|||||||||||
|
Real
Estate-Mortgage
|
1,716
|
38
|
%
|
1,512
|
39
|
%
|
1,504
|
38
|
%
|
1,454
|
37
|
%
|
1,247
|
35
|
%
|
||||||||||||||||
|
Consumer
Installment
|
1,763
|
15
|
%
|
1,934
|
19
|
%
|
2,060
|
20
|
%
|
2,246
|
22
|
%
|
2,462
|
26
|
%
|
||||||||||||||||
|
Lease
Financing
|
—
|
—
|
—
|
—
|
—
|
—
|
15
|
—
|
52
|
—
|
|||||||||||||||||||||
|
Other
|
0
|
—
|
101
|
—
|
75
|
—
|
49
|
—
|
47
|
—
|
|||||||||||||||||||||
|
Total
|
$
|
7,304
|
100
|
%
|
$
|
6,530
|
100
|
%
|
$
|
6,416
|
100
|
%
|
$
|
6,814
|
100
|
%
|
$
|
5,974
|
100
|
%
|
|||||||||||
Investment
Securities
In
an
April 13, 2007 press release, we announced our decision to early adopt Statement
of Financial Accounting Standards No. 159 “The Fair Value Option for Financial
Assets and Liabilities” (“SFAS No.159”) and Statement of Financial Accounting
Standards No. 157 “Fair Value Measurement” (“SFAS No. 157”), and presented
financial information related to an associated restructuring of our investment
portfolio. The decision to early adopt fair value accounting was based on
what
we believed to be an appropriate interpretation of SFAS No. 159 at that time
after consulting with our independent registered public accounting firm.
The
decision to early adopt was also influenced by our decision to substantially
change the economic position of our investment portfolio by shifting the
anticipated cash flow of the investment portfolio (from maturing securities,
amortizing securities and securities subject to call) from the short-term
period
of nine months to three years into the intermediate term of three to eight
years. After that press release was issued, informal guidance emerged that
created uncertainty as to the proper interpretation and implementation of
these
accounting standards, which caused us to re-evaluate our initial intent to
early
adopt them. As a result of our re-evaluation, and after considering the totality
of the circumstances at that time, we decided to rescind our initial early
adoption of SFAS No. 159 and SFAS No. 157. We nevertheless believe that our
investment portfolio restructuring will provide long-term benefits to
shareholders.
The
restructuring referred to above enabled us to improve our investment portfolio
by replacing certain securities with securities having a longer duration.
This
was accomplished in the first quarter of 2007 through the transfer of
available-for-sale securities with a carrying value of $76.9 million at the
beginning of the quarter to trading securities with the anticipation of selling
the securities and replacing them with higher yielding investments. We
determined that the securities earmarked for sale would, if retained, have
subjected our earnings to higher volatility in a declining interest rate
environment. As a result of transferring these securities to the trading
category and our decision to rescind SFAS No. 159 and SFAS No. 157, we
recognized a pre-tax loss of approximately $1.5 million in earnings for the
first quarter of 2007. On April 11, 2007, we sold $73 million of the securities
held in trading at March 31, 2007 recognizing an additional loss of $.1 million.
As anticipated, these losses have been partially offset by the increase in
investment income that we have recognized from the restructuring. The securities
sold had an average book yield of 4.28%. The proceeds from the sale of these
securities were reinvested in securities having an average book yield of
approximately 5.55%. The securities purchased included government agency
bonds
with a longer duration than those sold as well as tax-free municipal bonds.
The
longer duration bonds were purchased at a discount and better position the
Corporation in a declining interest rate environment by protecting against
premium and reinvestment risk. The municipal bonds assist in lowering our
effective tax rate. During the past few years, we have undertaken several
strategies to reduce the risk of future investment cash flow being reinvested
in
a lower interest rate environment. The restructuring of our investment portfolio
enabled us to rebalance the portfolio and restructure the maturity schedule
of
the portfolio to mitigate the effects of premium and call risk and to manage
our
future interest rate risk and effective tax yield. We expect the restructuring
to result in an on-going stream of higher interest income for shareholders
and
to have a positive impact on our net interest margin.
Our
entire security portfolio is categorized as available-for-sale. Investment
securities classified as available-for-sale are
held
for
an indefinite period of time and may be sold in response to changing market
and
interest rate conditions or for liquidity purposes as part of our overall
asset/liability management strategy. Available-for-sale securities are reported
at market value, with unrealized gains and losses excluded from earnings
and
reported as a separate component of other comprehensive income included in
shareholders’ equity, net of applicable income taxes. We do not currently
purchase securities with the intent to resell and, therefore, do not own
any
securities classified as trading securities. For additional information,
see
Notes 1 and 3 of the Notes to Consolidated Financial Statements, which are
included in Item 8 of Part II of this annual report.
The
following sets forth the composition of our securities portfolio by major
category as of the indicated dates (in thousands):
December
31
(fair
value)
|
2007
|
As
% of Total
|
2006
|
As
% of Total
|
2005
|
As
% of Total
|
||||||||||||||
|
Securities
Available-for-Sale:
|
|||||||||||||||||||
|
U.S.
government and agencies
|
$
|
90,768
|
30
|
%
|
$
|
97,490
|
37
|
%
|
$
|
107,019
|
47
|
%
|
|||||||
|
Mortgage-backed
securities
|
60,939
|
20
|
%
|
50,829
|
19
|
%
|
63,938
|
28
|
%
|
||||||||||
|
Obligation
of states and political
subdivisions
|
85,893
|
28
|
%
|
68,432
|
26
|
%
|
57,661
|
25
|
%
|
||||||||||
|
Corporate
and other debt
|
67,308
|
22
|
%
|
46,521
|
18
|
%
|
1,077
|
—
|
|||||||||||
|
Other
securities
|
—
|
—
|
—
|
—
|
400
|
—
|
|||||||||||||
|
Total
|
$
|
304,908
|
100
|
%
|
$
|
263,272
|
100
|
%
|
$
|
230,095
|
100
|
%
|
|||||||
Total
investment securities increased $42 million (16%) in 2007 when compared to
the
2006 year-end balance. The increase in our investment portfolio since year-end
2006 is primarily due to the purchase of $25 million in corporate bonds during
the first quarter of 2007 as part of a leverage strategy originally implemented
during the fourth quarter of 2006 and the purchase of additional securities
in
September 2007. Mortgage-backed securities increased by $10 million and tax
exempt municipal bonds increased by $17 million while U.S. Government agencies
decreased $7 million.
Total
investment securities increased $33 million (14%) in 2006 when compared to
the
year-end balance in 2005. This increase is attributable to an investment
leverage strategy utilized during 2006. The Bank purchased $45 million of
investment grade corporate bonds with a quarterly adjustable rate and funded
this purchase with three month brokered certificates of deposit. U.S. Government
agencies decreased $10 million and tax exempt municipal bonds increased by
$11
million while mortgage-backed securities declined by $13 million due to
maturities and repayments.
At
December 31, 2007, the securities available-for-sale balance included a net
unrealized loss of $4.2 million, which represents the difference between
fair
value and amortized cost. The comparable amount at December 31, 2006 was
a net
unrealized loss of $1.2 million. The fair values of securities
available-for-sale will generally decrease whenever interest rates increase,
and
the fair values will typically increase in a declining rate environment.
Securities
available-for-sale are reviewed for possible other-than-temporary impairment
on
a quarterly basis. During this review, management considers the severity
and
duration of the unrealized losses as well as its intent and ability to hold
the
securities until recovery, taking into account balance sheet management
strategies and its market view and outlook. Management also assesses the
nature
of the unrealized losses taking into consideration factors such as changes
in
the general level of interest rates, creditworthiness of the issuer or any
credit enhancement providers, and the quality of the underlying collateral.
Management also reviewed mortgage-backed securities with unrealized losses
for
other-than-temporary impairment. All the issuers of the mortgage-backed
securities in our portfolio are of investment grade quality. Additional analysis
was performed on the investment portfolio during the fourth quarter of 2007
due
to recent economic weaknesses, particularly in the financial
sector.
Management
does not believe that an unrealized loss on any individual security as of
December 31, 2007 represents an other-than-temporary impairment. We have
both
the intent and ability to hold the securities available-for-sale presented
in
the preceding table for the period of time necessary to recover their amortized
cost or until maturity.
During
2007, there was significant media attention regarding “sub-prime” mortgage
investments. “Sub-prime” mortgages with similar characteristics can be packaged
together and sold as investments. We believe that we do not have significant
exposure to these types of securities.
We
manage
our investment portfolios utilizing policies which seek to achieve desired
levels of liquidity, manage interest rate sensitivity, meet earnings objectives,
and provide required collateral support for deposit activities and treasury
management overnight investment products. Excluding the U.S. Government
sponsored agencies; we had no concentration of investment securities from
any
single issue that exceeded 10% of shareholders’ equity.
Table
8
sets forth the contractual or estimated maturities of the components of our
securities portfolio as of December 31, 2007 and the weighted average yields
on
a tax-equivalent basis.
Investment
Security Maturities, Yields, and Fair Values at December 31,
2007
(Dollars
in thousands)
Table
8
|
Within
1
Year
|
1
Year
Thru
5
Years
|
5
Years
Thru
10 Years
|
Over
10
Years
|
Total
Fair
Value
|
||||||||||||
|
Securities
Available-for-Sale:
|
||||||||||||||||
|
U.S.
government and agencies
|
$
|
—
|
$
|
35,360
|
$
|
38,149
|
$
|
17,259
|
$
|
90,768
|
||||||
|
Mortgage-backed
securities
|
13
|
19,377
|
38,298
|
3,251
|
60,939
|
|||||||||||
|
Obligations
of states and political
subdivisions
|
1,340
|
6,549
|
9,832
|
68,172
|
85,893
|
|||||||||||
|
Corporate
and other debt
|
—
|
—
|
—
|
67,308
|
67,308
|
|||||||||||
|
Total
|
$
|
1,353
|
$
|
61,286
|
$
|
86,279
|
$
|
155,990
|
$
|
304,908
|
||||||
|
Percentage
of total
|
.44
|
%
|
20.10
|
%
|
28.30
|
%
|
51.16
|
%
|
100.00
|
%
|
||||||
|
Weighted
average yield*
|
8.66
|
%
|
5.76
|
%
|
5.69
|
%
|
6.66
|
%
|
6.21
|
%
|
||||||
*
Refer
to notes on Table 1
Deposits
Table
9
sets forth the average deposit balances by major category for 2007, 2006
and
2005:
Average
Deposit Balances
(Dollars
in thousands)
Table
9
|
2007
|
2006
|
2005
|
|||||||||||||||||
|
Average
Balance
|
Avg.
Yield
|
Average
Balance
|
Avg.
Yield
|
Average
Balance
|
Avg.
Yield
|
||||||||||||||
|
Non-interest-bearing
demand
deposits
|
$
|
133,509
|
—
|
$
|
107,595
|
—
|
$
|
112,860
|
—
|
||||||||||
|
Interest-bearing
demand
deposits
|
321,723
|
2.90
|
%
|
285,250
|
2.25
|
%
|
293,129
|
1.67
|
%
|
||||||||||
|
Savings
deposits
|
42,123
|
3.43
|
%
|
47,779
|
.97
|
%
|
58,964
|
.41
|
%
|
||||||||||
|
Time
deposits less than $100K
|
234,439
|
4.45
|
%
|
229,829
|
3.67
|
%
|
264,503
|
2.28
|
%
|
||||||||||
|
Time
deposits $100K or more
|
317,219
|
5.09
|
%
|
273,305
|
4.41
|
%
|
187,412
|
4.24
|
%
|
||||||||||
|
Total
|
$
|
1,049,013
|
$
|
943,758
|
$
|
916,868
|
|||||||||||||
Total
deposits increased $121.4 million in 2007, or 12.5%, when compared to 2006.
This
compares to a $15.5 million (2%) increase during 2006 over 2005. On an average
balance basis, total deposits increased $105 million (11%) in 2007 versus
2006,
following a $27 million (3%) increase in 2006 versus 2005.
The
increase in deposits resulted primarily from the successful retail growth
in
money market products, public funds and the purchase of $85 million in brokered
money market funds. The Bank also chose to allow high-priced, volatile customer
deposits to decline in order to allocate these resources to customers with
full
banking relationships.
The
increase in deposits in 2006 resulted primarily from the Bank’s utilization of
brokered certificates of deposits to fund the purchase of corporate bonds
combined with the successful promotion of a 9-month certificate of deposit
offered during most of 2006. The increases were offset by the decline in
non-interest bearing and interest bearing demand deposits and savings accounts.
At December 31, 2007 and 2006, brokered certificates of deposit amounted
to
$120.8 million and $178.0 million, respectively, or 11% and 18% of total
deposits at December 31, 2007 and 2006 respectively.
The
following table sets forth the maturities of time deposits of $100,000 or
more
(in thousands):
Maturity
of Time Deposits of $100,000 or More
(Dollars
in thousands)
Table
10
|
December
31,
2007
|
||||
|
Maturities
|
||||
|
3
Months or Less
|
$
|
173,443
|
||
|
3-6
Months
|
44,127
|
|||
|
6-12
Months
|
60,809
|
|||
|
Over
1 Year
|
21,225
|
|||
|
Total
|
$
|
299,604
|
||
The
Bank
has opted to maintain relatively short maturities in its time deposits of
$100,000 or more in anticipation of stable or lower interest rates in the
future.
Borrowed
Funds
The
following shows the composition of our borrowings at December 31 (in
thousands):
|
2007
|
2006
|
2005
|
||||||||
|
Securities
sold under agreements to repurchase
|
$
|
67,924
|
$
|
74,879
|
$
|
90,939
|
||||
|
Short-term
FHLB advances
|
21,000
|
24,500
|
31,000
|
|||||||
|
Total
short-term borrowings
|
88,924
|
99,379
|
121,939
|
|||||||
|
Long-term
FHLB advances
|
142,522
|
130,401
|
92,444
|
|||||||
|
Junior
subordinated debentures
|
35,929
|
35,929
|
35,929
|
|||||||
|
Total
long-term borrowings
|
178,451
|
166,330
|
128,373
|
|||||||
|
Total
borrowings
|
$
|
267,375
|
$
|
265,709
|
$
|
250,312
|
||||
|
Average
balance (from Table 1)
|
$
|
255,402
|
$
|
260,519
|
$
|
260,349
|
||||
Total
borrowings increased slightly ($1.7 million or .6%) in 2007 when compared
to
2006, while the average balance of borrowings decreased by $5.1 million during
the same period. During 2007, the Corporation took advantage of opportunities
to
borrow long-term FHLB advances and match these borrowings with specific interest
earning assets where possible.
Total
borrowings increased $15 million (6%) in 2006 when compared to 2005. Securities
sold under agreements to repurchase declined by $16 million during 2006.
These
borrowings consist of overnight sweep accounts for our business customers
and
municipalities. Growth of $14 million in this area was offset by the loss
of $30
million from a local County government. During 2006, the Bank took advantage
of
replacing short-term money with more attractive long-term advances offered
by
the Federal Home Loan Bank of Atlanta.
Management
will continue to closely monitor interest rates within the context of its
overall asset-liability management process. See the “Interest Rate Sensitivity”
section of this Item 7 for further discussion on this topic.
At
December 31, 2007, we had additional borrowing capacity with the FHLB totaling
$24.0 million and an additional $25 million of unused lines of credit with
various financial institutions. See Note 8 to Consolidated Financial Statements,
included in Item 8 of Part II of this annual report, for further details
about
our borrowings and additional borrowing capacity, which is incorporated herein
by reference.
Capital
Resources
The
Bank
and the Corporation are subject to risk-based capital regulations, which
were
adopted and monitored by federal banking regulators. These guidelines are
used
to evaluate capital adequacy and are based on an institution’s asset risk
profile and off-balance sheet exposures, such as unused loan commitments
and
stand-by letters of credit. The regulatory guidelines require that a portion
of
total capital be Tier I capital, consisting of common shareholders’ equity,
qualifying portion of trust issued preferred securities, and perpetual preferred
stock, less goodwill and certain other deductions. The remaining capital,
or
Tier II capital, consists of elements such as subordinated debt, mandatory
convertible debt, remaining portion of trust issued preferred securities,
and
grandfathered senior debt, plus the allowance for loan losses, subject to
certain limitations.
Under
the
risk-based capital regulations, banking organizations are required to maintain
a
minimum 8% (10% for well capitalized banks) total risk-based capital ratio
(total qualifying capital divided by risk-weighted assets), including a Tier
I
ratio of 4% (6% for well capitalized banks). The risk-based capital rules
have
been further supplemented by a leverage ratio, defined as Tier I capital
divided
by average assets, after certain adjustments. The minimum leverage ratio
is 3%
(5% for well capitalized banks) for banking organizations that do not anticipate
significant growth and have well-diversified risk (including no undue interest
rate risk exposure), excellent asset quality, high liquidity and good earnings.
Other banking organizations not in this category are expected to have ratios
of
at least 4-5%, depending on their particular condition and growth plans.
Higher
capital ratios could be required if warranted by the particular circumstances
or
risk profile of a given banking organization. In the current regulatory
environment, banking organizations must stay well capitalized in order to
receive favorable regulatory treatment on acquisition and other expansion
activities and favorable risk-based deposit insurance assessments. The
Corporation’s capital policy establishes guidelines meeting these regulatory
requirements, and takes into consideration current or anticipated risks as
well
as potential future growth opportunities.
At
December 31, 2007, the Corporation’s total risk-based capital ratio was 12.51%,
which was well above the regulatory minimum of 8%. The Corporation’s total
risk-based capital ratio for year-end 2006 was 12.95%. As of December 31,
2007,
the most recent notification from the regulators categorizes the Corporation
as
“well capitalized” under the regulatory framework for prompt corrective action.
See Note 2 to Consolidated Financial Statements, included in Item 8 of Part
II
of this annual report, for additional information regarding regulatory capital
ratios.
Total
shareholders’ equity increased $7.8 million to $104.7 million at December 31,
2007, from $96.9 million at December 31, 2006. The return on average equity
(ROE) for 2007 decreased to 12.70% from 13.07% for 2006. The combination
of net
income growth of only 2% and higher capital growth of 8% contributed to the
decline in ROE. The recognition of $1.6 million in security losses during
the
first quarter of 2007 negatively impacted these ratios.
Cash
dividends of $.78 per share were paid during 2007, compared with $.76 and
$.74
paid in 2006 and 2005, respectively. This represents a dividend payout ratio
(cash dividends per share divided by net income per share) of 37.50%, 37.07%,
and 37.44% for 2007, 2006, and 2005, respectively.
Liquidity
The
Asset
and Liability Management Committee of the Corporation seeks to assess and
manage
the risks associated with fluctuating interest rates while maintaining adequate
liquidity. This is accomplished by formulating and implementing policies
that
take into account the sources and uses of funds, maturity and repricing
distributions of assets and liabilities, pricing strategies, and marketability
of assets.
The
objective of liquidity management is to maintain sufficient funds to satisfy
the
needs of depositors and borrowers. The principal sources of asset liquidity
are
cash and due from banks, interest-bearing deposits in banks, federal funds
and
investment securities available-for-sale that are not pledged. At December
31,
2007, such liquid assets totaled $162 million. While much more difficult
to
quantify, liability liquidity is enhanced by a stable core deposit base,
access
to credit lines at other financial institutions, and the Corporation’s ability
to renew maturing deposits. The Corporation’s ability to attract deposits and
borrow funds depends primarily on continued rate competitiveness, profitability,
capitalization and overall financial condition.
When
appropriate, we take advantage of external sources of funds, such as advances
from the FHLB, lines of credit at other financial institutions and brokered
funds. These external sources often provide attractive interest rates and
flexible maturity dates that better enable us to match funding dates and
pricing
characteristics with contractual maturity dates and pricing parameters of
earning assets. At December 31, 2007, our available borrowing capacity through
the FHLB and other financial institutions was approximately $49
million.
We
actively manage our liquidity position under the direction of the Asset and
Liability Management Committee of the Corporation’s Board of Directors. Monthly
reviews by management and quarterly reviews by this Committee under prescribed
policies and procedures are intended to ensure that we will maintain adequate
levels of available funds. Management believes that we have adequate liquidity
available to respond to current and anticipated liquidity demands, which
include
future branch expansion and implementation of a new core processor. Management
anticipates opening additional branches or expanding current facilities in
its
existing market footprint annually or bi-annually for the next several
years.
At
the
holding company level, the Corporation uses cash to pay dividends to
shareholders and to service its junior subordinated debt. The main sources
of
funding for the holding company include dividends from the Bank and access
to
the capital markets. As discussed in Note 12 of the Notes to Consolidated
Financial Statements, included in Item 8 of Part II of this annual report,
the
Bank is subject to significant regulation and, among other things, may be
limited in its ability to pay dividends or transfer funds to the holding
company. Accordingly, consolidated cash flows as presented in the Consolidated
Statements of Cash Flows may not represent cash immediately available to
the
holding company. During 2007, the Bank declared and paid dividends of $6.0
million. As of December 31, 2007, the amount of additional dividends that
the
Bank could have paid to the Corporation without regulatory approval was $13.9
million.
Interest
Rate Sensitivity
Our
primary market risk is interest rate fluctuation. Interest rate risk results
primarily from the traditional banking activities that we engage in, such
as
gathering deposits and extending loans. Many factors, including economic
and
financial conditions, movements in interest rates and consumer preferences
affect the difference between the interest earned on our assets and the interest
paid on our liabilities. Interest rate sensitivity refers to the degree that
earnings will be impacted by changes in the prevailing level of interest
rates.
Interest rate risk arises from mismatches in the repricing or maturity
characteristics between interest-bearing assets and liabilities. Management
seeks to minimize fluctuating net interest margins, and to enhance consistent
growth of net interest income through periods of changing interest rates.
Management uses interest sensitivity gap analysis and simulation models to
measure and manage these risks. The interest rate sensitivity gap analysis
assigns each interest-earning asset and interest-bearing liability to a time
frame reflecting its next repricing or maturity date. The differences between
total interest-sensitive assets and liabilities at each time interval represent
the “interest sensitivity gap” for that interval. A positive gap generally
indicates that rising interest rates during a given interval will increase
net
interest income, as more assets than liabilities will reprice. A negative
gap
position would benefit us during a period of declining interest
rates.
In
order
to manage interest sensitivity risk, management formulates guidelines regarding
asset generation and pricing, funding sources and pricing, and off-balance
sheet
commitments. These guidelines are based on management’s outlook regarding future
interest rate movements, the state of the regional and national economy,
and
other financial and business risk factors. Management uses computer simulations
to measure the effect on net interest income of various interest rate scenarios.
Key assumptions used in the computer simulations include cash flows and
maturities of interest rate sensitive assets and liabilities, changes in
asset
volumes and pricing, and management’s capital plans. This modeling reflects
interest rate changes and the related impact on net interest income over
specified periods. Management has not historically used derivative financial
instruments to manage its interest rate sensitivity. At December 31, 2007,
the
static gap analysis prepared by management indicated that we remain liability
sensitive over the next year. In computing the effect on net interest income
of
changes in interest rates, management has assumed that any changes would
immediately affect earnings. Normally, when an organization is liability
sensitive there is a negative impact to net interest income when interest
rates
increase. Based on the simulation analysis performed at December 31, 2007
and
2006, management estimated the following changes in net interest income,
assuming the indicated rate changes:
(Dollars
in thousands)
|
2007
|
2006
|
||||||
|
+200
basis point increase
|
$
|
(3,337
|
)
|
$
|
(3,658
|
)
|
|
|
+100
basis point increase
|
$
|
(1,693
|
)
|
$
|
(1,612
|
)
|
|
|
-100
basis point decrease
|
$
|
640
|
$
|
663
|
|||
This
estimate is based on assumptions that may be affected by unforeseeable changes
in the general interest rate environment and any number of unforeseeable
factors. Rates on different assets and liabilities within a single maturity
category adjust to changes in interest rates to varying degrees and over
varying
periods of time. The relationships between lending rates and rates paid on
purchased funds are not constant over time. Management can respond to current
or
anticipated market conditions by lengthening or shortening the Corporation’s
sensitivity through loan repricings or changing its funding mix. The rate
of
growth in interest-free sources of funds will influence the level of
interest-sensitive funding sources. In addition, the absolute level of interest
rates will affect the volume of earning assets and funding sources. As a
result
of these limitations, the interest-sensitive gap is only one factor to be
considered in estimating the net interest margin.
Impact
of Inflation
- Our
assets and liabilities are primarily monetary in nature, and as such, future
changes in prices do not affect the obligations to pay or receive fixed and
determinable amounts of money. During inflationary periods, monetary assets
lose
value in terms of purchasing power and monetary liabilities have corresponding
purchasing power gains. The concept of purchasing power is not an adequate
indicator of the impact of inflation on financial institutions because it
does
not incorporate changes in interest rates, which are an important determination
of the Corporation’s earnings.
Contractual
Obligations, Commitments and Off-Balance Sheet
Arrangements
The
following table presents, as of December 31, 2007, significant fixed and
determinable contractual obligations to third parties by payment date and
amounts and expected maturities of significant commitments. Commitments to
extend credit and letters of credit are legally binding, conditional agreements
generally having fixed expiration or termination dates. These commitments
generally require customers to maintain certain credit standards and are
established based on management’s credit assessment of the customer. The
commitments may expire without being drawn upon. Therefore, the total commitment
does not necessarily represent future funding requirements. Further discussion
of the nature of certain obligations and commitments is included in the Notes
to
the Consolidated Financial Statements referenced in the table below, which
are
included in Item 8 of Part II of this annual report.
|
Payments
Due by Period
|
|||||||||||||||||||
|
Contractual
Obligations
(in
millions)
|
Note
Reference
|
Total
|
Less
than
1
Year
|
1-3
Years
|
3-5
Years
|
More
than
5
Years
|
|||||||||||||
|
Long
term debt
|
8
|
||||||||||||||||||
|
FHLB
Advances
|
$
|
142.5
|
$
|
1.0
|
$
|
45.0
|
$
|
95.25
|
$
|
1.25
|
|||||||||
|
Junior
subordinated debt
|
35.9
|
—
|
—
|
—
|
35.9
|
||||||||||||||
|
Operating
leases
|
5
|
2.2
|
.4
|
1.0
|
.8
|
—
|
|||||||||||||
|
Data
processing and telecommunications services
|
5
|
4.7
|
1.6
|
1.9
|
1.2
|
—
|
|||||||||||||
|
Time
Deposits
|
7
|
524.2
|
447.1
|
72.5
|
4.0
|
.6
|
|||||||||||||
|
Pension/SERP
|
11
|
11.6
|
.6
|
1.3
|
1.9
|
7.8
|
|||||||||||||
|
Commitment
Expiration by Period
|
|||||||||||||||||||
|
Commitments
(in
millions)
|
Note
Reference
|
Total
|
Less
than
1
Year
|
1-3
Years
|
3-5
Years
|
More
than
5
Years
|
|||||||||||||
|
Loan
commitments
|
4
|
$
|
143.8
|
$
|
8.6
|
$
|
4.4
|
$
|
3.2
|
$
|
127.6
|
||||||||
|
Letters
of credit
|
4
|
7.5
|
7.5
|
—
|
—
|
—
|
|||||||||||||
ITEM
7A.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The
information
called
for by this item is incorporated herein by reference to Item 7 of Part II
of
this annual report under the caption “Interest Rate
Sensitivity”.
Item
8.
Financial
Statements and Supplementary Data
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Shareholders
First
United Corporation
Oakland,
Maryland
We
have
audited the accompanying consolidated statements of financial condition of
First
United Corporation and subsidiaries (“Corporation”) as of December 31, 2007 and
2006, and the related consolidated statements of income, changes in
shareholders’ equity, and cash flows for the years then ended. The Corporation’s
management is responsible for these financial statements. Our responsibility
is
to express an opinion on these consolidated financial statements based on our
audits. The consolidated financial statements of First United Corporation for
the year ended December 31, 2005 were audited by other auditors, whose
report dated March 9, 2006, expressed an unqualified opinion on those
statements.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the 2007 and 2006 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of
First United Corporation and its subsidiaries as of December 31, 2007 and
2006, and the consolidated results of their operations and their cash flows
for
the years then ended, in conformity with accounting principles generally
accepted in the United States of America.
As
discussed in Note 1 to the consolidated financial statements, the Corporation
changed its method of accounting for its defined benefit pension plan in
2006.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), First United Corporation’s internal control
over financial reporting as of December 31, 2007, based on criteria
established in
Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated March 5, 2008, expressed an unqualified
opinion.
| /s/ Beard Miller Company LLP |
Beard
Miller Company LLP
Baltimore,
Maryland
March
5,
2008
Report
of Independent Registered Public Accounting Firm
The
Shareholders and Board of Directors
First
United Corporation
We
have
audited the accompanying consolidated statements of income, changes in
shareholders’ equity, and cash flows of First United Corporation and
subsidiaries (the Company) for the year ended December 31, 2005. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based
on
our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated results of operations and cash flows of
First United Corporation and subsidiaries for the year ended December 31, 2005,
in conformity with U.S. generally accepted accounting principles.
/s/
Ernst
& Young LLP
Pittsburgh,
Pennsylvania
March
9,
2006
First
United Corporation and Subsidiaries
Consolidated
Statements of Financial Condition
(In
thousands, except per share amounts)
|
December
31
|
|||||||
|
2007
|
2006
|
||||||
|
Assets
|
|||||||
|
Cash
and due from banks
|
$
|
24,316
|
$
|
23,325
|
|||
|
Interest-bearing
deposits in banks
|
1,486
|
2,463
|
|||||
|
Investment
securities available-for-sale (at fair
value)
|
304,908
|
263,272
|
|||||
|
Federal
Home Loan Bank stock, at cost
|
9,863
|
9,620
|
|||||
|
Loans
|
1,043,266
|
963,656
|
|||||
|
Allowance
for loan losses
|
(7,304
|
)
|
(6,530
|
)
|
|||
|
Net
loans
|
1,035,962
|
957,126
|
|||||
|
Premises
and equipment, net
|
31,407
|
29,852
|
|||||
|
Goodwill
and other intangible assets, net
|
14,560
|
14,536
|
|||||
|
Bank
owned life insurance
|
29,039
|
27,926
|
|||||
|
Accrued
interest receivable and other assets
|
27,368
|
21,197
|
|||||
|
Total
Assets
|
$
|
1,478,909
|
$
|
1,349,317
|
|||
|
Liabilities
and Shareholders’ Equity
|
|||||||
|
Liabilities:
|
|||||||
|
Non-interest-bearing
deposits
|
$
|
97,976
|
$
|
106,579
|
|||
|
Interest-bearing
deposits
|
994,764
|
864,802
|
|||||
|
Total
deposits
|
1,092,740
|
971,381
|
|||||
|
Short-term
borrowings
|
88,924
|
99,379
|
|||||
|
Long-term
borrowings
|
178,451
|
166,330
|
|||||
|
Accrued
interest payable and other liabilities
|
12,895
|
14,202
|
|||||
|
Dividends
payable
|
1,234
|
1,169
|
|||||
|
Total
Liabilities
|
1,374,244
|
1,252,461
|
|||||
|
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
6,138
in 2007 and 6,141 in 2006
|
61
|
61
|
|||||
|
Surplus
|
21,400
|
21,448
|
|||||
|
Retained
earnings
|
88,859
|
80,927
|
|||||
|
Accumulated
other comprehensive loss
|
(5,655
|
)
|
(5,580
|
)
|
|||
|
Total
Shareholders’ Equity
|
104,665
|
96,856
|
|||||
|
Total
Liabilities and Shareholders’ Equity
|
$
|
1,478,909
|
$
|
1,349,317
|
|||
|
See
notes to consolidated financial statements.
|
|||||||
First
United Corporation and Subsidiaries
Consolidated
Statements of Income
(In
thousands, except share and per share amounts)
|
Year
ended December 31
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Interest
income
|
||||||||||
|
Interest
and fees on loans
|
$
|
77,132
|
$
|
69,019
|
$
|
61,570
|
||||
|
Interest
on investment securities:
|
||||||||||
|
Taxable
|
12,474
|
7,699
|
6,231
|
|||||||
|
Exempt
from federal income taxes
|
3,152
|
2,860
|
1,383
|
|||||||
|
15,626
|
10,559
|
7,614
|
||||||||
|
Other
|
796
|
690
|
517
|
|||||||
|
Interest
on federal funds sold
|
11
|
1
|
55
|
|||||||
|
Total
interest income
|
93,565
|
80,269
|
69,756
|
|||||||
|
Interest
expense
|
||||||||||
|
Interest
on deposits
|
37,342
|
27,349
|
19,104
|
|||||||
|
Interest
on short-term borrowings
|
3,319
|
4,429
|
2,749
|
|||||||
|
Interest
on long-term borrowings
|
8,670
|
7,557
|
7,560
|
|||||||
|
Total
interest expense
|
49,331
|
39,335
|
29,413
|
|||||||
|
Net
interest income
|
44,234
|
40,934
|
40,343
|
|||||||
|
Provision
for loan losses
|
2,312
|
1,165
|
1,078
|
|||||||
|
Net
interest income after provision for loan losses
|
41,922
|
39,769
|
39,265
|
|||||||
|
Other
operating income
|
||||||||||
|
Service
charges
|
6,949
|
6,267
|
5,463
|
|||||||
|
Trust
department
|
4,076
|
3,671
|
3,260
|
|||||||
|
Insurance
commissions
|
2,529
|
1,573
|
1,599
|
|||||||
|
Gain
related to prepayment of long term borrowings
|
0
|
0
|
868
|
|||||||
|
Net
securities gains (losses)
|
(1,605
|
)
|
4
|
(125
|
)
|
|||||
|
Bank
owned life insurance
|
1,114
|
848
|
819
|
|||||||
|
Other
income
|
2,029
|
1,678
|
2,204
|
|||||||
|
Total
other operating income
|
15,092
|
14,041
|
14,088
|
|||||||
|
Other
operating expense
|
||||||||||
|
Salaries
and employee benefits
|
20,628
|
19,084
|
18,428
|
|||||||
|
Equipment
|
3,224
|
3,011
|
3,067
|
|||||||
|
Expenses
related to prepayment of long-term borrowings
|
0
|
0
|
437
|
|||||||
|
Occupancy
|
2,388
|
2,043
|
1,642
|
|||||||
|
Data
processing
|
1,672
|
1,452
|
1,404
|
|||||||
|
Other
expenses
|
10,563
|
9,900
|
9,676
|
|||||||
|
Total
other operating expenses
|
38,475
|
35,490
|
34,654
|
|||||||
|
Income
before income taxes
|
18,539
|
18,320
|
18,699
|
|||||||
|
Applicable
income taxes
|
5,746
|
5,743
|
6,548
|
|||||||
|
Net
Income
|
$
|
12,793
|
$
|
12,577
|
$
|
12,151
|
||||
|
Earnings
per share
|
$
|
2.08
|
$
|
2.05
|
$
|
1.99
|
||||
|
Weighted
average common shares outstanding
|
6,149,125
|
6,129,612
|
6,105,699
|
|||||||
|
See
notes to consolidated financial statements
.
|
||||||||||
First
United Corporation and Subsidiaries
Consolidated
Statements of Changes in Shareholders’ Equity
(In
thousands, except per share amounts)
|
Capital
Stock
|
Surplus
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
Total
Shareholders’
Equity
|
||||||||||||
|
Balance
at January 1, 2005
|
$
|
61
|
$
|
20,453
|
$
|
65,405
|
$
|
437
|
$
|
86,356
|
||||||
|
Comprehensive
income:
|
||||||||||||||||
|
Net
income for the year
|
12,151
|
12,151
|
||||||||||||||
|
Unrealized
loss on securities available-for
sale,
net of income tax benefit of $1,301
|
(2,417
|
)
|
(2,417
|
)
|
||||||||||||
|
Comprehensive
income
|
9,734
|
|||||||||||||||
|
Issuance
of 24,758 shares of common
stock
under dividend reinvestment plan
|
493
|
493
|
||||||||||||||
|
Cash
dividends-$.745 per share
|
(4,544
|
)
|
(4,544
|
)
|
||||||||||||
|
Balance
at December 31, 2005
|
61
|
20,946
|
73,012
|
(1,980
|
)
|
92,039
|
||||||||||
|
Comprehensive
income:
|
||||||||||||||||
|
Net
income for the year
|
12,577
|
12,577
|
||||||||||||||
|
Unrealized
gain on securities available-for
sale,
net of income taxes of $682
|
1,265
|
1,265
|
||||||||||||||
|
Comprehensive
Income
|
13,842
|
|||||||||||||||
|
Adjustment
to initially adopt SFAS No.
158
net of income taxes of $2,619
|
(4,865
|
)
|
(4,865
|
)
|
||||||||||||
|
Issuance
of 23,241 shares of common
stock
under dividend reinvestment plan
|
502
|
502
|
||||||||||||||
|
Cash
dividends-$.76 per share
|
(4,662
|
)
|
(4,662
|
)
|
||||||||||||
|
Balance
at December 31, 2006
|
61
|
21,448
|
80,927
|
(5,580
|
)
|
96,856
|
||||||||||
|
Comprehensive
income:
|
||||||||||||||||
|
Net
income for the year
|
12,793
|
12,793
|
||||||||||||||
|
Unrealized
loss on securities available-for
sale,
net of income taxes of $1,228
|
(1,815
|
)
|
(1,815
|
)
|
||||||||||||
|
Change
in accumulated unrealized losses
for
pension and SERP obligations, net of
income
taxes of $1,178
|
1,740
|
1,740
|
||||||||||||||
|
Comprehensive
income
|
12,718
|
|||||||||||||||
|
Issuance
of 22,824 shares of common
stock
under dividend reinvestment plan
|
476
|
476
|
||||||||||||||
|
Repurchase
of common stock
|
(524
|
)
|
(524
|
)
|
||||||||||||
|
Cash
dividends-$.78 per share
|
(4,861
|
)
|
(4,861
|
)
|
||||||||||||
|
Balance
at December 31, 2007
|
$
|
61
|
$
|
21,400
|
$
|
88,859
|
$
|
(5,655
|
)
|
$
|
104,665
|
|||||
|
See
notes to consolidated financial statements
.
|
||||||||||||||||
First
United Corporation and Subsidiaries
Consolidated
Statements of Cash Flows
(In
thousands)
|
Year
ended December 31
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Operating
activities
|
||||||||||
|
Net
Income
|
$
|
12,793
|
$
|
12,577
|
$
|
12,151
|
||||
|
Adjustments
to reconcile net income to net cash
provided
by operating activities:
|
||||||||||
|
Provision
for loan losses
|
2,312
|
1,165
|
1,078
|
|||||||
|
Depreciation
and amortization
|
3,237
|
2,990
|
3,074
|
|||||||
|
Net
accretion and amortization of investment
security
discounts and premiums
|
145
|
175
|
483
|
|||||||
|
Loss
(gain) on sale of investment securities
|
1,605
|
(4
|
)
|
125
|
||||||
|
Increase
in accrued interest
receivable
and other assets
|
(3,187
|
)
|
(2,517
|
)
|
(1,838
|
)
|
||||
|
(Decrease)
increase in accrued interest payable and
other
liabilities
|
(1,307
|
)
|
(443
|
)
|
1,513
|
|||||
|
Proceeds
from sale of mortgage loans
|
—
|
—
|
30,941
|
|||||||
|
Earnings
on bank owned life insurance
|
(1,114
|
)
|
(848
|
)
|
(819
|
)
|
||||
|
Net
cash provided by operating activities
|
14,484
|
13,095
|
46,708
|
|||||||
|
Investing
activities
|
||||||||||
|
Net
decrease (increase) in interest-bearing deposits in banks
|
977
|
2,538
|
(3,146
|
)
|
||||||
|
Proceeds
from maturities of investment securities
available-for-sale
|
45,190
|
56,196
|
87,035
|
|||||||
|
Proceeds
from sales of investment securities
available-for-sale
|
—
|
548
|
27,684
|
|||||||
|
Purchases
of investment securities
available-for-sale
|
(163,246
|
)
|
(88,004
|
)
|
(139,118
|
)
|
||||
|
Proceeds
from sales of investment securities
held
for trading
|
71,611
|
—
|
—
|
|||||||
|
Net
increase in loans
|
(56,193
|
)
|
(2,726
|
)
|
(80,452
|
)
|
||||
|
Purchase
of mortgage loans
|
(24,955
|
)
|
—
|
—
|
||||||
|
Net
(increase) decrease in FHLB stock
|
(243
|
)
|
(1,570
|
)
|
1,475
|
|||||
|
Acquisition
of insurance business
|
(680
|
)
|
—
|
—
|
||||||
|
Purchase
of premises and equipment
|
(4,135
|
)
|
(5,287
|
)
|
(5,542
|
)
|
||||
|
Purchase
of additional bank owned life insurance
|
—
|
(2,839
|
)
|
—
|
||||||
|
Net
cash used in investing activities
|
(131,674
|
)
|
(41,144
|
)
|
(112,064
|
)
|
||||
|
Financing
activities
|
||||||||||
|
Net
increase in deposits
|
121,359
|
15,527
|
105,193
|
|||||||
|
Net
(decrease) increase in short-term borrowings
|
(10,455
|
)
|
(22,560
|
)
|
11,707
|
|||||
|
Proceeds
from long-term borrowings
|
73,500
|
55,000
|
—
|
|||||||
|
Payments
on long-term borrowings
|
(61,379
|
)
|
(17,043
|
)
|
(47,042
|
)
|
||||
|
Cash
dividends paid
|
(4,796
|
)
|
(4,662
|
)
|
(4,544
|
)
|
||||
|
Proceeds
from issuance of common stock
|
476
|
502
|
493
|
|||||||
|
Stock
repurchase
|
(524
|
)
|
—
|
—
|
||||||
|
Net
cash provided by financing activities
|
118,181
|
26,764
|
65,807
|
|||||||
|
Increase
(decrease) in cash and cash equivalents
|
991
|
(1,285
|
)
|
451
|
||||||
|
Cash
and cash equivalents at beginning of year
|
23,325
|
24,610
|
24,159
|
|||||||
|
|
||||||||||
|
Cash
and cash equivalents at end of year
|
$
|
24,316
|
$
|
23,325
|
$
|
24,610
|
||||
|
Supplemental
information
|
||||||||||
|
Interest
paid
|
$
|
48,790
|
$
|
38,363
|
$
|
28,557
|
||||
|
Income
taxes paid
|
5,620
|
7,860
|
6,750
|
|||||||
|
See
notes to consolidated financial
statements
|
||||||||||
First
United Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
1.
Summary
of Significant Accounting Policies
Business
First
United Corporation (“Corporation”) is a registered financial holding company
that was incorporated under the laws of Maryland. It is the parent company
of
First United Bank & Trust (“Bank”), First United Insurance Group, LLC,
(“Insurance Group”) a full-service insurance agency, OakFirst Loan Center, Inc.
and OakFirst Loan Center, LLC, both consumer finance companies. The Bank
provides a complete range of retail and commercial banking services to a
customer base serviced by a network of 26 offices and 35 automated teller
machines. This customer base includes individuals, businesses and various
governmental units. The Insurance Group is a full-service insurance agency.
The
Corporation and its subsidiaries operate principally in four Western Maryland
counties and four West Virginia counties.
Basis
of Presentation
The
accompanying consolidated financial statements have been prepared in accordance
with United States generally accepted accounting principles that require
management to make estimates and assumptions that affect the reported amounts
of
certain assets and liabilities at the date of the financial statements as well
as the reported amount of revenues and expenses during the reporting period.
Actual results could differ from these estimates. Material estimates that are
particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses, the assessment of other than
temporary impairment pertaining to investment securities, potential impairment
of goodwill, and the valuation of deferred tax assets. For purposes of
comparability, certain prior period amounts have been reclassified to conform
with the 2007 presentation.
The
Corporation determines whether it should consolidate other entities or account
for them on the
equity
method
of accounting depending on whether it has a controlling financial interest
in an
entity of less than 100% of the voting interest of that entity by considering
the provisions of Accounting Research Bulletin 51 (ARB 51), “Consolidated
Financial Statements”, or a controlling financial interest in a variable
interest entity (“VIE”) by considering the provisions of FASB Interpretation No.
46R (“FIN 46R”), “Consolidation of Variable Interest Entities”. Under FIN 46, a
VIE is a corporation, partnership, trust or any other legal structure used
for
business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. Under FIN 46R, an entity
that holds a variable interest in a VIE is required to consolidate the VIE
if
the entity is subject to a majority of the risk of loss from the VIE’s
activities, is entitled to receive a majority of the entity’s residual returns
or both. ARB 51 is considered for entities in which the total equity investment
at risk is sufficient to enable the entity to finance itself independently
and
provides the equity holders with the obligation to absorb losses, the right
to
receive residual returns and the right to make financial and operating
decisions.
As
discussed further in Note 8, the Corporation formed statutory trusts for the
purpose of issuing securities which qualify as
regulatory
capital.
These trusts are considered VIEs, but are not consolidated, based on the
criteria established in FIN 46. The Corporation’s investment in non-consolidated
VIEs is accounted for using the equity method of accounting.
Principles
of Consolidation
The
consolidated
financial
statements of the Corporation include the accounts of the Bank, the Insurance
Group, OakFirst Loan Center, Inc., and OakFirst Loan Center, LLC. All
significant inter-company accounts and transactions have been
eliminated.
Significant
Concentrations of Credit Risk
Most
of
the Corporation’s activities are with customers located in Western Maryland and
Northeastern West Virginia. Note 3 discusses the types of securities in which
the Corporation invests and Note 4 discusses the types of lending in which
the
Corporation engages. The Corporation does not have any significant
concentrations in any one industry or customer.
Investments
Securities
available-for-sale:
All
securities purchased have been classified as available-for-sale, and as such
are
stated at their fair value, with the unrealized gains and losses, net of tax,
reported as a separate component of accumulated other
comprehensive
income
(loss) in shareholders’ equity. The fair values of publicly traded investments
are determined using quoted market prices. The fair values of investments are
based upon information that is currently available and may not necessarily
represent amounts that will ultimately be realized, which depends on future
events and circumstances.
The
amortized cost of debt securities classified as available-for-sale is adjusted
for the amortization of premiums to the first call date, if applicable, or
to
maturity, and for the accretion of discounts to maturity, or in the case of
mortgage-backed securities, over the estimated life of the security. Such
amortization and accretion is included in interest income from investments.
Interest and dividends are included in interest income from investments. Gains
and losses on the sale of securities are recorded using the specific
identification method. Management systematically evaluates the securities for
impairment on a quarterly basis. Declines in the fair value of available for
sale securities below their cost that are considered other than temporary
declines are recognized in earnings as realized losses in the period in which
the impairment determination is made. In estimating other-than-temporary
impairment losses, management considers (1) the length of time and the extent
to
which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, and (3) the intent and ability of the
Corporation to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value.
Securities
held for trading:
Securities that are held principally for resale in the near future are reported
at their fair values as investment securities - trading, with changes in fair
value reported in earnings. Interest and dividends on trading securities are
included in investment income.
Federal
Home Loan Bank stock is carried at cost, which approximates its redemption
value.
Loans
Loans
and
leases that management
has the
intent and ability to hold for the foreseeable future or until maturity or
full
repayment by the borro
wer
are
reported at their outstanding unpaid principal balance, adjusted for any
deferred fees or costs pertaining to origination.
Interest
and Fees on Loans
Interest
on loans and leases (other than those on non-accrual status) is recognized
based
upon the principal amount outstanding. Loan fees in excess of the costs incurred
to originate the loan are recognized as income over the life of the loan
utilizing either the interest method or the straight-line method, depending
on
the type of loan. Generally, fees on loans with a specified maturity date,
such
as residential mortgages, are recognized using the interest method. Loan fees
for lines of credit are recognized on the straight-line method.
A
loan is
considered to be past due when a payment has not been received for 30 days
after
its contractual due date. It is the Corporation’s general policy to discontinue
the
accrual
of
interest on loans (including impaired loans), except for consumer loans, when
circumstances indicate that collection of principal or interest is doubtful.
After a loan is placed on non-accrual status, interest is not recognized and
cash payments received are applied to the principal balances. A non-accruing
loan is restored to accrual status when principal and interest payments have
been brought current, it becomes well secured or is in the process of collection
and the prospects of future contractual payments are no longer in doubt.
Generally,
consumer installment loans are not placed on non-accrual status, but are charged
off after they are 120 days contractually past due. Loans other than consumer
loans are charged-off based on an evaluation of the facts and circumstances
of
each individual loan.
Allowance
for Loan Losses
The
allowance for loan losses is maintained at a level believed by management to
be
sufficient to absorb estimated losses inherent in the loan portfolio. Loans
deemed uncollectible are charged off against the allowance, while recoveries
of
amounts previously charged off are
credited
to it.
Management’s determination of the adequacy of the loan loss reserve is based
upon several factors including the impact of economic conditions on borrowers’
ability to repay their loans, past collection experience, the risk
characteristics of the loan portfolio, estimated fair value of underlying
collateral for collateral dependent loans, and such other factors which in
management’s judgment, deserve current recognition.
The
Corporation utilizes the methodology outlined in the FDIC Statement of Policy
on
Allowance for Loan and Lease Losses. The
starting
point
for this methodology is to segregate the loan portfolio into two pools,
non-homogeneous (i.e. commercial) and homogeneous (i.e. mortgage, consumer)
loans. Each loan pool is analyzed with general allowances and specific
allocations being made as appropriate. For general allowances, the previous
eight quarters of loss activity are used in the estimation of losses in the
current portfolio. These historical loss amounts are modified by the following
qualitative factors: levels of and trends in delinquency and non-accruals;
trends in volumes and terms of loans; effects of changes in lending policies,
experience, ability, and depth of management, national and local economic trends
and conditions; and concentrations of credit in the determination of the general
allowance. The qualitative factors are updated each quarter by the gathering
of
information from internal, regulatory, and governmental sources. Specific
allocations are made for those loans on the Watchlist in which the collateral
value is less than the outstanding loan balance with the allocation being the
dollar difference between the two. The Watchlist represents loans, identified
and closely monitored by management, which possess certain qualities or
characteristics that may lead to collection and loss issues. Allocations are
not
made for loans that are cash secured, for the Small Business Administration
or
Farm Service Agency guaranteed portion of loans, or for loans that are
sufficiently collateralized.
A
loan is
considered impaired when, based on current information and events, it is
probable that the Corporation will be unable to collect the scheduled payments
of principal or interest when due according to the contractual terms of the
loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower’s prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis for commercial and construction loans. Large
groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Corporation does not separately identify individual
consumer and residential loans for impairment disclosures, unless such loans
are
the subject of a restructuring agreement.
The
Corporation maintains an allowance for losses on unfunded commercial lending
commitments and letters of credit to provide for the risk of loss inherent
in
these arrangements. The allowance is determined utilizing a methodology that
is
similar to that used to determine the allowance for loan losses, modified to
take into account the probability of a draw down on the commitment. This
allowance is reported as a liability on the balance sheet within accrued
interest payable and other liabilities. The balance in the liability account
was
$.08 million at December 31, 2007.
Premises
and Equipment
Land
is
carried at cost. Premises and equipment are carried at cost, less accumulated
depreciation. The provision for depreciation for financial reporting has been
made by
using
the
straight-line method based on the estimated useful lives of the assets, which
range from 18 to 32 years for buildings and 3 to 20 years for equipment.
Accelerated depreciation methods are used for income tax purposes.
Goodwill
and Other Intangible Assets
Goodwill
represents the excess of the cost of an acquisition over the fair value of
the
net assets acquired in business combinations. In
accordance
with
SFAS No. 147 and 142 which include guidance specific to bank branch purchases
that qualify as business combinations, goodwill is not amortized but is subject
to an annual impairment test.
Other
intangible assets with finite lives are core deposit intangible assets, which
represent
the
present value of future net income to be earned from acquired deposits. Core
deposit intangibles are being amortized using the straight-line method over
their estimated life of 7.2 years.
Bank-Owned
Life Insurance (BOLI)
BOLI
policies are recorded at their cash
surrender
values.
Changes in the cash surrender values are recorded as other operating
income.
Foreclosed
Assets
Assets
acquired through, or in lieu of, loan foreclosure are held for sale and are
initially recorded at fair value less cost to sell at the date of foreclosure,
establishing a new cost basis. Subsequent to foreclosure, valuations are
periodically performed by management and the assets are carried at the lower
of
carrying amount or fair value less cost to sell. Revenue and expenses from
operations and changes in the valuation allowance are included in net expenses
from foreclosed assets. Foreclosed assets are included in accrued interest
receivable and other assets and were $825,000 and $23,000, respectively, at
December 31, 2007 and 2006.
Income
Taxes
The
Corporation and its subsidiaries file a consolidated federal income tax return.
The Corporation accounts for income taxes using the liability method. Under
the
liability method, the deferred tax liability or asset is determined based on
the
difference between the financial statement and tax bases of assets and
liabilities (temporary
differences
)
and is
measured at the enacted tax rates that will be in effect when these differences
reverse. Deferred tax expense is determined by the change in the net liability
or asset for deferred taxes adjusted for changes in any deferred tax asset
valuation allowance.
Effective
January 1, 2007, the Corporation adopted the provisions of Financial Accounting
Standards (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes.” The Interpretation provides clarification on accounting for uncertainty
in income taxes recognized in an enterprise’s financial statements in accordance
with FASB Statement of Financial Accounting Standards (SFAS) No. 109,
“Accounting for Income Taxes.” The Interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition
and
measurement of a tax position taken or expected to be taken in a tax return,
and
also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. As a result of the
Corporation’s evaluation of the implementation of FIN 48, no income tax
uncertainties were identified.
In
May
2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1 “Definition of
Settlement in FASB Interpretation No. 48” (FSP FIN 48-1). FSP FIN 48-1 provides
guidance on how to determine whether a tax position is effectively settled
for
the purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1
is
effective retroactively to January 1, 2007. The implementation of this standard
did not have a material impact on our consolidated financial position or results
of operations.
Defined
Benefit Plans
In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 158, “Employers Accounting for
Defined Benefit Pension and other Post Retirement Plans.” Effective December 31,
2006, the Corporation adopted the provisions of this Statement which resulted
in
the recognition of the funded status of its defined benefits pension plan as
an
asset, and its supplemental executive retirement plan as a liability on the
Consolidated Statements of Financial Condition, and the recognition of
unrecognized net actuarial losses, prior service costs and a net transition
asset totaling $4.9 million as a separate component of accumulated other
comprehensive loss, net of tax. Refer to Note 11 for a further discussion of
the
Corporation’s pension plan and supplemental executive retirement plan
obligations.
Statement
of Cash Flows
Cash
and
cash equivalents are defined as cash and due from banks in the consolidated
statement of cash flows.
Earnings
Per Share
Earnings
per share is computed by dividing net income by the weighted average number
of
common shares outstanding. The Corporation does not
have
any
common stock equivalents.
Trust
Assets and Income
Assets
held in an agency or fiduciary capacity are not assets of the Corporation and,
accordingly, are not included in the accompanying consolidated statements of
financial condition. Income from the Bank’s Trust department represents fees
charged
to
customers and is recorded on an accrual basis.
Business
Segments
As
defined by SFAS No. 131, “Disclosure about Segments of an Enterprise and Related
Information,” the Corporation has two operating segments, community banking and
insurance. Because the operating activities of the insurance segment are
immaterial to the
consolidated
financial statements, no separate segment disclosures for insurance operations
have been made.
Equity
Compensation Plan
At
the
2007 Annual Meeting of Shareholders, the Corporation’s shareholders approved the
First United Corporation Omnibus Equity Compensation Plan (the “Omnibus Plan”),
which authorizes the grant of stock options, stock appreciation rights, stock
awards, stock units, performance units, dividend equivalents, and other
stock-based awards. 185,000 shares of stock were authorized for issuance under
the plan, but to date no shares have been granted.
Stock
Repurchases
Repurchases
of the Corporation’s common stock are recorded in accordance with the laws of
the State of Maryland. Accordingly, repurchased shares are cancelled and retired
and the amount of cash paid for the shares is properly allocated between capital
stock and surplus.
Variable
Interest Entities
In
2003,
the FASB issued Interpretations No. 46 (FIN 46 and FIN 46 R), “Consolidation of
Variable Interest Entities”, which clarified the application of Accounting
Research Bulletin No. 51, “Consolidated Financial Statements” to certain VIEs,
commonly referred to as special-purpose entities (SPEs), in which equity
investors do not have the
characteristics
of a
controlling financial interest or do not have sufficient equity at risk for
the
entity to finance its activities without additional subordinated financial
support from other parties.
In
March
2004, the Corporation issued approximately $30.9 million of junior subordinated
debentures to First United Statutory Trust I (“FUST I”) and First United
Statutory Trust II (collectively with FUST I, the “Trusts”). The Trusts are
Connecticut statutory
business
trusts,
with all outstanding common stock owned by the Corporation, that issued
mandatorily redeemable preferred capital securities to third party investors.
The Trusts are considered SPEs. In accordance with FIN 46R, the Corporation
reported the $30.9 million of junior subordinated debentures as long-term
borrowings and its $0.9 million equity interest in the Trusts as “Other Assets”
at December 31, 2007 and 2006.
These
debentures and preferred securities are discussed in detail in Note
8.
Recent
Accounting Pronouncements
FASB
Statement No. 141(R) “Business Combinations” was issued in December of 2007.
SFAS No. 141(R) establishes principles and requirements for how the acquirer
of
a business recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in
the
acquiree. The Statement also provides guidance for recognizing and measuring
the
goodwill acquired in the business combination and determines what information
to
disclose to enable users of the financial statements to evaluate the nature
and
financial effects of the business combination. The guidance will become
effective as of the beginning of a company’s fiscal year beginning after
December 15, 2008.
FASB
Statement No. 160 “Noncontrolling Interests in Consolidated Financial Statements
- an amendment of ARB No. 51” was issued in December of 2007. This Statement
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. The guidance will
become effective as of the beginning of a company’s fiscal year beginning after
December 15, 2008. The Company believes that these new pronouncements will
have
an immaterial impact on the Company’s financial statements in future
periods.
Staff
Accounting Bulletin No. 109 (SAB 109), “Written Loan Commitments Recorded at
Fair Value Through Earnings” expenses the views of the staff regarding written
loan commitments that are accounted for at fair value through earnings under
generally accepted accounting principles. To make the staff’s views consistent
with current authoritative accounting guidance, the SAB revises and rescinds
portions of SAB No. 105, “Application of Accounting Principles to Loan
Commitments.” Specifically, the SAB revises the SEC staff’s views on
incorporating expected net future cash flows related to loan servicing
activities in the fair value measurement of a written loan commitment. The
SAB
retains the staff’s views on incorporating expected net future cash flows
related to internally-developed intangible assets in the fair value measurement
of a written loan commitment. The staff expects registrants to apply the views
in Question 1 of SAB 109 on a prospective basis to derivative loan commitments
issued or modified in fiscal quarters beginning after December 15, 2007. The
Company does not expect SAB 109 to have a material impact on its financial
statements.
In
December 2007, the FASB issued proposed FASB Staff Position (FSP) 157-b,
“Effective Date of FASB Statement No. 157,” that would permit a one-year
deferral in applying the measurement provisions of Statement No. 157 to
non-financial assets and non-financial liabilities (non-financial items) that
are not recognized or disclosed at fair value in an entity’s financial
statements on a recurring basis (at least annually). Therefore, if the change
in
fair value of a non-financial item is not required to be recognized or disclosed
in the financial statement on an annual basis or more frequently, the effective
date of application of Statement 157 to that item is deferred until fiscal
years
beginning after November 15, 2008 and interim periods within those fiscal years.
This deferral does not apply, however, to an entity that applies Statement
157
in interim or annual financial statements before proposed FSP 157-b is
finalized. The Company is currently evaluating the impact, if any, that the
adoption of FSP 157-b will have on the Company’s operating income or net
earnings.
In
March
2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10 “Accounting
for Collateral Assignment Split-Dollar Life Insurance Agreements” (EITF 06-10).
EITF 06-10 provides guidance for determining a liability for the postretirement
benefit obligation as well as recognition and measurement of the associated
asset on the basis of the terms of the collateral assignment agreement. EITF
06-10 is effective for fiscal years beginning after December 15, 2007. We are
currently evaluating EITF 06-10 but believe it will not have a material impact
on our consolidated financial statement or disclosures.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities-Including an amendment of FASB
Statement No. 115." SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items at fair value. Unrealized
gains and losses on items for which the fair value option has been elected
will
be recognized in earnings at each subsequent reporting date. SFAS No. 159 is
effective for fiscal years beginning on or after January 1, 2008 (although
early-adoption was permitted under certain circumstances). We do not expect
the
adoption of SFAS No. 159 to have a significant impact.
In
September 2006, the FASB issued FASB Statement No. 157,
Fair
Value Measurements
,
which
defines fair value, establishes a framework for measuring fair value under
GAAP,
and expands disclosures about fair value measurements. FASB Statement
No. 157 applies to other accounting pronouncements that require or permit
fair value measurements. The new guidance is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and for interim
periods within those fiscal years. We are currently evaluating the potential
impact, if any, of the adoption of FASB Statement No. 157 on our
consolidated financial position, results of operations and cash flows. For
further information, see the discussion under “Investment Securities” of the
section entitled “Management’s Discussion and Results of Operations” that
appears in Item 7 of Part II of this annual report.
2.
Regulatory
Capital Requirements
The
Corporation and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Corporation
and
the Bank must meet specific capital guidelines that involve quantitative
measures of its assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the regulators
about
components, risk weightings, and other factors.
Quantitative
measures established by regulation to ensure capital adequacy require the
Corporation and the Bank to maintain certain
minimum
amounts
of capital and ratios of total and Tier I capital to risk-weighted assets,
and
of Tier I capital to average assets (leverage). Management believes, as of
December 31, 2007, that the Corporation and the Bank meet all capital adequacy
requirements to which they are subject.
As
of
December 31, 2007, the most recent notification from regulatory agencies
categorized the Bank as “well
capitalized”
under
the regulatory framework for prompt corrective action. For a financial
institution to be categorized as well capitalized, total risk-based, Tier I
risk-based, and Tier I leverage ratios must not fall below the percentages
shown
in the following table. Management is not aware of any condition or event which
has caused the well capitalized position to change.
|
Actual
|
For
Capital
Adequacy
Purposes
|
To
Be Well
Capitalized
Under
Prompt
Corrective
Action
Provisions
|
|||||||||||||||||
|
(Dollars
in thousands)
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||
|
December
31, 2007
|
|||||||||||||||||||
|
Total
Capital (to Risk Weighted Assets)
|
|||||||||||||||||||
|
Consolidated
|
$
|
138,993
|
12.51
|
%
|
$
|
88,900
|
8.00
|
%
|
N/A
|
N/A
|
|||||||||
|
First
United Bank
|
120,974
|
11.01
|
%
|
87,877
|
8.00
|
%
|
109,900
|
10.00
|
%
|
||||||||||
|
Tier
1 Capital (to Risk Weighted Assets)
|
|||||||||||||||||||
|
Consolidated
|
126,689
|
11.40
|
%
|
44,450
|
4.00
|
%
|
N/A
|
N/A
|
|||||||||||
|
First
United Bank
|
113,851
|
10.36
|
%
|
43,938
|
4.00
|
%
|
65,940
|
6.00
|
%
|
||||||||||
|
Tier
1 Capital (to Average Assets)
|
|||||||||||||||||||
|
Consolidated
|
126,689
|
8.91
|
%
|
56,846
|
4.00
|
%
|
N/A
|
N/A
|
|||||||||||
|
First
United Bank
|
113,851
|
8.08
|
%
|
56,341
|
4.00
|
%
|
70,427
|
5.00
|
%
|
||||||||||
|
Actual
|
For
Capital
Adequacy
Purposes
|
To
Be Well
Capitalized
Under
Prompt
Corrective
Action
Provisions
|
|||||||||||||||||
|
(Dollars
in thousands)
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||
|
December
31, 2006
|
|||||||||||||||||||
|
Total
Capital (to Risk Weighted Assets)
|
|||||||||||||||||||
|
Consolidated
|
$
|
130,863
|
12.95
|
%
|
$
|
80,737
|
8.00
|
%
|
N/A
|
N/A
|
|||||||||
|
First
United Bank
|
113,770
|
11.40
|
%
|
79,827
|
8.00
|
%
|
99,785
|
10.00
|
%
|
||||||||||
|
Tier
1 Capital (to Risk Weighted Assets)
|
|||||||||||||||||||
|
Consolidated
|
119,332
|
11.81
|
%
|
40,368
|
4.00
|
%
|
N/A
|
N/A
|
|||||||||||
|
First
United Bank
|
107,503
|
10.77
|
%
|
39,914
|
4.00
|
%
|
59,871
|
6.00
|
%
|
||||||||||
|
Tier
1 Capital (to Average Assets)
|
|||||||||||||||||||
|
Consolidated
|
119,332
|
9.08
|
%
|
52,563
|
4.00
|
%
|
N/A
|
N/A
|
|||||||||||
|
First
United Bank
|
107,503
|
8.25
|
%
|
52,116
|
4.00
|
%
|
65,145
|
5.00
|
%
|
||||||||||
3.
Investment
Securities
The
following table shows a comparison of amortized cost and fair values of
investment securities available-for-sale (in thousands):
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
||||||||||
|
December
31, 2007
|
|||||||||||||
|
U.S.
government and agencies
|
$
|
89,211
|
$
|
1,557
|
$
|
—
|
$
|
90,768
|
|||||
|
Mortgage-backed
securities
|
60,505
|
450
|
16
|
60,939
|
|||||||||
|
Obligations
of states and political subdivisions
|
85,896
|
691
|
694
|
85,893
|
|||||||||
|
Corporate
and other debt securities
|
73,537
|
48
|
6,277
|
67,308
|
|||||||||
|
Totals
|
$
|
309,149
|
$
|
2,746
|
$
|
6,987
|
$
|
304,908
|
|||||
|
December
31, 2006
|
|||||||||||||
|
U.S.
government and agencies
|
$
|
98,007
|
$
|
125
|
$
|
642
|
$
|
97,490
|
|||||
|
Mortgage-backed
securities
|
51,955
|
26
|
1,152
|
50,829
|
|||||||||
|
Obligations
of states and political subdivisions
|
67,892
|
705
|
165
|
68,432
|
|||||||||
|
Corporate
and other debt securities
|
46,602
|
103
|
184
|
46,521
|
|||||||||
|
Totals
|
$
|
264,456
|
$
|
959
|
$
|
2,143
|
$
|
263,272
|
|||||
Proceeds
from sales and calls of securities and the realized gains and losses are as
follows (in thousands):
|
2007
|
2006
|
2005
|
||||||||
|
Proceeds
|
$
|
71,611
|
$
|
548
|
$
|
27,684
|
||||
|
Realized
gains
|
10
|
4
|
93
|
|||||||
|
Realized
losses
|
(1,615
|
)
|
—
|
(218
|
)
|
|||||
The
following table shows the Corporation’s securities available-for-sale with gross
unrealized losses and fair value, aggregated by investment category and length
of time that individual securities have been in a continuous unrealized
position, at December 31, 2007 and 2006 (in thousands):
|
December
31, 2007
|
|||||||||||||
|
Less
than 12 months
|
12
months or more
|
||||||||||||
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
||||||||||
|
Mortgage-backed
securities
|
$
|
1,251
|
$
|
(2
|
)
|
$
|
889
|
$
|
(14
|
)
|
|||
|
Obligations
of states and political
subdivisions
|
24,103
|
(337
|
)
|
22,681
|
(357
|
)
|
|||||||
|
Corporate
securities
|
36,679
|
(4,192
|
)
|
23,035
|
(2,085
|
)
|
|||||||
|
$
|
62,033
|
$
|
(4,531
|
)
|
$
|
46,605
|
$
|
(2,456
|
)
|
||||
|
December
31, 2006
|
|||||||||||||
|
Less
than 12 months
|
12
months or more
|
||||||||||||
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
||||||||||
|
U.S.
government agencies
|
$
|
25,878
|
$
|
(127
|
)
|
$
|
56,609
|
$
|
(515
|
)
|
|||
|
Mortgage-backed
securities
|
3,212
|
(7
|
)
|
45,470
|
(1,145
|
)
|
|||||||
|
Obligations
of states and political
subdivisions
|
9,844
|
(35
|
)
|
15,234
|
(130
|
)
|
|||||||
|
Corporate
securities
|
33,680
|
(184
|
)
|
—
|
—
|
||||||||
|
$
|
72,614
|
$
|
(353
|
)
|
$
|
117,313
|
$
|
(1,790
|
)
|
||||
The
Corporation does not believe any individual unrealized loss as of December
31,
2007 represents an other-than-temporary impairment. The unrealized losses on
our
investment securities are primarily attributable to changes in market interest
rates and not due to declines in credit quality. All of our investments in
states and other political subdivisions are of the highest investment grade
as
determined by the major rating agencies. The total $6.3 million in unrealized
losses reported for corporate securities at December 31, 2007 relates to
Preferred Term Securities (PreTSLs). These securities maintain a high credit
rating. The Corporation has both the intent and ability to hold the impaired
securities in its investment portfolio for the period of time necessary to
recover its amortized cost.
The
amortized cost and estimated fair value of securities available-for-sale by
contractual maturity at December 31, 2007 are shown in the following table.
Actual maturities will differ from contractual maturities because the issuers
of
the securities may have the right to call or prepay obligations with or without
call or prepayment penalties.
|
(in
thousands)
|
|||||||
|
Contractual
Maturity
|
Amortized
Cost
|
Fair
Value
|
|||||
|
Due
in one year or less
|
$
|
1,325
|
$
|
1,340
|
|||
|
Due
after one year through five years
|
41,132
|
41,909
|
|||||
|
Due
after five years through ten years
|
47,087
|
47,981
|
|||||
|
Due
after ten years
|
159,100
|
152,739
|
|||||
|
248,644
|
243,969
|
||||||
|
Mortgage-backed
securities
|
60,505
|
60,939
|
|||||
|
$
|
309,149
|
$
|
304,908
|
||||
At
December 31, 2007 and 2006, investment securities with a fair value of $134
million and $146 million, respectively, were pledged as permitted or required
to
secure public and trust
deposits
and securities sold under agreements to repurchase as required or permitted
by
law.
4.
Loans
The
Corporation, through the Bank, is active in originating loans to customers
primarily in Western Maryland and Northeastern West Virginia. The following
table
is
a
summary of the loan portfolio and loan commitments by principal categories
(in
thousands):
|
December
31, 2007
|
December
31, 2006
|
||||||||||||
|
Loans
|
Loan
Commitments
|
Loans
|
Loan
Commitments
|
||||||||||
|
Commercial
|
$
|
492,302
|
$
|
92,301
|
$
|
408,361
|
$
|
72,861
|
|||||
|
Real
Estate - Mortgage
|
384,420
|
42,819
|
359,601
|
40,557
|
|||||||||
|
Consumer
Installment
|
153,593
|
66
|
181,574
|
66
|
|||||||||
|
Real
Estate - Construction
|
12,951
|
8,645
|
14,120
|
6,312
|
|||||||||
|
Commercial
letters of credit
|
—
|
7,488
|
—
|
7,200
|
|||||||||
|
Total
|
$
|
1,043,266
|
$
|
151,319
|
$
|
963,656
|
$
|
126,996
|
|||||
Loan
commitments are made to accommodate the financial needs of the Corporation’s
customers. Letters of credit commit the Corporation to make payments on behalf
of customers when certain specified future events occur. Letters of credit
are
issued to customers to support contractual obligations and to insure job
performance. Commitments to extend credit generally have fixed expiration dates,
may require payment of a fee, and contain cancellation clauses in the event
of
an adverse change in the customer’s credit quality. Historically, most letters
of credit expire unfunded, and therefore, cash requirements are substantially
less than the total commitment. Loan commitments and letters of credit have
credit risk essentially the same as
that
involved in extending loans to customers and are subject to normal credit
policies. Collateral is obtained based on management’s credit assessment of the
customer. The Corporation considers letters of credit to be guarantees and
the
amount of liability related to such guarantees was not significant at December
31, 2007 and 2006.
In
the
ordinary course of business, executive officers and directors of the
Corporation, including their families and companies in which certain directors
are principal owners, were loan customers of the Bank. Pursuant to the Bank’s
lending policies, such loans were made on the same terms, including collateral,
as those prevailing at the time for comparable transactions with unrelated
persons and do not involve more than the normal risk of collectibility. Changes
in the dollar amount of loans outstanding to officers, directors and their
associates were as follows for the year ended December 31 (in
thousands):
|
2007
|
||||
|
Balance
at January 1
|
$
|
25,322
|
||
|
Loans
or advances
|
14,131
|
|||
|
Repayments
|
(11,036
|
)
|
||
|
Balance
at December 31
|
$
|
28,417
|
||
Activity
in the allowance for loan losses is summarized as follows (in
thousands):
|
2007
|
|
2006
|
|
2005
|
||||||
|
Balance
at January 1
|
$
|
6,530
|
$
|
6,416
|
$
|
6,814
|
||||
|
Gross
credit losses
|
(2,222
|
)
|
(1,575
|
)
|
(1,890
|
)
|
||||
|
Recoveries
|
684
|
524
|
414
|
|||||||
|
Net
credit losses
|
(1,538
|
)
|
(1,051
|
)
|
(1,476
|
)
|
||||
|
Provision
for loan losses
|
2,312
|
1,165
|
1,078
|
|||||||
|
Balance
at December 31
|
$
|
7,304
|
$
|
6,530
|
$
|
6,416
|
||||
Non-accruing
loans were $5.4 million, $3.2 million, and $2.4 million at December 31, 2007,
2006 and 2005, respectively. Interest income not recognized as a result of
placing loans on a non-accrual status was $.2 million during 2007 and 2006,
and
$.05 million during 2005. Accruing loans past due 90 days or more were $3.3
million, $.6 million and $.9 million at the end of 2007, 2006 and 2005,
respectively.
The
following is a summary of information pertaining to impaired and non-accrual
loans (in thousands):
|
Years
Ended December 31,
|
||||||||||
|
2007
|
|
2006
|
|
2005
|
||||||
|
Impaired
loans without a valuation allowance
|
$
|
6,814
|
$
|
-
|
||||||
|
Impaired
loans with a valuation allowance
|
176
|
127
|
||||||||
|
Total
impaired loans
|
$
|
6,990
|
$
|
127
|
||||||
|
Valuation
allowance related to impaired loans
|
$
|
176
|
$
|
127
|
||||||
|
Average
investment in impaired loans
|
$
|
1,472
|
$
|
166
|
$
|
657
|
||||
|
Interest
income recognized on an accrual basis on impaired loans
|
$
|
225
|
$
|
-
|
$
|
0
|
||||
|
Interest
income recognized on a cash basis on impaired loans
|
$
|
162
|
$
|
178
|
$
|
51
|
||||
No
additional funds are committed to be advanced in connection with impaired
loans.
In
December 2005, the Bank sold $31.1 million of its residential mortgage loans.
The loans were sold without recourse and the Bank will continue to service
these
loans. No gain or loss was recognized on the sale. Loan servicing rights of
$0.3
million were recorded as part of this transaction and are being amortized over
the weighted average remaining life of the loans sold. In April 2007, the Bank
purchased $25.0 million of adjustable rate residential mortgage
loans.
5.
Premises
and Equipment
The
composition of premises and equipment at December 31 is as follows (in
thousands):
|
2007
|
|
2006
|
|||||
|
Land
|
$
|
8,910
|
$
|
8,910
|
|||
|
Land
Improvements
|
316
|
190
|
|||||
|
Premises
|
22,340
|
20,700
|
|||||
|
Furniture
and Equipment
|
29,475
|
27,610
|
|||||
|
61,041
|
57,410
|
||||||
|
Less
accumulated depreciation
|
(29,634
|
)
|
(27,558
|
)
|
|||
|
Total
|
$
|
31,407
|
$
|
29,852
|
|||
The
Corporation recorded depreciation expense of $2.6 million in 2007 and $2.5
million in 2006 and 2005.
Pursuant
to the terms of noncancelable operating lease agreements for banking and
subsidiaries’ offices and for data processing and telecommunications equipment
in
effect
at December 31, 2007, future minimum rent commitments under these leases for
each of the next five years are as follows: $2.0, $1.8, $1.1, $1.0, and $1.0
million. The leases contain options to extend for periods from 1 to 5 years,
not
included in the aforementioned amounts.
Total
rent expense for offices amounted to $.7 million, $.6 million and $.5 million
in
2007, 2006 and 2005, respectively.
6.
Goodwill
and Other Intangible Assets
Goodwill
resulted from the acquisition of four branch offices and a banking center from
The Huntington National Bank in July 2003 and an insurance agency in April
1999.
The Corporation performed its annual impairment test as of December 31, 2007
and
determined that goodwill was not impaired. There can be no assurance
that
goodwill impairment will not occur in the future. The Corporation will continue
to evaluate goodwill for impairment on an annual basis and as events occur
or
circumstances change.
The
significant components of goodwill and acquired intangible assets at December
31
are as follows (in thousands):
|
2007
|
2006
|
||||||||||||||||||||||||
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
Weighted
Average
Remaining
Life
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
Weighted
Average
Remaining
Life
|
||||||||||||||||||
|
Goodwill
|
$
|
11,900
|
$
|
—
|
$
|
11,900
|
$
|
11,900
|
$
|
—
|
$
|
11,900
|
|||||||||||||
|
Core
deposit
intangible
assets
|
4,040
|
(2,465
|
)
|
1,575
|
2.8
|
4,040
|
(1,907
|
)
|
2,133
|
3.8
|
|||||||||||||||
|
Acquisition
of insurance businesses
|
1,205
|
(120
|
)
|
1,085
|
7.8
|
525
|
(22
|
)
|
503
|
9.6
|
|||||||||||||||
|
Total
|
$
|
17,145
|
$
|
(2,585
|
)
|
$
|
14,560
|
$
|
16,465
|
$
|
(1,929
|
)
|
$
|
14,536
|
|||||||||||
Amortization
expense relating to amortizable intangible assets was $.6 million in 2007,
2006
and 2005. Future estimated annual amortization expense is presented below (in
thousands):
|
Year
|
Annual
Amortization
|
|||
|
2008
|
$
|
684
|
||
|
2009
|
684
|
|||
|
2010
|
585
|
|||
|
2011
|
126
|
|||
|
2012
|
126
|
|||
7.
Deposits
The
aggregate amount of time deposits with a minimum denomination of $100,000 was
$299.6 and $479.6 million at December 31, 2007 and December 31,
2006,
respectively.
The
following is a summary of the scheduled maturities of all time deposits as
of
December 31, 2007 (in thousands):
|
2008
|
$
|
447,140
|
||
|
2009
|
59,075
|
|||
|
2010
|
13,385
|
|||
|
2011
|
2,170
|
|||
|
2012
|
1,835
|
|||
|
Thereafter
|
587
|
8.
Borrowed
Funds
The
following is a summary of short-term borrowings at December 31 with original
maturities of less than one year (dollars in thousands):
|
2007
|
|
2006
|
|
2005
|
||||||
|
Short-term
FHLB advance,
Daily
borrowings, interest rate of 4.56% (at December 31, 2007)
|
$
|
21,000
|
$
|
4,500
|
$
|
31,000
|
||||
|
Short-term
FHLB advance,
Interest
rate of 5.44% (at December 31, 2006) maturing in May 2007
|
—
|
20,000
|
—
|
|||||||
|
2007
|
|
|
2006
|
|
|
2005
|
||||
|
Securities
sold under agreements to repurchase:
|
||||||||||
|
Outstanding
at end of year
|
$
|
67,924
|
$
|
74,879
|
$
|
90,939
|
||||
|
Weighted
average interest rate at year end
|
3.62
|
%
|
3.96
|
%
|
2.56
|
%
|
||||
|
Maximum
amount outstanding as of
any
month end
|
$
|
73,185
|
$
|
84,380
|
$
|
93,632
|
||||
|
Average
amount outstanding
|
66,854
|
78,032
|
85,846
|
|||||||
|
Approximate
weighted average rate
during
the year
|
3.68
|
%
|
3.80
|
%
|
2.68
|
%
|
||||
The
following is a summary of long-term borrowings at December 31 with original
maturities exceeding one year (dollars in thousands):
|
2007
|
|
2006
|
|
||||
|
FHLB
advances, bearing interest at rates ranging
from
3.77% to 4.98% at December 31
|
$
|
142,522
|
$
|
130,401
|
|||
|
Junior
subordinated debt, bearing interest at rates
ranging
from 5.88% to 7.74% at December 31
|
35,929
|
35,929
|
|||||
|
$
|
178,451
|
$
|
166,330
|
||||
The
contractual maturities of long-term borrowings are as follows:
|
December
31
|
|||||||||||||
|
2007
|
2006
|
||||||||||||
|
Fixed
Rate
|
Floating
Rate
|
Total
|
Total
|
||||||||||
|
(in
thousands)
|
|||||||||||||
|
Due
in 2007
|
—
|
—
|
—
|
19,800
|
|||||||||
|
Due
in 2008
|
1,000
|
—
|
1,000
|
1,000
|
|||||||||
|
Due
in 2009
|
14,000
|
—
|
14,000
|
25,500
|
|||||||||
|
Due
in 2010
|
31,000
|
—
|
31,000
|
1,000
|
|||||||||
|
Due
in 2011
|
51,000
|
—
|
51,000
|
81,000
|
|||||||||
|
Due
in 2012
|
44,250
|
—
|
44,250
|
750
|
|||||||||
|
Thereafter
|
26,891
|
10,310
|
37,201
|
37,280
|
|||||||||
|
Total
long-term debt
|
$
|
168,141
|
$
|
10,310
|
$
|
178,451
|
$
|
166,330
|
|||||
In
addition to the above, the Corporation has $5.5 million of letters of credit
with the Federal Home Loan Bank of Atlanta (“FHLB”) at December 31, 2007. These
letters of credit are pledged to secure public deposits.
The
Corporation has a borrowing capacity agreement with the FHLB in an amount equal
to 29% of the Bank’s assets. At December 31, 2007, the available line of credit
equaled $424 million. This line of credit, which can be used for both short
or
long-term funding, can only be utilized to the extent of available collateral.
The line is secured by certain qualified mortgage and commercial loans and
investment securities, as follows:
|
1-4
family mortgage loans
|
$
|
147,161
|
||
|
Commercial
loans
|
12,746
|
|||
|
Multifamily
loans
|
2,737
|
|||
|
Home
Equity loans
|
9,916
|
|||
|
Investment
securities
|
19,994
|
|||
|
$
|
192,554
|
The
collateralized line of credit totaled $173 million at December 31, 2007, of
which $24 million was available for additional borrowings.
The
Corporation also has various unsecured lines of credit totaling $25.0 million
with various financial institutions to meet daily liquidity requirements. As
of
December 31, 2007, the Corporation had no borrowings under these credit
facilities.
Repurchase
Agreements
—The
Corporation has retail repurchase agreements with customers within its local
market areas. Repurchase agreements generally have maturities of one to four
days from the transaction date. These borrowings are collateralized with
securities owned by the company and held in safekeeping at independent
correspondent banks.
FHLB
Advances
—The
FHLB
advances consist of various borrowings with maturities generally ranging from
5
to 10 years with initial fixed rate
periods
of one,
two or three years. After the initial fixed rate period the FHLB has one or
more
options to convert each advance to a LIBOR based, variable rate advance, but
the
Corporation may repay the advance in whole or in part, without a penalty, if
the
FHLB exercises its option. At all other times, the Corporation’s early repayment
of any advance could be subject to a prepayment penalty.
In
May
2006, the Bank exchanged $25 million of long-term FHLB advances, with an
interest rate of 5.01% for $25 million of long-term FHLB advances, bearing
a
rate of 4.69%. The exchange netted a gain of $.2 million which will be amortized
over 5 years into interest expense.
Subordinated
Debt
—
In
March 2004, the Trusts issued preferred securities with an aggregate liquidation
amount of $30.9 million to third-party investors. The proceeds of
issuance
of the preferred securities were used to purchase an equal amount of junior
subordinated debentures of the Corporation, as follows:
$20.6
million
—6.02%
fixed rate for five years payable quarterly, converting to floating rate based
on three-month LIBOR plus 275 basis points,
maturing
in 2034, redeemable five years after issuance at the Corporation’s
option.
$10.3
million
—floating
rate payable quarterly based on three-month LIBOR plus 275 basis points (7.74%
at December 31, 2007) maturing in 2034,
redeemable
five years after issuance at the Corporation’s option.
The
debentures represent the sole assets of the Trusts, and payments of the
debentures by the Corporation are the only sources of cash flow for the
Trusts.
In
December 2004, the Corporation issued an additional $5.0 million of debentures.
The debentures have a fixed rate of 5.88% for the first five years,
payable
quarterly, and then convert to a floating rate based on the three month LIBOR
plus 185 basis points. The debentures mature in 2014, but are redeemable five
years after issuance at the Corporation’s option.
The
Corporation has the right to defer interest on all of the foregoing debentures
for up to 20 quarterly periods, in which case distributions on the preferred
securities
will
also
be deferred. Should this occur, the Corporation may not pay dividends or
distributions on, or repurchase, redeem or acquire any shares of its common
stock.
9.
Other
Comprehensive Income
A
summary
of the activity in accumulated other comprehensive loss follows (in
thousands):
|
For
the Year Ending December 31
|
||||||||||
|
2007
|
|
2006
|
|
2005
|
||||||
|
Accumulated
unrealized (losses)/gains on securities available for sale at January
1,
net of tax
|
$
|
(715
|
)
|
$
|
(1,980
|
)
|
$
|
437
|
||
|
Net
unrealized gains/(losses) for the period, net of tax
|
(2,771
|
)
|
1,268
|
(2,498
|
)
|
|||||
|
Reclassification
of (gains)/losses occurring during the period, net of tax
|
956
|
(3
|
)
|
81
|
||||||
|
Effect
on other comprehensive income (loss) for the period
|
(1,815
|
)
|
1,265
|
(2,417
|
)
|
|||||
|
Accumulated
unrealized losses on securities available for sale at December 31,
net of
tax ($1,712) in 2007, ($468) in 2006 and ($1,295) in 2005
|
$
|
(2,530
|
)
|
$
|
(715
|
)
|
$
|
(1,980
|
)
|
|
|
Accumulated
unrealized losses for pension obligation at January 1, net of tax
|
$
|
(2,901
|
)
|
$
|
0
|
$
|
0
|
|||
|
Cumulative
effect of change in accounting for pension obligation - adoption
of SFAS
No. 158, net of tax
|
0
|
(2,901
|
)
|
0
|
||||||
|
Change
in accumulated unrealized losses for pension obligation, net of tax
of
|
151
|
0
|
0
|
|||||||
|
Accumulated
unrealized losses for Pension obligation at December 31, net of tax
of
($1,859) in 2007 and ($1,562) in 2006
|
$
|
(2,750
|
)
|
$
|
(2,901
|
)
|
$
|
0
|
||
|
Accumulated
unrealized losses for SERP obligation at January 1, net of tax
|
(1,964
|
)
|
0
|
0
|
||||||
|
Cumulative
effect of change in accounting for SERP obligation - adoption of
SFAS No.
158, net of tax
|
0
|
(1,964
|
)
|
0
|
||||||
|
Change
in accumulated unrealized losses for SERP obligation, net of tax
|
1,589
|
0
|
0
|
|||||||
|
Accumulated
unrealized losses for SERP obligation at December 31, net of tax
of ($255)
in 2007 and ($1,052) in 2006
|
$
|
(375
|
)
|
$
|
(1,964
|
)
|
$
|
0
|
||
|
TOTAL
ACCUMULATED OTHER COMPREHENSIVE
INCOME
(LOSS) AT DECEMBER 31, NET OF TAX of ($3,826) at 2007, ($3,082) at
2006
and ($1,295) at 2005
|
$
|
(5,655
|
)
|
$
|
(5,580
|
)
|
$
|
(1,980
|
)
|
|
10.
Income
Taxes
The
provision for income taxes consists of the following for the years ended
December 31 (in thousands):
|
2007
|
|
2006
|
|
2005
|
||||||
|
Current
Tax Provision:
|
||||||||||
|
Federal
|
$
|
4,275
|
$
|
5,179
|
$
|
4,321
|
||||
|
State
|
914
|
1,094
|
978
|
|||||||
|
$
|
5,189
|
$
|
6,273
|
$
|
5,299
|
|||||
|
Deferred
taxes (benefit) :
|
||||||||||
|
Federal
|
$
|
455
|
$
|
(469
|
)
|
$
|
1,105
|
|||
|
State
|
102
|
(61
|
)
|
144
|
||||||
|
$
|
557
|
$
|
(530
|
)
|
$
|
1,249
|
||||
|
Income
tax expense for the year
|
$
|
5,746
|
$
|
5,743
|
$
|
6,548
|
||||
The
reconciliation between the statutory federal income tax rate and effective
income tax rate is as follows:
|
2007
|
|
2006
|
|
2005
|
|
|||||
|
Federal
statutory rate
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
||||
|
Tax-exempt
income on securities and loans
|
(5.9
|
)
|
(5.6
|
)
|
(2.7
|
)
|
||||
|
Tax-exempt
BOLI income
|
(2.1
|
)
|
(1.6
|
)
|
(1.5
|
)
|
||||
|
State
income tax, net of federal tax benefit
|
4.0
|
3.5
|
3.9
|
|||||||
|
Other
|
—
|
—
|
.3
|
|||||||
|
31.0
|
%
|
31.3
|
%
|
35.0
|
%
|
|||||
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and
the amounts used for income tax purposes. Significant components of the
Corporation’s temporary differences as of December 31 are as follows (in
thousands):
|
2007
|
|
2006
|
|||||
|
Deferred
tax assets:
|
|||||||
|
Allowance
for loan losses
|
$
|
2,948
|
$
|
2,583
|
|||
|
Deferred
loan fees
|
198
|
225
|
|||||
|
Deferred
compensation
|
491
|
513
|
|||||
|
State
tax loss carry forwards
|
916
|
722
|
|||||
|
Unrealized
loss on investment securities
available-for-sale
|
1,712
|
468
|
|||||
|
Other
|
685
|
81
|
|||||
|
Total
deferred tax assets
|
6,950
|
4,592
|
|||||
|
Valuation
allowance
|
(916
|
)
|
(722
|
)
|
|||
|
Total
deferred tax assets less valuation allowance
|
6,034
|
3,870
|
|||||
|
Deferred
tax liabilities:
|
|||||||
|
Amortization
of goodwill and core deposit intangible
|
(688
|
)
|
(524
|
)
|
|||
|
Pension/SERP
|
(1,833
|
)
|
(449
|
)
|
|||
|
Depreciation
|
(741
|
)
|
(943
|
)
|
|||
|
Other
|
(239
|
)
|
(406
|
)
|
|||
|
Total
deferred tax liabilities
|
(3,501
|
)
|
(2,322
|
)
|
|||
|
Net
deferred tax assets
|
$
|
2,533
|
$
|
1,548
|
|||
State
income tax expense amounted to $1.0 million, $1.0 million and $1.1 million
during 2007, 2006 and 2005, respectively. The state tax loss carry forwards
included in deferred tax assets will expire commencing in 2019.
11.
Employee
Benefit Plans
The
Corporation sponsors a noncontributory defined benefit pension plan (Plan)
covering substantially all full-time employees who qualify as to age and length
of service. The benefits are based on years of service and the employees’
compensation during the last five years of employment. The Corporation’s funding
policy is to make annual contributions in amounts sufficient to meet the current
year’s minimum funding requirements.
During
2001, the Corporation established an unfunded supplemental executive retirement
plan (SERP) to provide senior management personnel with
supplemental
retirement benefits in excess of limits imposed on qualified plans by federal
tax law. Concurrent with the establishment of the SERP, the Corporation acquired
bank owned life insurance (BOLI) policies on the senior management personnel
and
officers of the Corporation. The benefits resulting from the favorable tax
treatment accorded the earnings on the BOLI are intended to provide a source
of
funds for the future payment of the SERP benefits as well as other employee
benefit costs.
The
benefit obligation activity for both the pension plan and SERP was calculated
using an actuarial measurement date of January 1. Plan assets and the benefit
obligations were calculated using an actuarial measurement date of December
31.
The following table summarizes benefit obligation and funded status, plan asset
activity, components of net pension cost, and weighted average assumptions
for
the Corporation’s pension and SERP plans (in thousands):
|
Pension
|
SERP
|
||||||||||||
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|||||||
|
Change
in Benefit Obligation
|
|||||||||||||
|
Obligation
at the beginning of the year
|
$
|
19,181
|
$
|
18,423
|
$
|
4,696
|
$
|
3,662
|
|||||
|
Service
cost
|
809
|
809
|
179
|
138
|
|||||||||
|
Interest
cost
|
1,155
|
1,048
|
256
|
200
|
|||||||||
|
Change
in assumptions
|
—
|
(591
|
)
|
—
|
—
|
||||||||
|
Actuarial
losses/(gains)
|
331
|
1
|
(2,069
|
)
|
722
|
||||||||
|
Benefits
paid
|
(554
|
)
|
(509
|
)
|
(26
|
)
|
(26
|
)
|
|||||
|
Obligation
at the end of the year
|
20,922
|
19,181
|
3,036
|
4,696
|
|||||||||
|
Change
in Plan Assets
|
|||||||||||||
|
Fair
value at the beginning of the year
|
21,474
|
19,276
|
—
|
—
|
|||||||||
|
Actual
return on plan assets
|
1,936
|
1,707
|
—
|
—
|
|||||||||
|
Employer
contribution
|
5,000
|
1,000
|
26
|
26
|
|||||||||
|
Benefits
paid
|
(554
|
)
|
(509
|
)
|
(26
|
)
|
(26
|
)
|
|||||
|
Fair
value at the end of the year
|
27,856
|
21,474
|
—
|
—
|
|||||||||
|
Funded
Status
|
$
|
6,934
|
$
|
2,293
|
$
|
(3,036
|
)
|
$
|
(4,696
|
)
|
|||
|
Pension
|
SERP
|
||||||||||||||||||
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2005
|
|||||||||
|
Components
of Net Pension Cost
|
|||||||||||||||||||
|
Service
cost
|
$
|
809
|
$
|
809
|
$
|
799
|
$
|
179
|
$
|
138
|
$
|
90
|
|||||||
|
Interest
cost
|
1,155
|
1,048
|
1,035
|
256
|
200
|
134
|
|||||||||||||
|
Expected
return on assets
|
(1,891
|
)
|
(1,586
|
)
|
(1,406
|
)
|
—
|
—
|
—
|
||||||||||
|
Amortization
of transition asset
|
(39
|
)
|
(39
|
)
|
(39
|
)
|
—
|
—
|
—
|
||||||||||
|
Amortization
of recognized loss
|
169
|
220
|
189
|
203
|
121
|
53
|
|||||||||||||
|
Amortization
of prior service cost
|
10
|
10
|
10
|
113
|
113
|
103
|
|||||||||||||
|
Net
pension expense in employee benefits
|
$
|
213
|
$
|
462
|
$
|
588
|
$
|
751
|
$
|
572
|
$
|
380
|
|||||||
|
Weighted
Average Assumptions used to
determine
benefit obligations:
|
|||||||||||||||||||
|
Discount
rate for benefit obligations
|
6.00
|
%
|
6.00
|
%
|
6.15
|
%
|
6.00
|
%
|
5.50
|
%
|
5.50
|
%
|
|||||||
|
Discount
rate for net pension cost
|
6.00
|
%
|
6.15
|
%
|
6.15
|
%
|
—
|
—
|
—
|
||||||||||
|
Expected
long-term return on assets
|
8.00
|
%
|
8.00
|
%
|
8.25
|
%
|
—
|
—
|
—
|
||||||||||
|
Rate
of compensation increase
|
3.00
|
%
|
3.00
|
%
|
4.00
|
%
|
4.00
|
%
|
4.00
|
%
|
4.00
|
%
|
|||||||
The
accumulated benefit obligation for the pension plan was $16.0 million at
December 31, 2007 and 2006, respectively. The accumulated benefit obligation
for
the SERP was $3.0 million and $3.7 million at December 31, 2007 and 2006,
respectively.
The
expected long-term rate of return on Plan assets for the pension plan was
determined by considering historical and future expected returns of the asset
classes invested in by the Plan trustees, and the allocation strategy currently
in place among those classes.
The
actual asset allocations for the defined benefit pension plan as of December
31,
2007 and 2006, by asset category, are as
follows:
|
Percentage
of
Plan
Assets
|
|||||||
|
2007
|
|
2006
|
|||||
|
ASSET
CATEGORY
|
|||||||
|
Equity
securities
|
62
|
%
|
63
|
%
|
|||
|
Debt
securities
|
32
|
32
|
|||||
|
Cash
and cash equivalents
|
6
|
5
|
|||||
|
Total
|
100
|
%
|
100
|
%
|
|||
The
investment objective for the defined benefit pension plan is to maximize total
return with tolerance for average risk. Asset allocation favors equities, with
a
target allocation of approximately 55% equity securities, 40% fixed income
securities, and 5% cash. Due to volatility in the market, the target allocation
is not always desirable and asset allocations will fluctuate between the
acceptable ranges. A core equity position of large cap stocks will be
maintained. However, more aggressive or volatile sectors will be meaningfully
represented in the asset mix in pursuit of higher returns. Higher volatility
investment strategies such as credit risk, structured finance, and international
bonds will be appropriate strategies in conjunction with the core
position.
It
is
management’s intent to give the plan’s investment managers flexibility with
respect to investment decisions and their timing within the overall guidelines.
However, certain investments require specific review and approval by management.
Management is also informed of anticipated changes in nonproprietary investment
managers, significant modifications of any previously approved investment,
or
the anticipated use of derivatives to execute investment
strategies.
The
following summarizes the number of Corporation shares and the fair value of
such
shares that are included in Plan assets at December 31, 2007 and 2006, as well
as dividends paid to the Plan for such years (dollars in
thousands):
|
2007
|
|
2006
|
|||||
|
Number
of shares held
|
3,000
|
3,000
|
|||||
|
Number
of shares purchased
|
0
|
0
|
|||||
|
Number
of shares sold
|
0
|
839
|
|||||
|
Fair
value
|
$
|
60
|
$
|
66
|
|||
|
Dividends
paid
|
$
|
2
|
$
|
2
|
|||
|
Percentage
of total plan assets
|
.21
|
%
|
.31
|
%
|
|||
Estimated
Cash Flows related to the Plan are as follows (in thousands):
Estimated
future benefit payments:
|
Pension
Plan
|
SERP
|
||||||
|
2008
|
$
|
584
|
$
|
55
|
|||
|
2009
|
595
|
55
|
|||||
|
2010
|
614
|
55
|
|||||
|
2011
|
802
|
55
|
|||||
|
2012
|
987
|
88
|
|||||
|
2013-2017
|
6,851
|
913
|
|||||
|
$
|
10,433
|
$
|
1,221
|
||||
The
Corporation estimates that it will contribute approximately $2 million to the
pension plan in 2008 and expects to fund the annual projected benefit payments
for the SERP from operations.
Amounts
included in accumulated other comprehensive loss as of December 31, 2007 and
2006, net of tax, are as follows (in thousands):
|
2007
|
2006
|
||||||||||||
|
Pension
|
|
SERP
|
|
Pension
|
|
SERP
|
|||||||
|
Unrecognized
net actuarial loss
|
$
|
2,851
|
$
|
14
|
$
|
3,032
|
$
|
1,497
|
|||||
|
Unrecognized
prior service costs
|
73
|
361
|
85
|
467
|
|||||||||
|
Net
transition asset
|
(174
|
)
|
—
|
(216
|
)
|
—
|
|||||||
|
$
|
2,750
|
$
|
375
|
$
|
2,901
|
$
|
1,964
|
||||||
Other
changes in plan assets and benefit obligations recognized in other comprehensive
income during the year ended December 31, 2007 were as follows:
|
Defined
Benefit Pension Plan
|
||||
|
Amortization
of prior service costs
|
$
|
(10
|
)
|
|
|
Amortization
of transition assets
|
39
|
|||
|
Amortization
of unrecognized loss
|
(170
|
)
|
||
|
$
|
(141
|
)
|
||
|
Supplemental
Executive Retirement Plan
|
||||
|
Net
actuarial gain during the period
|
$
|
(2,302
|
)
|
|
|
Amortization
of prior service costs
|
(113
|
)
|
||
|
$
|
(2,415
|
)
|
||
|
$
|
(2,556
|
)
|
||
|
Tax
effect
|
816
|
|||
|
Amount
included in other comprehensive income, net of tax
|
$
|
(1,740
|
)
|
|
The
estimated costs that will be amortized from accumulated other comprehensive
loss
into net periodic pension cost during the next fiscal year are as follows (in
thousands):
|
Pension
|
SERP
|
||||||
|
Prior
service cost
|
$
|
10
|
$
|
113
|
|||
|
Net
transition asset
|
(39
|
)
|
—
|
||||
|
Net
actuarial loss
|
170
|
203
|
|||||
|
$
|
141
|
$
|
316
|
||||
401(K)
Profit Sharing Plan
The
First
United Bank & Trust 401(k) Profit Sharing Plan (“the 401(k) Plan”) is a
defined contribution plan that is intended to qualify under section 401(k)
of
the Internal Revenue Code. The 401(k) Plan covers substantially all employees
of
the Corporation. Eligible employees can elect to contribute to the plan through
payroll deductions. Contributions up to 6% of an employee’s base salary are
matched on a 50% basis by the Corporation. Expense charged to operations for
the
401(k) Plan was $.3 million, $.5 million, and $.4 million in 2007, 2006 and
2005, respectively.
12.
Federal
Reserve Requirements
The
Bank
is required to maintain cash reserves with the Federal Reserve Bank of Richmond
based principally on the type and amount of its deposits.
During
2007, the daily average amount of these required reserves was approximately
$1.3
million.
13.
Restrictions
on Subsidiary Dividends, Loans or Advances
Federal
and state banking regulations place certain restrictions on the amount of
dividends paid and loans or advances made by the Bank to the Corporation. The
total
amount of dividends that may be paid at any date is generally limited to the
retained earnings of the Bank, and loans or advances are limited to 10 percent
of the Bank’s capital stock and surplus on a secured basis. In addition,
dividends paid by the Bank to the Corporation would be prohibited if the effect
thereof would cause the Bank’s capital to be reduced below applicable minimum
capital requirements. At December 31, 2007, the Bank could have paid additional
dividends of $13.9 million to the Corporation without regulatory
approval.
14.
Commitments
and Contingent Liabilities
The
Corporation and its subsidiaries are at times, and in the ordinary course of
business, subject to legal actions. However, to the knowledge of
management,
the Corporation is not currently subject to any such legal actions.
Loan
and
letter of credit commitments are discussed in Note 4.
15.
Fair
Value of Financial Instruments
As
required by SFAS No. 107, “Disclosures about Fair Value of Financial
Instruments,” presented in the following table is fair value information about
financial
instruments, whether or not recognized in the statement of financial condition,
for which it is practicable to estimate that value. Fair value is best
determined by values quoted through active trading markets. Active trading
markets are characterized by numerous transactions of similar financial
instruments between willing buyers and willing sellers. Because no active
trading market exists for various types of financial instruments, many of the
fair values disclosed were derived using present value discounted cash flow
or
other valuation techniques. As a result, the Corporation’s ability to actually
realize these derived values cannot be assumed.
The
fair
values disclosed under SFAS No. 107 may vary significantly between institutions
based on the estimates and assumptions used in the various
valuation
methodologies. The derived fair values are subjective in nature and involve
uncertainties and significant judgment. Therefore, they cannot be determined
with precision. Changes in the assumptions could significantly impact the
derived estimates of fair value. SFAS No. 107 excludes disclosure of non
financial assets such as buildings as well as certain financial instruments
such
as leases. Accordingly, the aggregate fair values presented do not represent
the
underlying value of the Corporation.
The
actual carrying amounts and estimated fair values of the Corporation’s financial
instruments that are included in the statement of financial condition
at
December 31 are as follows (in thousands):
|
|
|
2007
|
|
2006
|
|||||||||
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
||||||||||
|
Financial
Assets:
|
|||||||||||||
|
Cash
and cash equivalents
|
$
|
24,316
|
$
|
24,316
|
$
|
23,325
|
$
|
23,325
|
|||||
|
Interest-bearing
deposits in banks
|
1,486
|
1,486
|
2,463
|
2,463
|
|||||||||
|
Investment
securities
|
304,908
|
304,908
|
263,272
|
263,272
|
|||||||||
|
Federal
Home Loan Bank stock
|
9,863
|
9,863
|
9,620
|
9,620
|
|||||||||
|
Loans,
net
|
1,035,962
|
1,037,567
|
957,126
|
943,173
|
|||||||||
|
Accrued
interest receivable
|
7,478
|
7,478
|
6,249
|
6,249
|
|||||||||
|
Financial
Liabilities:
|
|||||||||||||
|
Deposits
|
1,092,740
|
1,093,360
|
971,381
|
967,849
|
|||||||||
|
Borrowed
funds
|
267,375
|
271,240
|
265,709
|
265,400
|
|||||||||
|
Accrued
interest payable
|
5,651
|
5,651
|
5,110
|
5,110
|
|||||||||
|
Off
Balance Sheet Financial Instruments
|
—
|
—
|
—
|
—
|
|||||||||
The
following methods and assumptions were used by the Corporation in estimating
its
fair value disclosures for financial instruments:
Cash
and cash equivalents:
The
carrying amounts as reported in the statement of financial condition for cash
and due from banks approximate their fair values.
Interest-bearing
deposits in banks:
The
carrying amount of interest-bearing deposits approximates their fair
values.
Investment
securities:
Fair
values of investment securities are based on quoted market values.
Federal
Home Loan Bank stock:
The
carrying value of Federal Home Loan stock approximates fair value based on
the
redemption provisions of the Federal Home Loan Bank.
Loans:
For
variable rate loans and leases that reprice frequently or “in one year or less,”
and with no significant change in credit risk, fair values are based on carrying
values. Fair values for fixed rate loans and leases and loans and leases that
do
not reprice frequently are estimated using a discounted cash flow calculation
that applies current interest rates being offered on the various loan
products.
Deposits:
The fair
values disclosed for demand deposits (e.g., interest and non-interest checking,
savings, and certain types of money market accounts) are, by definition, equal
to the amount payable on demand at the reporting date (i.e., their carrying
amounts). The carrying amounts for variable rate certificates of deposit
approximate their fair values at the reporting date. Fair values for fixed
rate
certificates of deposit are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on the various certificates
of deposit to the cash flow stream.
Borrowed
funds:
The fair
value of the Corporation’s Federal Home Loan Bank borrowings and junior
subordinated debt is calculated based on the discounted value of contractual
cash flows, using rates currently existing for borrowings
with
similar
remaining maturities. The carrying amounts of federal funds purchased and
securities sold under agreements to repurchase approximate their fair
values.
Accrued
Interest:
The
carrying amount of accrued interest receivable and payable approximates their
fair values.
Off-Balance-Sheet
Financial Instruments:
In the
normal course of business, the Corporation makes commitments to extend credit
and issues standby letters of credit. The Corporation expects most of these
commitments to expire without being drawn upon, therefore the commitment amounts
do not necessarily represent future cash requirements. Due to the uncertainty
of
cash flows and difficulty in the predicting the timing of such cash flows,
fair
values were not estimated for these instruments. The Corporation did not have
any derivative financial instruments at December 31, 2007 or 2006.
16.
Parent
Company Only Financial Information
Condensed
Statements of Financial Condition (in thousands)
|
December
31
|
|||||||
|
2007
|
|
2006
|
|||||
|
Assets
|
|||||||
|
Cash
|
$
|
1,486
|
$
|
1,593
|
|||
|
Investment
securities
|
1,216
|
1,221
|
|||||
|
Investment
in bank subsidiary
|
121,632
|
115,914
|
|||||
|
Investment
in non-bank subsidiaries
|
11,923
|
9,653
|
|||||
|
Other
assets
|
6,919
|
7,043
|
|||||
|
Total
Assets
|
$
|
143,176
|
$
|
135,424
|
|||
|
Liabilities
and Shareholder’s Equity
|
|||||||
|
Accrued
interest and other liabilities
|
$
|
1,348
|
$
|
1,470
|
|||
|
Dividends
payable
|
1,234
|
1,169
|
|||||
|
Junior
subordinated debt
|
35,929
|
35,929
|
|||||
|
Shareholders’
equity
|
104,665
|
96,856
|
|||||
|
Total
Liabilities and Shareholder’s Equity
|
$
|
143,176
|
$
|
135,424
|
|||
Condensed
Statements of Income (in thousands)
|
Year
Ended December 31
|
||||||||||
|
2007
|
|
2006
|
|
2005
|
||||||
|
Income:
|
||||||||||
|
Dividend
income from bank subsidiary
|
$
|
7,912
|
$
|
5,819
|
$
|
8,009
|
||||
|
Other
income
|
299
|
284
|
253
|
|||||||
|
Total
Income
|
8,211
|
6,103
|
8,262
|
|||||||
|
Expenses:
|
||||||||||
|
Interest
expense
|
2,384
|
2,355
|
2,179
|
|||||||
|
Other
expenses
|
169
|
142
|
127
|
|||||||
|
Total
Expenses
|
2,553
|
2,497
|
2,306
|
|||||||
|
Income
before income taxes and equity in undistributed
net
income of subsidiaries
|
5,658
|
3,606
|
5,956
|
|||||||
|
Equity
in undistributed net income of subsidiaries:
|
||||||||||
|
Bank
|
5,790
|
8,124
|
5,518
|
|||||||
|
Non-bank
|
1,345
|
847
|
677
|
|||||||
|
Net
Income
|
$
|
12,793
|
$
|
12,577
|
$
|
12,151
|
||||
Condensed
Statements of Cash Flows (in thousands)
|
Year
Ended December 31
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Operating
Activities
|
||||||||||
|
Net
Income
|
$
|
12,793
|
$
|
12,577
|
$
|
12,151
|
||||
|
Adjustments
to reconcile net income to net cash
provided
by operating activities:
|
||||||||||
|
Equity
in undistributed net income
of
subsidiaries
|
(7,135
|
)
|
(8,971
|
)
|
(6,195
|
)
|
||||
|
Decrease
(increase) in other assets
|
124
|
1,208
|
(237
|
)
|
||||||
|
Increase
(decrease) in accrued interest payable
and
other liabilities
|
(122
|
)
|
138
|
250
|
||||||
|
Increase
in dividends payable
|
65
|
6
|
36
|
|||||||
|
Net
cash provided by operating activities
|
5,725
|
4,958
|
6,005
|
|||||||
|
Investing
Activities
|
||||||||||
|
Proceeds
from investment maturities
|
—
|
9
|
38
|
|||||||
|
Net
investment in subsidiaries
|
(988
|
)
|
(1,281
|
)
|
(1,331
|
)
|
||||
|
Net
cash used in investing activities
|
(988
|
)
|
(1,272
|
)
|
(1,293
|
)
|
||||
|
Financing
Activities
|
||||||||||
|
Cash
dividends
|
(4,796
|
)
|
(4,662
|
)
|
(4,544
|
)
|
||||
|
Proceeds
from issuance of common stock
|
476
|
502
|
493
|
|||||||
|
Repurchase
of Common Stock
|
(524
|
)
|
—
|
—
|
||||||
|
Net
cash provided by (used in)
financing
activities
|
(4,844
|
)
|
(4,160
|
)
|
(4,051
|
)
|
||||
|
(Decrease)
increase in cash and cash equivalents
|
(107
|
)
|
(474
|
)
|
661
|
|||||
|
Cash
and cash equivalents at beginning of year
|
1,593
|
2,067
|
1,406
|
|||||||
|
Cash
and cash equivalents at end of year
|
$
|
1,486
|
$
|
1,593
|
$
|
2,067
|
||||
17.
Quarterly
Results of Operations (Unaudited)
The
following is a summary of the quarterly results of operations for the years
ended December 31, 2007 and 2006 (in thousands, except per share
amounts):
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
||||||||||
|
2007
|
|||||||||||||
|
Interest
income
|
$
|
21,418
|
$
|
22,841
|
$
|
24,262
|
$
|
25,044
|
|||||
|
Interest
expense
|
11,353
|
11,947
|
13,021
|
13,010
|
|||||||||
|
Net
interest income
|
10,065
|
10,894
|
11,241
|
12,034
|
|||||||||
|
Provision
for loan losses
|
163
|
367
|
790
|
992
|
|||||||||
|
Other
income
|
3,872
|
4,117
|
4,063
|
4,645
|
|||||||||
|
Gains
(losses) on securities
|
(1,511
|
)
|
(99
|
)
|
0
|
5
|
|||||||
|
Other
expenses
|
9,243
|
9,836
|
9,626
|
9,770
|
|||||||||
|
Income
before income taxes
|
3,020
|
4,709
|
4,888
|
5,922
|
|||||||||
|
Applicable
income taxes
|
959
|
1,504
|
1,333
|
1,950
|
|||||||||
|
Net
income
|
$
|
2,061
|
$
|
3,205
|
$
|
3,555
|
$
|
3,972
|
|||||
|
Earnings
per share
|
$
|
.34
|
$
|
.52
|
$
|
.58
|
$
|
.64
|
|||||
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
||||||||||
|
2006
|
|||||||||||||
|
Interest
income
|
$
|
18,977
|
$
|
19,539
|
$
|
20,560
|
$
|
21,193
|
|||||
|
Interest
expense
|
8,840
|
9,225
|
10,380
|
10,890
|
|||||||||
|
Net
interest income
|
10,137
|
10,314
|
10,180
|
10,303
|
|||||||||
|
Provision
for loan losses
|
(77
|
)
|
157
|
499
|
586
|
||||||||
|
Other
income
|
3,512
|
3,304
|
3,510
|
3,711
|
|||||||||
|
Gains
(losses) on securities
|
4
|
0
|
0
|
0
|
|||||||||
|
Other
expenses
|
9,518
|
8,936
|
8,538
|
8,498
|
|||||||||
|
Income
before income taxes
|
4,212
|
4,525
|
4,653
|
4,930
|
|||||||||
|
Applicable
income taxes
|
1,407
|
1,481
|
1,388
|
1,467
|
|||||||||
|
Net
income
|
$
|
2,805
|
$
|
3,044
|
$
|
3,265
|
$
|
3,463
|
|||||
|
Earnings
per share
|
$
|
.46
|
$
|
.50
|
$
|
.53
|
$
|
.56
|
|||||
ITEM
9.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
The
Corporation maintains disclosure controls and procedures that are designed
to
ensure that information required to be disclosed in the
Corporation’s
reports filed under the Securities Exchange Act of 1934 with the SEC, such
as
this annual report, is recorded, processed, summarized and reported within
the
time periods specified in those rules and forms, and that such information
is
accumulated and communicated to the Corporation’s management, including the
Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), as
appropriate, to allow for timely decisions regarding required disclosure. A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake. Additionally, controls can be circumvented
by the individual acts of some persons, by collusion of two or more people,
or
by management override of the control. The design of any system of controls
also
is based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions; over time, a control may
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate.
An
evaluation of the effectiveness of these disclosure controls as of December
31,
2007 was carried out under the supervision and with the participation of the
Corporation’s management, including the CEO and the CFO. Based on that
evaluation, the Corporation’s management, including the CEO and the CFO, has
concluded that the Corporation’s disclosure controls and procedures are, in
fact, effective at the reasonable assurance level.
During
the fourth quarter of 2007, there was no change in the Corporation’s internal
control over financial reporting that has materially
affected,
or is reasonably likely to materially affect, the Corporation’s internal control
over financial reporting.
As
required by Section 404 of the Sarbanes-Oxley Act of 2002, management has
performed an evaluation and testing of the Corporation’s internal control
over
financial reporting as of December 31, 2007. Management’s report on the
Corporation’s internal control over financial reporting and the related
attestation report of the Corporation’s registered public accounting firm are
included on the following pages.
Management’s
Report on Internal Control Over Financial Reporting
The
Board
of Directors and Shareholders
First
United Corporation
The
Corporation’s management is responsible for establishing and maintaining
adequate internal control over financial reporting. This internal
control
system was designed to provide reasonable assurance to management and the Board
of Directors as to the reliability of the Corporation’s financial reporting and
the preparation and presentation of financial statements for external purposes
in accordance with accounting principles generally accepted in the United
States, as well as to safeguard assets from unauthorized use or
disposition.
An
internal control system, no matter how well designed, has inherent limitations.
Therefore, even those systems determined to be effective can
provide
only reasonable assurance with respect to financial statement preparation and
presentation and may not prevent or detect misstatements in the financial
statements or the unauthorized use or disposition of the Corporation’s assets.
Also, projections of any evaluation of effectiveness of internal controls to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with policies
and procedures may deteriorate.
Management
assessed the effectiveness of the Corporation’s internal control over financial
reporting as of December 31, 2007, based on the criteria
set
forth
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in Internal Control—Integrated Framework. Based on this assessment and on the
foregoing criteria, management has concluded that, as of December 31, 2007,
the
Corporation’s internal control over financial reporting is
effective.
Beard
Miller Company LLP, an independent registered public accounting firm, has
audited the Consolidated Financial Statements of the Corporation for the
year
ended December 31, 2007, appearing elsewhere in this annual report, and has
issued an attestation report on the effectiveness of the Corporation’s internal
control over financial reporting as of December 31, 2007, as stated in their
report, which is included herein.
|
/s/
William B. Grant
|
/s/ Carissa L. Rodeheaver | ||
|
William
B. Grant, Esq., CFP
Chairman
of the Board and
Chief
Executive Officer
|
Carissa
L. Rodeheaver, CPA, CFP
Senior
Vice President and
Chief
Financial Officer
|
Report
of Independent Registered Public Accounting Firm
To
the
Board of Directors and Shareholders
First
United Corporation
Oakland,
Maryland
We
have
audited First United Corporation’s internal control over financial reporting as
of December 31, 2007, based on criteria established in
Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
First United Corporation’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control Over Financial Reporting.
Our responsibility is to express an opinion on the Corporation’s internal
control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control, based on the
assessed risk. Our audit also included performing such other procedures as
we
considered necessary in the circumstances. We believe that our audit provides
a
reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, First United Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31,
2007, based on criteria established in
Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated statements of financial
condition and the related consolidated statements of income, changes in
shareholders’ equity, and cash flows of First United Corporation and our report
dated March 5, 2008 expressed an unqualified opinion.
| /s/ Beard Miller Company LLP |
Beard
Miller Company LLP
Baltimore,
Maryland
March 5,
2008
ITEM
9B.
OTHER
INFORMATION
None.
The
Corporation has adopted a Code of Ethics applicable to its principal executive
officer, principal financial officer, principal accounting officer, or
controller, or persons performing similar functions, a Code of Ethics applicable
to all employees, and a Code of Ethics applicable to members of the Board of
Directors. Copies of the Corporation’s Codes of Ethics are available free of
charge upon request to Mr. Robert W. Kurtz, Secretary, First United Corporation,
c/o First United Bank & Trust, P.O. Box 9, Oakland, MD 21550-0009 or on the
Corporation’s website at www.mybankfirstunited.com.
All
other
information required by this item is incorporated by reference herein to the
Corporation’s definitive Proxy Statement for the 2008 Annual Shareholders
Meeting to be filed with the SEC pursuant to Regulation 14A.
ITEM
11.
EXECUTIVE
COMPENSATION
The
information required by this item is incorporated by reference herein to the
Corporation’s definitive Proxy Statement for the 2008 Annual Shareholders
Meeting
to be filed with the SEC pursuant to Regulation 14A.
ITEM
12.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED
STOCKHOLDER MATTERS
The
information required by this item is incorporated by reference herein to the
Corporation’s definitive Proxy Statement for the 2008 Annual Shareholders
Meeting
to be filed with the SEC pursuant to Regulation 14A.
ITEM
13.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
,
AND DIRECTOR INDEPENDENCE
The
information required by this item is incorporated by reference herein to the
Corporation’s definitive Proxy Statement for the 2008 Annual Shareholders
Meeting
to be filed with the SEC pursuant to Regulation 14A.
ITEM
14.
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
The
information required by this item is incorporated by reference herein to the
Corporation’s definitive Proxy Statement for the 2008 Annual Shareholders
Meeting
to be filed with the SEC pursuant to Regulation 14A.
(a)(1),
(2) and (c) Financial Statements.
Reports
of Independent Registered Public Accounting Firms
Consolidated
Statements of Financial Condition as of December 31, 2007 and
2006
Consolidated
Statements of Income for the years ended December 31, 2007, 2006 and
2005
Consolidated
Statements of Changes in Shareholders’ Equity for the years ended December 31,
2007, 2006
and
2005
Consolidated
Statements of Cash Flows for the years ended December 31, 2007, 2006 and
2005
Notes
to
Consolidated Financial Statements for the years ended December 31, 2007, 2006
and 2005
(a)
(3)
and (b) Exhibits.
The
exhibits filed or furnished with this annual report are shown on the Exhibit
List that follows the signatures to this annual report.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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
|
||
|
|
|
|
| Dated: March 7, 2008 | By: | /s/ William B. Grant |
|
William
B. Grant, Esq., CFP
Chairman
of the Board and Chief Executive
Officer
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the
registrant
and in the capacities indicated.
|
/s/
William B. Grant
(William
B. Grant) Director, Chief Executive Officer
|
/s/
David J. Beachy
(David
J. Beachy) Director
—
March
7,
2008
|
|
|
March
7, 2008
|
||
|
/s/
M. Kathryn Burkey
(M.
Kathryn Burkey) Director
—
March
7,
2008
|
/s/
Faye E. Cannon
(Faye
E. Cannon) Director
—
March
7,
2008
|
|
|
/s/
Paul Cox, Jr.
(Paul
Cox, Jr.) Director
—
March
7,
2008
|
/s/
Raymond F. Hinkle
(Raymond
F. Hinkle) Director
—
March
7,
2008
|
|
|
/s/
Robert W. Kurtz
(Robert
W. Kurtz) Director, President and Chief
|
/s/
John W. McCullough
(John
W. McCullough) Director
—
March
7,
2008
|
|
|
Risk
Officer—March 7, 2008
|
||
|
Elaine
L. McDonald
(Elaine
L. McDonald) Director
—
March
7,
2008
|
/s/
Donald E. Moran
(Donald
E. Moran) Director
—
March
7,
2008
|
|
|
/s/
Karen F. Myers
(Karen
F. Myers) Director
—
March
7,
2008
|
/s/
Carissa L. Rodeheaver
(Carissa
L. Rodeheaver) SVP & Chief Financial Officer-
|
|
|
March
7, 2008
|
||
|
/s/
Gary R. Ruddell
(Gary
R. Ruddell) Director
—
March
7,
2008
|
/s/
I. Robert Rudy
(I.
Robert Rudy) Director
—
March
7,
2008
|
|
|
/s/
Richard G. Stanton
(Richard
G. Stanton) Director
—
March 7,
2008
|
/s/
Robert G. Stuck
(Robert
G. Stuck) Director
—
March
7,
2008
|
|
|
/s/
H. Andrew Walls, III
(H.
Andrew Walls, III) Director
—
March
7,
2008
|
EXHIBIT
INDEX
|
Exhibit
|
Description
|
|
|
3.1
|
Amended
and Restated Articles of Incorporation (incorporated by reference
to
Exhibit 3.1 of the Corporation's Quarterly Report on Form 10-Q
for the
period ended September 30, 1998)
|
|
|
3.2(i)
|
Amended
and Restated By-Laws (filed herewith)
|
|
|
3.2(ii)
|
First
Amendment to Amended and Restated Bylaws (filed
herewith)
|
|
|
10.1
|
First
United Bank & Trust Amended and Restated Supplemental Executive
Retirement Plan (“SERP”) (incorporated by reference to Exhibit 10.4 of the
Corporation’s Current Report on Form 8-K filed on February 21,
2007)
|
|
|
10.2
|
Amended
and Restated SERP Agreement with William B. Grant (incorporated
by
reference to Exhibit 10.5 of the Corporation’s Current Report on Form 8-K
filed on February 21, 2007)
|
|
|
10.3
|
Form
of Amended and Restated SERP Agreement with executive officers
other than
William B. Grant (incorporated by reference to Exhibit 10.6 of
the
Corporation’s Current Report on Form 8-K filed on February 21,
2007)
|
|
|
10.4
|
Form
of Endorsement Split Dollar Agreement between the Bank and each
of William
B. Grant, Robert W. Kurtz, Jeannette R. Fitzwater, Phillip D. Frantz,
Eugene D. Helbig, Jr., Steven M. Lantz, Robin M. Murray, Carissa
L.
Rodeheaver, and Frederick A. Thayer, IV (incorporated by reference
to
Exhibit 10.3 of the Corporation’s Quarterly Report on Form 10-Q for the
period ended September 30, 2003)
|
|
|
10.5
|
First
United Corporation Executive and Director Deferred Compensation
Plan
(incorporated by reference to Exhibit 10.10 of the Corporation’s Quarterly
Report on Form 10-Q for the period ended September 30,
2003)
|
|
|
10.6
|
First
United Corporation Change in Control Severance Plan (incorporated
by
reference to Exhibit 10.1 of the Corporation’s Current Report on Form 8-K
filed on February 21, 2007)
|
|
|
10.7
|
Change
in Control Severance Plan Agreement with William B. Grant (incorporated
by
reference to Exhibit 10.2 the Corporation’s Current Report on Form 8-K
filed on February 21, 2007)
|
|
|
10.8
|
Form
of Change in Control Severance Plan Agreement with executive officers
other than William B. Grant (incorporated by reference to Exhibit
10.3 the
Corporation’s Current Report on Form 8-K filed on February 21,
2007)
|
|
|
10.9
|
First
United Corporation Omnibus Equity Compensation Plan (incorporated
by
reference to Appendix B of the Corporation’s 2007 definitive proxy
statement filed on March 23, 2007)
|
|
|
21
|
Subsidiaries
of the Corporation, incorporated by reference to page 3 of this
Annual
Report on Form 10-K.
|
|
|
23.1
|
Consent
of Beard Miller Company LLP (filed herewith)
|
|
|
23.2
|
Consent
of Ernst & Young LLP (filed herewith)
|
|
|
31.1
|
Certifications
of the CEO pursuant to Section 302 of the Sarbanes-Oxley Act (filed
herewith)
|
|
|
31.2
|
Certifications
of the CFO pursuant to Section 302 of the Sarbanes-Oxley Act (filed
herewith)
|
|
|
32.1
|
Certification
of the CEO pursuant to Section 906 of the Sarbanes-Oxley Act (furnished
herewith)
|
|
|
32.2
|
Certification
of the CFO pursuant to Section 906 of the Sarbanes-Oxley Act (furnished
herewith)
|
75