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,
2008
|
OR
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¨
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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
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52-1380770
|
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification Number)
|
|
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19
South Second Street, Oakland, Maryland
|
21550-0009
|
|
|
(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (800) 470-4356
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of Each Class:
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Name
of Each Exchange on Which Registered:
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|
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Common
Stock, par value $.01 per share
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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 ¨ 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 ¨ 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 ¨
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 ¨ Accelerated
filer x Non-accelerated filer
¨ Smaller
reporting company ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).Yes ¨ 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, 2008: $ 106,519,790.
The
number of shares of the registrant’s common stock outstanding as of February 28,
2009: 6,122,411
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
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ITEM
1.
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Business
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3
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ITEM
1A.
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Risk
Factors
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11
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ITEM
1B.
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Unresolved
Staff Comments
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17
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ITEM
2.
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Properties
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17
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ITEM
3.
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Legal
Proceedings
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17
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ITEM
4.
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Submission
of Matters to a Vote of Security Holders
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17
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PART
II
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||
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ITEM
5.
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Market
for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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18
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ITEM
6.
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Selected
Financial Data
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21
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ITEM
7.
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Management's
Discussion & Analysis of Financial Condition & Results of
Operations
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22
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ITEM
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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44
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ITEM
8.
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Financial
Statements and Supplementary Data
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45
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ITEM
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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76
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ITEM
9A.
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Controls
and Procedures
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76
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ITEM
9B.
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Other
Information
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79
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PART
III
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||
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ITEM
10.
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Directors,
Executive Officers and Corporate Governance
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79
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ITEM
11.
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Executive
Compensation
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79
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ITEM
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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79
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ITEM
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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79
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ITEM
14.
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Principal
Accountant Fees and Services
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79
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PART
IV
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||
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ITEM
15.
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Exhibits
and Financial Statement Schedules
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79
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80
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||
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EXHIBITS
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81
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|
[2]
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.
PART
I
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ITEM
1.
|
BUSINESS
|
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, 2008, the Corporation
had assets of approximately $1.64 billion, net loans of approximately $1.12
billion, and deposits of approximately $1.22 billion. Shareholders’
equity at December 31, 2008 was approximately $73 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 32 Automated Teller Machines
(“ATM’s”) in Allegany County, Frederick County, Garrett County, and Washington
County in Maryland, and in Berkeley County, Mineral County, and Monongalia
County in West Virginia. 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 retirement accounts including individual retirement account
(“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”).
[3]
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 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, are 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, businesses, and consumers, 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.
[4]
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, 2008, 2007 and 2006, the total
market value of assets under the supervision of the Bank’s Trust Department was
approximately $472 million, $547 million and $502 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 contained 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, 2008, 2007 and 2006 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, 2008, the most recent date for which comparative
information is available.
|
Offices
(in Market)
|
Deposits (in thousands)
|
Market Share
|
||||||||||
|
Allegany
County, Maryland:
|
||||||||||||
|
Susquehanna
Bank
|
5 | $ | 224,368 | 36.72 | % | |||||||
|
Manufacturers
& Traders Trust Company
|
7 | 172,975 | 28.31 | % | ||||||||
|
First
United Bank & Trust
|
4 | 126,714 | 20.74 | % | ||||||||
|
PNC
Bank NA
|
3 | 51,300 | 8.39 | % | ||||||||
|
Standard
Bank
|
2 | 35,746 | 5.85 | % | ||||||||
Source: FDIC
Deposit Market Share Report
[5]
|
Frederick
County, Maryland:
|
||||||||||||
|
PNC
Bank NA
|
20 | 1,015,594 | 32.82 | % | ||||||||
|
Branch
Banking & Trust Co.
|
12 | 593,671 | 19.18 | % | ||||||||
|
Frederick
County Bank
|
4 | 225,184 | 7.28 | % | ||||||||
|
Bank
Of America NA
|
5 | 222,764 | 7.20 | % | ||||||||
|
Manufacturers
& Traders Trust Company
|
6 | 185,296 | 5.99 | % | ||||||||
|
Chevy
Chase Bank FSB
|
6 | 152,430 | 4.93 | % | ||||||||
|
Woodsboro
Bank
|
7 | 150,069 | 4.85 | % | ||||||||
|
Middletown
Valley Bank
|
4 | 131,044 | 4.23 | % | ||||||||
|
SunTrust
Bank
|
3 | 121,831 | 3.94 | % | ||||||||
|
First
United Bank & Trust
|
3 | 103,390 | 3.34 | % | ||||||||
|
Sandy
Spring Bank
|
4 | 65,731 | 2.12 | % | ||||||||
|
Provident
Bank of Maryland
|
2 | 34,602 | 1.12 | % | ||||||||
|
Damascus
Community Bank
|
2 | 22,152 | 0.72 | % | ||||||||
|
Wachovia
Bank NA
|
1 | 16,287 | 0.53 | % | ||||||||
|
Columbia
Bank
|
2 | 16,197 | 0.52 | % | ||||||||
|
Sovereign
Bank
|
3 | 15,887 | 0.51 | % | ||||||||
|
Graystone
Bank
|
1 | 11,591 | 0.37 | % | ||||||||
|
BlueRidge
Bank
|
1 | 11,166 | 0.36 | % | ||||||||
Source: FDIC
Deposit Market Share Report
|
Garrett
County, Maryland:
|
||||||||||||
|
First
United Bank & Trust
|
5 | 579,636 | 74.84 | % | ||||||||
|
Manufacturers
& Traders Trust Co.
|
5 | 95,043 | 12.27 | % | ||||||||
|
Susquehanna
Bank
|
2 | 70,569 | 9.11 | % | ||||||||
|
Clear
Mountain Bank
|
1 | 25,408 | 3.28 | % | ||||||||
|
Miners
& Merchants Bank
|
1 | 3,861 | 0.50 | % | ||||||||
Source: FDIC
Deposit Market Share Report
|
Washington
County, Maryland:
|
||||||||||||
|
Susquehanna
Bank
|
10 | 607,697 | 30.67 | % | ||||||||
|
Hagerstown
Trust Co.
|
11 | 398,102 | 20.09 | % | ||||||||
|
Manufacturers
& Traders Trust Company
|
12 | 386,594 | 19.51 | % | ||||||||
|
Sovereign
Bank
|
4 | 195,022 | 9.84 | % | ||||||||
|
PNC
Bank NA
|
6 | 153,804 | 7.76 | % | ||||||||
|
First
United Bank & Trust
|
3 | 68,526 | 3.46 | % | ||||||||
|
First
National Bank of Greencastle
|
3 | 46,069 | 2.33 | % | ||||||||
|
Centra
Bank
|
2 | 37,928 | 1.91 | % | ||||||||
|
Chevy
Chase Bank FSB
|
3 | 37,310 | 1.88 | % | ||||||||
|
Citizens
National Bank of Berkeley Springs
|
1 | 30,892 | 1.56 | % | ||||||||
|
Orrstown
Bank
|
1 | 10,706 | 0.54 | % | ||||||||
|
Jefferson
Security Bank
|
1 | 5,983 | 0.30 | % | ||||||||
|
Middletown
Valley Bank
|
1 | 2,777 | 0.14 | % | ||||||||
Source: FDIC
Deposit Market Share Report
[6]
|
Berkeley
County, West Virginia:
|
||||||||||||
|
Branch
Banking & Trust Co.
|
5 | 311,844 | 30.97 | % | ||||||||
|
Centra
Bank Inc.
|
3 | 217,491 | 21.60 | % | ||||||||
|
First
United Bank & Trust
|
5 | 118,775 | 11.80 | % | ||||||||
|
City
National Bank of West Virginia
|
4 | 106,957 | 10.62 | % | ||||||||
|
Susquehanna
Bank
|
4 | 102,314 | 10.16 | % | ||||||||
|
Jefferson
Security Bank
|
2 | 59,555 | 5.92 | % | ||||||||
|
Bank
of Charles Town
|
2 | 42,352 | 4.21 | % | ||||||||
|
Citizens
National Bank of Berkeley Springs
|
3 | 35,157 | 3.49 | % | ||||||||
|
Summit
Community Bank
|
1 | 9,117 | 0.91 | % | ||||||||
|
MVB
Bank Inc.
|
1 | 3,221 | 0.32 | % | ||||||||
Source: FDIC
Deposit Market Share Report
|
Hardy
County, West Virginia:
|
||||||||||||
|
Summit
Community Bank, Inc.
|
2 | 308,677 | 65.58 | % | ||||||||
|
Capon
Valley Bank
|
3 | 111,206 | 23.63 | % | ||||||||
|
Pendleton
Community Bank, Inc.
|
1 | 23,493 | 4.99 | % | ||||||||
|
First
United Bank & Trust
|
1 | 16,188 | 3.44 | % | ||||||||
|
Grant
County Bank
|
1 | 11,148 | 2.37 | % | ||||||||
Source: FDIC
Deposit Market Share Report
|
Mineral
County, West Virginia:
|
||||||||||||
|
First
United Bank & Trust
|
2 | 82,627 | 33.08 | % | ||||||||
|
Branch
Banking & Trust Co.
|
2 | 80,665 | 32.29 | % | ||||||||
|
Manufacturers
& Traders Trust Co.
|
2 | 49,596 | 19.85 | % | ||||||||
|
Grant
County Bank
|
1 | 36,905 | 14.77 | % | ||||||||
Source: FDIC
Deposit Market Share Report
|
Monongalia
County, West Virginia:
|
||||||||||||
|
Centra
Bank, Inc.
|
6 | 461,896 | 28.39 | % | ||||||||
|
Huntington
National Bank
|
5 | 389,495 | 23.94 | % | ||||||||
|
Branch
Banking & Trust Co.
|
5 | 342,964 | 21.08 | % | ||||||||
|
United
Bank
|
4 | 183,521 | 11.28 | % | ||||||||
|
Wesbanco
Bank, Inc.
|
5 | 85,731 | 5.27 | % | ||||||||
|
Clear
Mountain Bank
|
5 | 77,151 | 4.74 | % | ||||||||
|
First
United Bank & Trust
|
2 | 40,264 | 2.48 | % | ||||||||
|
First
Exchange Bank
|
2 | 23,804 | 1.46 | % | ||||||||
|
Citizens
Bank of Morgantown, Inc.
|
1 | 21,991 | 1.35 | % | ||||||||
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.
[7]
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 “GLB Act”) was signed
into law. The GLB Act revised the BHC Act 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. Under
the GLB Act, a bank holding company can elect, subject to certain
qualifications, to become a “financial holding company.” The GLB Act
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. The GLB Act 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,
the GLB Act 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.
[8]
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
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. Effective October 3, 2008, the
Emergency Economic Stabilization Act of 2008 (the “EESA”) was enacted to
temporarily raise the basic limit on federal deposit insurance coverage from
$100,000 to $250,000 per depositor. The legislation states the limit
will return to $100,000 after December 31, 2009. The coverage for
retirement accounts did not change and remains at $250,000. The Bank
is required to pay semi-annual deposit insurance premium assessments to the
FDIC. The Bank paid $.5 million in FDIC premiums during
2008. Further information about deposit insurance premiums is
provided in Item 7 of Part II of this report under the heading “Recent
Developments”.
On
October 14, 2008, the FDIC announced the creation of the Temporary Liquidity
Guarantee Program (the “TLGP”) to decrease the cost of bank funding and,
hopefully, normalize lending. This program is comprised of two
components. The first component guarantees senior unsecured debt
issued between October 14, 2008 and June 30, 2009. The guarantee will
remain in effect until June 30, 2012 for such debts that mature beyond June 30,
2009. The second component provides full coverage for non-interest
bearing transaction deposit accounts, IOLTAs, and NOW accounts with interest
rates of 0.50 percent or less, regardless of account balance, until December 31,
2009. The Bank elected to participate in both programs and expects
FDIC premiums to increase in 2009 as a result of its participation.
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).
[9]
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, 2008
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 Global
Select 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.
[10]
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, 2008, we employed approximately 485 individuals, of whom 380 were
full-time employees.
|
ITEM
1A.
|
RISK
FACTORS
|
Our financial condition and results of
operations are subject to numerous risks and uncertainties and could be
materially and adversely affected by any of these risks and
uncertainties. The risks and uncertainties that we believe are the
most significant are discussed below. You should carefully consider
these risks before making an investment decision with respect to any of the
Corporation’s securities. This annual report also contains
forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including the risks
faced by us described below and elsewhere in this report.
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.
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 (the “FHLB”) 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. There can be no
assurance that our attempts to structure our asset and liability management
strategies to mitigate the impact on net interest income of changes in market
interest rates will be successful in the event of such changes.
The
majority of our business is concentrated in Maryland and West Virginia; a
significant amount of our business is concentrated in real estate
lending.
Most of our loans are made to Western
Maryland and Northeastern West Virginia borrowers, and many of these loans are
secured by real estate, including construction and land development
loans. Accordingly, 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. Moreover, the national and local economies have
significantly weakened during the past two years in part due to the
widely-reported problems in the sub-prime mortgage loan market. As a
result, real estate values across the country, including in our market areas,
have decreased and the general availability of credit, especially credit to be
secured by real estate, has also decreased. These conditions have
made it more difficult for real estate owners and owners of loans secured by
real estate to sell their assets at the times and at the prices they
desire. In addition, these conditions have increased the risk that
the market values of the real estate securing our loans may deteriorate, which
could cause us to lose money in the event a borrower fails to repay a loan and
we are forced to foreclose on the property. There can be no guarantee
as to when or whether economic conditions will improve.
[11]
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, 2008, we may be subject
to further supervisory analysis during future examinations. 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 the Bank 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 continually monitors our loan
portfolio and makes 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.
The
market value of our investments could decline.
As of December 31, 2008, 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.
Our investments include stock issued by
the FHLB of Atlanta. As a member of the FHLB of Atlanta, we are
required to purchase stock of that bank based on how much we borrow from it and
the quality of the collateral that we pledge to secure that
borrowing. In recent months, the banking industry has become
concerned about the financial strength of the banks in the FHLB system, and some
FHLB banks have stopped paying dividends on and redeeming FLHB
stock. On January 30, 2009, the FHLB of Atlanta announced that it was
deferring the declaration of a dividend on its stock for the quarter ended
December 31, 2008 until it completes its year-end analysis of
other-than-temporary impairment which is critical to its net income
determination. The FHLB of Atlanta stated that it anticipates a
decision regarding the dividend to be made in March
2009. Accordingly, there can be no guaranty that the FHLB of Atlanta
will declare a dividend on its stock for the quarter ended December 31, 2008 or
for any future quarter.
[12]
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, the
GLB Act 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
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.
Our
regulatory expenses will likely increase due to the enactment of the Emergency
Economic Stabilization Act and related government programs.
Among
other things, the EESA included a provision to increase the amount of deposits
insured by FDIC to $250,000. The TLGP provides, until December 31,
2009, unlimited deposit insurance on funds in non-interest-bearing transaction
deposit accounts and certain IOLTAs and NOW accounts not otherwise covered by
the existing deposit insurance limit of $250,000, as well as a 100% guarantee of
the newly issued senior debt of all FDIC-insured institutions and their holding
companies issued between October 14, 2008 and June 30, 2009. All
eligible institutions will be covered under the TLGP for the first 30 days
without incurring any costs. After the initial period, participating
institutions will be assessed a charge of 10 basis points per annum for the
additional insured deposits and a charge of 75 basis points per annum for
guaranteed senior unsecured debt. We elected to participate in both
portions of the TLGP, so we expect to incur additional regulatory fees
associated with our participation.
[13]
Customer
concern about deposit insurance may cause a decrease in deposits held at the
Bank.
With recent increased concerns about
bank failures, customers increasingly are concerned about the extent to which
their deposits are insured by the FDIC. Customers may withdraw
deposits from the Bank in an effort to ensure that the amount they have on
deposit with us is fully insured. Decreases in deposits may adversely
affect our funding costs and net income.
Our
funding sources may prove insufficient to replace deposits and support our
future growth.
We rely on customer deposits, advances
from the FHLB, lines of credit at other financial institutions and brokered
funds to fund our operations. Although we have historically been able
to replace maturing deposits and advances if desired, no assurance can be given
that we would be able to replace such funds in the future if our financial
condition or the financial condition of the FHLB or market conditions were to
change. Our financial flexibility will be severely constrained and/or
our cost of funds will increase if we are unable to maintain our access to
funding or if financing necessary to accommodate future growth is not available
at favorable interest rates. Finally, if we are required to rely more heavily on
more expensive funding sources to support future growth, our revenues may not
increase proportionately to cover our costs. In this case, our profitability
would be adversely affected.
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.
We
may lose key personnel because of our participation in the Troubled Asset Relief
Program Capital Purchase Program.
On January 30, 2009, we participated in
the Troubled Asset Relief Program (“TARP”) Capital Purchase Program (the “CPP”)
adopted by the U.S. Department of Treasury (“Treasury”) by selling $30 million
in shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the
“Series A Preferred Stock”) to Treasury and issuing a 10-year common stock
purchase warrant (the “Warrant”) to Treasury. As part of these
transactions, we adopted Treasury’s standards for executive compensation and
corporate governance for the period during which Treasury holds any shares of
the Series A Preferred Stock and/or any shares of common stock that may be
acquired upon exercise of the Warrant. On February 17, 2009, the
American Recovery and Reinvestment Act of 2009 (the “Recovery Act”) was signed
into law, which, among other things, imposes additional executive compensation
restrictions on institutions that participate in TARP for so long as any TARP
assistance remains outstanding. Among these restrictions is a
prohibition against making most severance payments to our “senior executive
officers”, which term includes our Chairman and Chief Executive Officer, our
Chief Financial Officer and, generally, the three next most highly compensated
executive officers, and to the next five most highly compensated
employees. The restrictions also limit the type, timing and amount of
bonuses, retention awards and incentive compensation that may be paid to certain
employees. These restrictions, coupled with the competition we face
from other institutions, including institutions that do not participate in TARP,
may make it more difficult for us to attract and/or retain exceptional key
employees.
Our
lending activities subject us to the risk of environmental
liabilities.
A
significant portion of our loan portfolio is secured by real
property. During the ordinary course of business, we may foreclose on
and take title to properties securing certain loans. In doing so,
there is a risk that hazardous or toxic substances could be found on these
properties. If hazardous or toxic substances are found, we may be
liable for remediation costs, as well as for personal injury and property
damage. Environmental laws may require us to incur substantial
expenses and may materially reduce the affected property’s value or limit our
ability to use or sell the affected property. In addition, future
laws or more stringent interpretations or enforcement policies with respect to
existing laws may increase our exposure to environmental
liability. Although we have policies and procedures to perform an
environmental review before initiating any foreclosure action on real property,
these reviews may not be sufficient to detect all potential environmental
hazards. The remediation costs and any other financial liabilities
associated with an environmental hazard could have a material adverse effect on
our financial condition and results of operations.
[14]
We
may be adversely affected by other recent legislation.
As discussed above, the GLB Act
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
federal 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 federal USA PATRIOT Act requires
certain financial institutions, such as the Bank, to maintain and prepare
additional records and reports that are designed to assist the government’s
efforts to combat terrorism. This law includes sweeping anti-money laundering
and financial transparency laws and required 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. If we fail to comply with
this law, we could be exposed 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 Securities
The
Corporation’s shares of common stock, Series A Preferred Stock, and the Warrant
are not insured.
The shares of the Series A Preferred
Stock, the warrant, and the shares of common stock for which the warrant may be
exercised are not deposits and are not insured against loss by the Federal
Deposit Insurance Corporation or any other governmental or private
agency.
The
Corporation’s ability to pay dividends is limited by applicable banking and
corporate law.
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.
[15]
Because
of the Corporation’s participation in TARP, it is subject to several
restrictions relating to shares of its capital stock, including restrictions on
its ability to declare or pay dividends on and repurchase its
shares.
As stated above, the Corporation
recently issued 30,000 shares of the Series A Preferred Stock and the Warrant to
purchase 326,323 shares of common stock. Under the terms of the
transaction documents, the Corporation’s ability to declare or pay dividends on
shares of its capital stock is limited. Specifically, the Corporation
is unable to declare dividends on common stock, other stock ranking junior to
the Series A Preferred Stock (“Junior Stock”), or preferred stock ranking on a
parity with the Series A Preferred Stock (“Parity Stock”) if the Corporation is
in arrears on the dividends on the Series A Preferred Stock. Further,
the Corporation is not permitted to increase dividends on its common stock above
the amount of the last quarterly cash dividend per share declared prior to
October 14, 2008 without Treasury’s approval until January 30, 2012 unless all
of the Series A Preferred Stock has been redeemed or transferred. In
addition, the Corporation’s ability to repurchase its capital stock is
restricted. Treasury’s consent generally is required for the
Corporation to make any stock repurchase until January 30, 2012 unless all of
the Series A Preferred Stock has been redeemed or
transferred. Further, shares of common stock, Junior Stock or Parity
Stock may not be repurchased if the Corporation is in arrears on the Series A
Preferred Stock dividends.
The
Corporation’s ability to pay dividends on its securities is also subject to the
terms of its outstanding debentures.
In March 2004, the Corporation issued
approximately $30.9 million of junior subordinated debentures to First United
Statutory Trust I and First United Statutory Trust II (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. In
December 2004, the Corporation issued an additional $5.0 million of
debentures. The terms of the debentures require the Corporation to
make quarterly payments of interest to the holders of the debentures, although
the Corporation has the ability to defer payments of interest for up to 20
consecutive quarterly periods. Should the Corporation make such a
deferral election, however, it would be prohibited from paying dividends or
distributions on, or from repurchasing, redeeming or otherwise acquiring any
shares of its capital stock, including the common stock and the Series A
Preferred Stock. Although the Corporation has no present intention of
deferring payments of interest on its debentures, there can be no assurance that
the Corporation will not elect to do so in the future.
There
is no market for the Series A Preferred Stock or the Warrant, and the common
stock is not heavily traded.
There is no established trading market
for the shares of the Series A Preferred Stock or the Warrant. The
Corporation does not intend to apply for listing of the Series A Preferred Stock
on any securities exchange or for inclusion of the Series A Preferred Stock in
any automated quotation system unless requested by Treasury. The
Corporation’s common stock is listed on the NASDAQ Global Select Market, but
shares of the common stock 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 the shares the common stock. Management cannot
predict the extent to which an active public market for any of the Corporation’s
securities will develop or be sustained in the future. Accordingly,
holders of the Corporation’s securities may not be able to sell such securities
at the volumes, prices, or times that they desire.
The
Corporation’s Articles of Incorporation and Bylaws and Maryland law may
discourage a corporate takeover.
The Corporation’s Amended and Restated
Articles of Incorporation and Amended and Restated Bylaws, as amended, contain
certain provisions designed to enhance the ability of the Corporation’s 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, the
Bylaws require any shareholder who desires to nominate a director to abide by
strict notice requirements.
[16]
Maryland law also contains
anti-takeover provisions that apply to the Corporation. Maryland’s
Business Combination Act generally prohibits, subject to certain limited
exceptions, corporations from being involved in any “business combination”
(defined as a variety of transactions, including a merger, consolidation, share
exchange, asset transfer or issuance or reclassification of equity securities)
with any “interested shareholder” for a period of five years following the most
recent date on which the interested shareholder became an interested
shareholder. An interested shareholder is defined generally as a
person who is the beneficial owner of 10% or more of the voting power of the
outstanding voting stock of the corporation after the date on which the
corporation had 100 or more beneficial owners of its stock or who is an
affiliate or associate of the corporation and was the beneficial owner, directly
or indirectly, of 10% percent or more of the voting power of the then
outstanding stock of the corporation at any time within the two-year period
immediately prior to the date in question and after the date on which the
corporation had 100 or more beneficial owners of its
stock. Maryland’s Control Share Acquisition Act applies to
acquisitions of “control shares”, which, subject to certain exceptions, are
shares the acquisition of which entitle the holder, directly or indirectly, to
exercise or direct the exercise of the voting power of shares of stock of the
corporation in the election of directors within any of the following ranges of
voting power: one-tenth or more, but less than one-third of all
voting power; one-third or more, but less than a majority of all voting power or
a majority or more of all voting power. Control shares have limited
voting rights.
Although these provisions do not
preclude a takeover, they may have the effect of discouraging, delaying or
deferring a tender offer or takeover attempt that a shareholder might consider
in his or her best interest, including those attempts that might result in a
premium over the market price for the common stock. 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. These 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 19 of its banking offices and leases
seven. During the fourth quarter 2008, the Corporation entered into a
lease agreement for an office building to house specialists for lending and
insurance and a retail branch site, both in Frederick, Maryland. The
Corporation also leases eight offices of non-bank subsidiaries. Total
rent expense on the leased offices and properties was $.54 million in
2008.
|
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 or results of operations.
|
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
None.
[17]
PART
II
|
ITEM
5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
Shares of
the Corporation’s common stock are listed on the NASDAQ Global Select Market
under the symbol “FUNC”. As of February 28, 2009, the Corporation had
1,988 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 2008 and 2007 are set forth below. On March 3,
2009, the closing sales price of the common stock was $8.98 per
share.
|
2008
|
High
|
Low
|
Dividends Declared
|
|||||||||
|
1st
Quarter
|
$ | 20.85 | $ | 17.01 | $ | .200 | ||||||
|
2nd
Quarter
|
19.98 | 18.04 | .200 | |||||||||
|
3rd
Quarter
|
20.73 | 16.01 | .200 | |||||||||
|
4th
Quarter
|
20.00 | 13.00 | .200 | |||||||||
|
2007
|
High
|
Low
|
Dividends Declared
|
|||||||||
|
1st
Quarter
|
$ | 23.49 | $ | 21.72 | $ | .195 | ||||||
|
2nd
Quarter
|
24.00 | 19.26 | .195 | |||||||||
|
3rd
Quarter
|
21.50 | 17.95 | .195 | |||||||||
|
4th
Quarter
|
21.95 | 18.70 | .200 | |||||||||
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 is limited by federal and state
banking laws, state corporate laws, and the terms of our other
securities. Further information about these limitations may be found
in Note 13 to the Consolidated Financial Statements and in the risk factors
contained in Item 1A of Part I under the heading “Risks Relating to the
Corporation’s Securities”, which are 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:
SCOTT AND STRINGFELLOW,
INC.
909 East
Main Street
Richmond,
VA 23219
(804)643-1811
(800)552-7757
[18]
First
United Corporation Stock Performance Graph
The following graph compares the yearly
percentage change in the cumulative total return for the Corporation’s common
stock for the five years ended December 31, 2008. 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
|
12/31/03
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
12/31/08
|
||||||||||||||||||
|
First
United Corporation
|
100.00 | 87.28 | 93.37 | 99.75 | 94.56 | 66.46 | ||||||||||||||||||
|
NASDAQ
Composite
|
100.00 | 108.59 | 110.08 | 120.56 | 132.39 | 78.72 | ||||||||||||||||||
|
SNL
Bank $1B-$5B Index
|
100.00 | 123.42 | 121.31 | 140.38 | 102.26 | 84.81 | ||||||||||||||||||
[19]
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. Stock compensation expense for 2008 was $.1
million. The following table contains information about the Omnibus
Plan as of December 31, 2008:
|
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
|
22,257 | $ | 18.85 | 162,743 | ||||||||
|
Equity
compensation plans not approved by security holders
|
0 | N/A | N/A | |||||||||
|
Total
|
22,257 | $ | 18.85 | 162,743 | ||||||||
|
(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
The
following table provides information about shares of common stock purchased by
or on behalf of First United Corporation and its affiliates (as defined by
Exchange Act Rule 10b-18) during the quarter ended December 31,
2008:
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
2008
|
4,416 | 18.78 | 4,416 | 209,672 | ||||||||||||
|
November
2008
|
1,471 | 17.12 | 1,471 | 208,201 | ||||||||||||
|
December
2008
|
- | - | - | 208,201 | ||||||||||||
|
Total
|
5,887 | $ | 18.50 | 5,887 | 208,201 | |||||||||||
|
|
(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
was suspended during the fourth quarter 2008 for the period of time that
the Corporation is participating in the Capital Purchase
Program.
|
[20]
|
ITEM
6.
|
SELECTED
FINANCIAL DATA
|
The
following table sets forth certain selected financial data for the five years
ended December 31, 2008 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)
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Balance
Sheet Data
|
||||||||||||||||||||
|
Total
Assets
|
$ | 1,639,104 | $ | 1,478,909 | $ | 1,349,317 | $ | 1,310,991 | $ | 1,233,901 | ||||||||||
|
Net
Loans
|
1,120,199 | 1,035,962 | 957,126 | 954,545 | 904,635 | |||||||||||||||
|
Investment
Securities
|
354,595 | 304,908 | 263,272 | 230,095 | 210,661 | |||||||||||||||
|
Deposits
|
1,222,889 | 1,126,552 | 971,381 | 955,854 | 850,661 | |||||||||||||||
|
Long-term
Borrowings
|
277,403 | 178,451 | 166,330 | 128,373 | 175,415 | |||||||||||||||
|
Shareholders’
Equity
|
72,690 | 104,665 | 96,856 | 92,039 | 86,356 | |||||||||||||||
|
Operating
Data
|
||||||||||||||||||||
|
Interest
Income
|
$ | 95,216 | $ | 93,565 | $ | 80,269 | $ | 69,756 | $ | 60,682 | ||||||||||
|
Interest
Expense
|
43,043 | 49,331 | 39,335 | 29,413 | 24,016 | |||||||||||||||
|
Net
Interest Income
|
52,173 | 44,234 | 40,934 | 40,343 | 36,666 | |||||||||||||||
|
Provision
for Loan Losses
|
12,925 | 2,312 | 1,165 | 1,078 | 2,534 | |||||||||||||||
|
Other
Operating Income
|
13,769 | 15,092 | 14,041 | 14,088 | 12,971 | |||||||||||||||
|
Other
Operating Expense
|
40,573 | 38,475 | 35,490 | 34,654 | 35,969 | |||||||||||||||
|
Income
Before Taxes
|
12,444 | 18,539 | 18,320 | 18,699 | 11,134 | |||||||||||||||
|
Income
Taxes
|
3,573 | 5,746 | 5,743 | 6,548 | 3,507 | |||||||||||||||
|
Net
Income
|
$ | 8,871 | $ | 12,793 | $ | 12,577 | $ | 12,151 | $ | 7,627 | ||||||||||
|
Per
Share Data
|
||||||||||||||||||||
|
Net
Income
|
$ | 1.45 | $ | 2.08 | $ | 2.05 | $ | 1.99 | $ | 1.25 | ||||||||||
|
Dividends
Paid
|
.80 | .78 | .76 | .74 | .72 | |||||||||||||||
|
Book
Value
|
11.89 | 17.05 | 15.77 | 15.04 | 14.17 | |||||||||||||||
|
Significant
Ratios
|
||||||||||||||||||||
|
Return
on Average Assets
|
.55 | % | .90 | % | .96 | % | .95 | % | .65 | % | ||||||||||
|
Return
on Average Equity
|
9.31 | % | 12.70 | % | 13.07 | % | 13.61 | % | 8.91 | % | ||||||||||
|
Dividend
Payout Ratio
|
55.17 | % | 37.50 | % | 37.07 | % | 37.44 | % | 58.00 | % | ||||||||||
|
Average
Equity to Average Assets
|
5.95 | % | 7.10 | % | 7.35 | % | 7.00 | % | 7.28 | % | ||||||||||
|
Total
Risk-based Capital Ratio
|
12.18 | % | 12.51 | % | 12.95 | % | 12.66 | % | 12.24 | % | ||||||||||
|
Tier
I Capital to Risk Weighted Assets
|
10.59 | % | 11.40 | % | 11.81 | % | 11.45 | % | 10.81 | % | ||||||||||
|
Tier
I Capital to Average Assets
|
8.10 | % | 8.91 | % | 9.08 | % | 8.64 | % | 8.44 | % | ||||||||||
[21]
|
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, 2008, which appear in Item 8 of Part II
of this annual report.
Recent
Developments
Capital Purchase
Program - As
discussed above, on January 30, 2009 the Corporation participated in the TARP
CPP by issuing 30,000 shares of Series A Preferred Stock, having a liquidation
amount of $1,000 per share, and the Warrant covering 326,323 shares of common
stock to the Treasury for a total sales price of $30 million. The
Warrant may be exercised at any time until January 30, 2019 at an exercise price
of $13.79 per share, or an aggregate exercise price of approximately $4.5
million. The Series A Preferred Stock qualifies as Tier 1 capital and
pays cumulative dividends at a rate of 5% per annum until February 15,
2014. The Warrant counts as tangible common equity.
Holders of the Series A Preferred Stock
are entitled to receive if, as and when declared by the Board of Directors, out
of assets legally available for payment, cumulative cash dividends at a rate per
annum of 5% per share on a liquidation amount of $1,000 per share of Series A
Preferred Stock with respect to each dividend period from January 30, 2009 to,
but excluding, February 15, 2014. From and after February 15, 2014,
holders of Series A Preferred Stock are entitled to receive cumulative cash
dividends at a rate per annum of 9% per share on a liquidation amount of $1,000
per share with respect to each dividend period thereafter. Under the terms of
the Series A Preferred Stock, on and after February 15, 2012, the Corporation
may, at its option, redeem shares of Series A Preferred Stock, in whole or in
part, at any time and from time to time, for cash at a per share amount equal to
the sum of the liquidation preference per share plus any accrued and unpaid
dividends to but excluding the redemption date. The terms of the
Series A Preferred Stock further provide that, prior to February 15, 2012, the
Corporation may redeem shares of Series A Preferred Stock only if it has
received aggregate gross proceeds of not less than $7.50 million from one or
more qualified equity offerings, and the aggregate redemption price may not
exceed the net proceeds received by the Company from such
offerings. The redemption of the Series A Preferred Stock requires
prior regulatory approval.
Until the earlier of (i) January 30,
2012 or (ii) the date on which the Series A Preferred Stock has been redeemed in
full or Treasury has transferred all of the Series A Preferred Stock to
non-affiliates, the terms of the Series A Preferred Securities prohibit the
Corporation from increasing its quarterly cash dividend paid on common stock
above $0.20 per share or repurchasing any shares of common stock or other
capital stock or equity securities or trust preferred securities without the
consent of the Treasury. Accordingly, the Corporation’s
previously-announced common stock repurchase plan has been suspended effective
January 30, 2009.
On February 17, 2009, President Obama
signed the Recovery Act into law. The Recovery Act permits any
institution that receives assistance under TARP (including pursuant to the CPP),
after consultation with the appropriate banking regulators, to repay any such
assistance at any time notwithstanding any repayment restrictions contained in
the instruments defining such assistance. Recent guidance issued by
Treasury states that, as a general rule, any partial repayment must equal at
least 25% of the outstanding assistance. Treasury may waive this
minimum repayment amount. Accordingly, the Corporation may, at any
time and notwithstanding the restrictions on redemption discussed above, and
assuming its regulators do not object, repay all of or a portion of (in 25%
increments, unless waived by Treasury) the $30 million it received as
consideration for the Series A Preferred Stock and the Warrant. If
the Corporation were to repay any assistance, it could also repurchase any or
all of the portion of the Warrant that relates to the repayment. Any
portion of the Warrant that relates to the repayment that the Corporation
chooses not to repurchase must be liquidated by Treasury, at the current market
price.
FDIC Deposit
Insurance Fund Restoration Plan Announced – On February 27, 2009, the
FDIC announced a proposed rule outlining its plan to implement an emergency
special assessment of 20 basis points on all insured depository institutions in
order to restore the Deposit Insurance Fund to an acceptable level. The
assessment, which would be payable on September 30, 2009, would be in addition
to a planned increase in premiums and a change in the way regular premiums are
assessed which the FDIC also approved on February 27, 2009. In
addition, the proposed rule provides that, after June 30, 2009, if the reserve
ratio of the Deposit Insurance Fund is estimated to fall to a level that that
the FDIC believes would adversely affect public confidence or to a level which
is close to or less than zero at the end of a calendar quarter, then an
additional emergency special assessment of up to 10 basis points may be imposed
on all insured depository institutions. If this rule is adopted
as proposed, it could increase the Bank’s FDIC premiums in 2009 by approximately
$2.5 million.
[22]
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 2008
totaled $8.9 million or $1.45 per share, compared to $12.8 million or $2.08 per
share for 2007. The decrease in net income resulted primarily from an
increase in the provision for loan losses to $12.9 million in 2008, compared to
$2.3 million for 2007 and a $2.7 million non-cash other-than-temporary
impairment charge on the investment portfolio. The increase in the
provision in 2008 is due to increased net charge offs, an increase in the level
of non-accrual loans, loan growth during 2008, specific allocations for impaired
loans and changes in the qualitative factors used in the overall assessment of
the adequacy of the allowance for loan losses. Specific allocations
have been provided in instances where losses may occur. Approximately
$4.0 million of the recorded expense is attributable to a real estate and
development loan in Hardy County, West Virginia and deterioration in a group of
loan relationships outside of the Corporation’s market
area. Additional provision expense was also recorded because the
company that services a loan in which the Bank holds a participation interest
failed to remit $1.2 million in principal payments made by the
borrower. The Bank is reviewing its rights with respect to its
insurance carriers and the servicing company’s insurance carriers and bonding
companies, but there can be no assurance that the Bank will ultimately recover
any of this loss.
During
2008, earnings on interest-earning assets increased primarily as a result of an
investment portfolio restructuring and an overall increase in average earning
assets. Interest expense on interest-bearing liabilities decreased
$6.3 million due to the decline in interest rates during 2008 as well as the
enhanced efforts of an internal treasury committee. As a result, the
net interest margin increased to 3.68% in 2008 from 3.51% in 2007.
Operations
in 2008 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 $91.3 million in loans in 2008 when compared to
2007. The residential mortgage portfolio grew $21.0 million and the
commercial portfolio increased $83.7 million as a result of in-house production
and commercial participations with other financial institutions. We
experienced growth in both fixed rate and adjustable rate
products. These increases were offset by a decline of $13.4 million
in the installment loan portfolio. Interest income on loans in 2008
decreased from the amount generated in 2007 by $2.7 million (on a fully taxable
equivalent basis) due to the decrease in interest rates. Interest
income on investment securities increased by $4.8 million (on a fully taxable
equivalent basis) due to a $79 million increase in the
portfolio. (Additional information on the composition of interest
income is available in Table 1 that appears on page 25).
Funding
costs in 2008 decreased as a result of the declining interest rate environment
and the enhanced efforts of the internal treasury committee. Deposits
at December 31, 2008 increased $96.3 million when compared to deposits at
December 31, 2007, primarily from an $86.6 million increase in our IRA products
and brokered products.
The
decline in the interest rate environment decreased deposit interest expense by
$7.0 million when compared to 2007. Although net borrowings increased by $94.3
million in 2008 when compared to 2007, we realized a minimal increase in
interest expense on these borrowings. The combination of increased
loan and deposit growth, declining 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 $8.1 million (18%) in 2008 when compared to
2007.
The
overall net interest margin increased during 2008 to 3.68% from 3.51% in 2007 on
a fully taxable equivalent basis.
Other Operating
Income/Other Operating Expense — Other operating income decreased $1.3
million in 2008 when compared to 2007. Service charge income
increased $.5 million, due primarily to increased customer usage of an account
overdraft product. This increase was offset by decreases in trust
department income, insurance commission income, and realized losses on our
investment portfolio.
Trust
department income is directly affected by the performance of the equity and bond
markets and by the amount of assets under management. Although we
have experienced favorable sales production in our trust department, unfavorable
market conditions have reduced the fees and commissions on our existing accounts
under management resulting in slightly lower income when compared to
2007. Declining market values negatively impacted the value of assets
under management at year-end. Assets under management were $472
million, $547 million and $502 million for years 2008, 2007 and 2006,
respectively.
[23]
Insurance
commissions also decreased in 2008 when compared to 2007 due to a soft insurance
market resulting in lower premium income and a reduction in the amount of
contingency income received in 2008. Contingency income is received
from the insurance carriers based upon claims histories and varies from year to
year. In December 2008, the insurance agency acquired
substantially all of the assets of three insurance agencies, which should enable
the agency to expand its business into central West
Virginia. Information about these acquisitions may be found in Note 1
to the Consolidated Financial Statements included in Item 8 of Part II of this
annual report under the heading “Goodwill and Other Intangible
Assets”. The increase in 2007 as compared to 2006 was due to the
acquisition of two books of business during 2007.
Securities
gains (losses) are the most variable component of other operating
income. During 2008, we recorded a non-cash charge of approximately
$2.7 million as a result of an other-than-temporary impairment analysis
performed on our investment portfolio at year-end. This process is described
more fully in the Investment Securities section of the Consolidated Balance
Sheet Review. This charge was offset by gains realized from sales of
investment securities and calls on fixed-income bonds.
Other
operating expenses increased $2.1 million in 2008 when compared to
2007. This increase is attributable to an increase of $.9 million in
salaries and wages in 2008 when compared to 2007. Other expenses such
as marketing, membership fees and licenses, and information system conversion
costs increased by $.7 million in 2008 when compared to 2007.
Dividends —
The Corporation continued its tradition of paying dividends to
shareholders during 2008, increasing them to $0.80 per share, a 2.6% increase
from $0.78 per share in 2007. The Corporation has paid quarterly cash
dividends consistently since 1985, the year in which it was
formed. However, as noted above, the Corporation is generally
prohibited from increasing this dividend, unless prior consent from Treasury is
given or until the earlier of (i) January 30, 2012 or (ii) the date on which the
Series A Preferred Stock has been redeemed in full or Treasury has transferred
all of the Series A Preferred Stock to non-affiliates.
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 and other
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.
[24]
The
allowance for loan losses is also discussed below in this Item 7 under the
caption “Allowance 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 $1.0 million of core deposit intangible assets and
$3.4 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. This process is described
more fully in the Investment Securities section of the Consolidated Balance
Sheet Review. Gains and losses on the sale of securities are recorded
using the specific identification method.
Fair
Value of Investments
Our entire investment portfolio is
classified as available-for-sale and is therefore carried at fair
value. We have determined the fair value of our investment securities
in accordance with the requirements of Statement of Financial Accounting
Standards (SFAS) No. 157, “Fair Value Instruments.” SFAS No. 157
defines fair value and establishes a framework for measuring fair value under
GAAP and expands the disclosures about fair value measurements. The
Corporation measures the fair market values of its investments based on the fair
value hierarchy established in SFAS No. 157. The determination of
fair value of investments and other assets is discussed further in Note 15 to
Consolidated Financial Statements contained in Item 8 of Part II of this annual
report.
[25]
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 our 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 2006-2008 (dollars in thousands).
|
2008
|
2007
|
2006
|
||||||||||
|
Interest
income
|
$ | 97,062 | $ | 95,286 | $ | 81,838 | ||||||
|
Interest
expense
|
43,043 | 49,331 | 39,335 | |||||||||
|
Net
interest income
|
$ | 54,019 | $ | 45,955 | $ | 42,503 | ||||||
|
Net
interest margin %
|
3.68 | % | 3.51 | % | 3.52 | % | ||||||
Net
interest income increased $8.1 million (18%) in 2008 over the same period in
2007, due to a $1.8 million (1.9%) increase in interest income coupled with a
$6.3 million (12.7%) decrease in interest expense. The increase in
interest income resulted from an increase in average interest-earning assets of
$158.9 million (12%) during 2008 when compared to 2007. The increased
level of interest earning assets is attributable to the growth that we
experienced in our loan and investment portfolios during 2008. The
declines in the interest rates throughout 2008 contributed to the decrease in
the average yield on our average earning assets of 67 basis points, from 7.29%
in 2007 to 6.62% in 2008 (on a fully tax equivalent basis). The
average yield on loans decreased by 81 basis points and the yield on investment
securities as a percentage of interest earning assets was stable in
2008. Although we experienced an increase in average interest-bearing
liabilities of $212.9 million in 2008, interest expense decreased $6.3 million
due to the decline in interest rates and the enhanced efforts of the internal
treasury committee. Average deposits increased in 2008 by
approximately $146.7 million. Effective management of both retail and
wholesale interest rates resulted in a 110 basis point decrease in the average
rate paid on our average interest-bearing liabilities from 4.21% for 2007 to
3.11% for 2008. The net result of the aforementioned factors
was a 17 basis point increase in the net interest margin at December 31, 2008 to
3.68% from 3.51% at December 31, 2007.
[26]
Comparing
2007 to 2006, net interest income increased $3.5 million (8%) 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.
As shown
below, the composition of total interest income over the three-year period from
2006 to 2008 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 throughout 2007 and
2008. 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. Management has more control over the rates, duration and
structure of the investment portfolio as compared to the loan portfolio which is
customized to the individual needs of each borrower. As such, the
investment portfolio is used as a supplement to our asset liability management
process.
|
%
of Total Interest Income
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Interest
and fees on loans
|
78 | % | 82 | % | 85 | % | ||||||
|
Interest
on investment securities
|
22 | % | 18 | % | 15 | % | ||||||
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 2008, 2007 and 2006. 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
2008, 2007 and 2006. 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).
[27]
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
|
||||||||||||||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||||||||||||||
|
AVERAGE
BALANCE
|
INTEREST
|
AVERAGE
YIELD/RATE
|
AVERAGE
BALANCE
|
INTEREST
|
AVERAGE
YIELD/RATE
|
AVERAGE
BALANCE
|
INTEREST
|
AVERAGE
YIELD/RATE
|
||||||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||||||
|
Loans
|
$ | 1,081,191 | $ | 74,415 | 6.88 | % | $ | 1,003,854 | $ | 77,158 | 7.69 | % | $ | 957,709 | $ | 69,049 | 7.21 | % | ||||||||||||||||||
|
Investment
Securities:
|
||||||||||||||||||||||||||||||||||||
|
Taxable
|
285,382 | 16,848 | 5.90 | 215,756 | 12,474 | 5.78 | 171,720 | 7,699 | 4.48 | |||||||||||||||||||||||||||
|
Non
taxable
|
82,844 | 5,229 | 6.31 | 73,467 | 4,847 | 6.60 | 65,902 | 4,399 | 6.67 | |||||||||||||||||||||||||||
|
Total
|
368,226 | 22,077 | 6.00 | 289,223 | 17,321 | 5.99 | 237,622 | 12,098 | 5.09 | |||||||||||||||||||||||||||
|
Federal
funds sold
|
368 | 4 | 1.09 | 285 | 11 | 3.86 | 463 | 1 | .21 | |||||||||||||||||||||||||||
|
Interest-bearing
deposits with other banks
|
3,691 | 77 | 2.09 | 5,135 | 241 | 4.69 | 2,811 | 165 | 5.88 | |||||||||||||||||||||||||||
|
Other
interest earning assets
|
13,235 | 489 | 3.69 | 9,363 | 555 | 5.93 | 9,231 | 525 | 5.68 | |||||||||||||||||||||||||||
|
Total
earning assets
|
1,466,711 | 97,062 | 6.62 | % | 1,307,860 | 95,286 | 7.29 | % | 1,207,836 | 81,838 | 6.78 | % | ||||||||||||||||||||||||
|
Allowance
for loan losses
|
(9,002 | ) | (6,584 | ) | (6,245 | ) | ||||||||||||||||||||||||||||||
|
Non-earning
assets
|
142,076 | 118,780 | 110,098 | |||||||||||||||||||||||||||||||||
|
Total
Assets
|
$ | 1,599,785 | $ | 1,420,056 | $ | 1,311,689 | ||||||||||||||||||||||||||||||
|
Liabilities
and Shareholders’ Equity
|
||||||||||||||||||||||||||||||||||||
|
Interest-bearing
demand deposits
|
$ | 414,750 | $ | 6,906 | 1.67 | % | $ | 333,443 | $ | 9,752 | 2.92 | % | $ | 285,250 | $ | 6,405 | 2.25 | % | ||||||||||||||||||
|
Savings
deposits
|
80,812 | 1,035 | 1.28 | 42,123 | 1,445 | 3.43 | 47,779 | 462 | .97 | |||||||||||||||||||||||||||
|
Time
deposits:
|
||||||||||||||||||||||||||||||||||||
|
Less
than $100
|
239,211 | 10,220 | 4.27 | 234,439 | 10,429 | 4.45 | 229,829 | 8,439 | 3.67 | |||||||||||||||||||||||||||
|
$100
or more
|
339,110 | 12,621 | 3.72 | 317,219 | 16,132 | 5.09 | 273,305 | 12,043 | 4.41 | |||||||||||||||||||||||||||
|
Short-term
borrowings
|
55,243 | 1,022 | 1.85 | 70,474 | 2,903 | 4.12 | 107,430 | 4,429 | 4.12 | |||||||||||||||||||||||||||
|
Long-term
borrowings
|
254,680 | 11,239 | 4.41 | 173,208 | 8,670 | 5.01 | 153,089 | 7,557 | 4.94 | |||||||||||||||||||||||||||
|
Total
interest-bearing liabilities
|
1,383,806 | 43,043 | 3.11 | % | 1,170,906 | 49,331 | 4.21 | % | 1,096,682 | 39,335 | 3.59 | % | ||||||||||||||||||||||||
|
Non-interest-bearing
Deposits
|
106,124 | 133,509 | 107,595 | |||||||||||||||||||||||||||||||||
|
Other
liabilities
|
14,595 | 14,885 | 11,189 | |||||||||||||||||||||||||||||||||
|
Shareholders’
Equity
|
95,260 | 100,756 | 96,223 | |||||||||||||||||||||||||||||||||
|
Total
Liabilities and Shareholders’ Equity
|
$ | 1,599,785 | $ | 1,420,056 | $ | 1,311,689 | ||||||||||||||||||||||||||||||
|
Net
interest income and Spread
|
$ | 54,019 | 3.51 | % | $ | 45,955 | 3.08 | % | $ | 42,503 | 3.19 | % | ||||||||||||||||||||||||
|
Net
interest margin
|
3.68 | % | 3.51 | % | 3.52 | % | ||||||||||||||||||||||||||||||
NOTES:
—The
above table reflects the average rates earned or paid stated on a tax equivalent
basis assuming a tax rate of 35% for 2008, 2007 and 2006. The fully
taxable equivalent adjustments for the years ended December 31, 2008, 2007, and
2006 were $1,846, $1,721, and $1,569, respectively.
—The
average balances of non-accrual loans for the years ended December 31, 2008,
2007 and 2006, which were reported in the average loan balances for these years,
were $23,517, $4,167, and $2,705, 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.
[28]
Interest
Variance Analysis (1)
(In
thousands and tax equivalent basis)
Table
2
|
2008
Compared to 2007
|
2007
Compared to 2006
|
|||||||||||||||||||||||
|
Volume
|
Rate
|
Net
|
Volume
|
Rate
|
Net
|
|||||||||||||||||||
|
INTEREST
INCOME:
|
||||||||||||||||||||||||
|
Loans
|
$ | 5,323 | $ | (8,066 | ) | $ | (2,743 | ) | $ | 3,547 | $ | 4,562 | $ | 8,109 | ||||||||||
|
Taxable
Investments
|
4,111 | 264 | 4,375 | 2,546 | 2,229 | 4,775 | ||||||||||||||||||
|
Non-taxable
Investments
|
592 | (210 | ) | 382 | 499 | (51 | ) | 448 | ||||||||||||||||
|
Federal
funds sold
|
1 | (8 | ) | (7 | ) | (7 | ) | 17 | 10 | |||||||||||||||
|
Other
interest earning assets
|
140 | (370 | ) | (230 | ) | 261 | (155 | ) | 106 | |||||||||||||||
|
Total
interest income
|
10,167 | (8,390 | ) | 1,777 | 6,846 | 6,602 | 13,448 | |||||||||||||||||
|
INTEREST
EXPENSE:
|
||||||||||||||||||||||||