Unassociated Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO
 SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For quarterly period ended March 31, 2009

Commission file number 0-14237

First United Corporation
(Exact name of registrant as specified in its charter)

Maryland
  
52-1380770
(State or other jurisdiction of
  
(I. R. S. Employer Identification No.)
incorporation or organization)
    
 
19 South Second Street, Oakland, Maryland 21550-0009
(Address of principal executive offices)  (Zip Code)
 
(800) 470-4356
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes R  No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes £ No £ (Not Applicable)

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 “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer £
Accelerated filer R
Non-accelerated filer £ (Do not check if a smaller reporting company)
Smaller reporting company £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes £ No R

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  6,122,410 shares of common stock, par value $.01 per share, as of April 30, 2009.

 
 
 

INDEX TO QUARTERLY REPORT
FIRST UNITED CORPORATION

PART I.  FINANCIAL INFORMATION
  
     
Item 1.
Financial Statements (unaudited)
3
     
 
Consolidated Statements of Financial Condition – March 31, 2009 and December 31, 2008
3
   
 
 
Consolidated Statements of Income - for the three months ended March 31, 2009 and 2008
4
     
 
Consolidated Statements of Changes in Shareholders’ Equity - for the three months ended March 31, 2009
and year ended December 31, 2008
5
   
 
 
Consolidated Statements of Cash Flows - for the three months ended March 31, 2009 and 2008
6
     
 
Notes to Consolidated Financial Statements
7
   
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
21
   
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
34
     
Item 4.
Controls and Procedures
35
     
PART II. OTHER INFORMATION
  
     
Item 1.
Legal Proceedings
35
     
Item 1A.
Risk Factors
35
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
35
     
Item 3.
Defaults Upon Senior Securities
35
     
Item 4.
Submission of Matters to a Vote of Security Holders
35
     
Item 5.
Other Information
35
     
Item 6.
Exhibits
35
     
SIGNATURES
36
    
EXHIBIT INDEX
37

 
2
 

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

FIRST UNITED CORPORATION
Consolidated Statements of Financial Condition
(In thousands, except per share data)

   
March 31,
2009
    
December 31, 
2008
  
   
(Unaudited)
        
Assets
      
Cash and due from banks
   $ 47,066     $ 18,423  
Interest-bearing deposits in banks     
16,165
      
882
  
Cash and cash equivalents
     63,231       19,305  
Investment securities - trading (at fair value)
    
19
      
-
  
Investment securities - available-for-sale (at fair value)
    
334,888
      
354,595
  
Federal Home Loan Bank stock, at cost
     13,863       13,933  
Loans
     1,123,206       1,134,546  
Allowance for loan losses
     (13,285 )     (14,347 )
    Net loans
     1,109,921       1,120,199  
Premises and equipment, net
     31,291       31,124  
Goodwill and other intangible assets, net
     16,113       16,322  
Bank owned life insurance
     29,880       29,743  
Deferred tax assets
     36,082        31,407  
Accrued interest receivable and other assets
     20,281       22,476  
                 
Total Assets
   $ 1,655,569     $ 1,639,104  
                 
Liabilities and Shareholders' Equity
                
Liabilities:
                
    Non-interest bearing deposits
   $ 123,027     $ 107,749  
    Interest-bearing deposits
     1,100,488       1,115,140  
         Total deposits
     1,223,515       1,222,889  
    Short-term borrowings
     42,330       50,495  
    Long-term borrowings
     277,140       277,403  
    Accrued interest payable and other liabilities
     14,299       14,529  
    Dividends payable
     1,223       1,098  
Total Liabilities
     1,558,507       1,566,414  
                 
Shareholders' Equity:
                
    Preferred stock – no par value;
                
        Authorized 2,000 shares of which 30 shares of Series A,
        $1 liquidation preference, 5% cumulative increasing to 9%
        cumulative on February 15, 2014, were issued and
        outstanding on March 31, 2009 (discount of $304 and $0,
         respectively)
         29,696           -  
    Common Stock – par value $.01 per share;
                
        Authorized 25,000 shares; issued and outstanding
         6,122 shares at March 31, 2009 and 6,113
         shares at December 31, 2008
       61         61  
    Surplus
     21,007       20,520  
    Retained earnings
     94,116       93,092  
    Accumulated other comprehensive loss
     (47,818 )     (40,983 )
Total Shareholders' Equity
     97,062       72,690  
                 
Total Liabilities and Shareholders' Equity
   $ 1,655,569     $ 1,639,104  

See accompanying notes to the consolidated financial statements.

 
3
 

FIRST UNITED CORPORATION
Consolidated Statements of Income
(in thousands, except per share data)
 
   
Three Months Ended
March 31,
  
   
2009
    
2008
  
   
(Unaudited)
  
Interest income
            
Interest and fees on loans
   $ 17,573     $ 18,954  
Interest on investment securities:
                
        Taxable
     3,859       3,878  
        Exempt from federal income tax
     957       847  
       Total investment income
     4,816       4,725  
Other
     (16 )     179  
Total interest income
     22,373       23,858  
Interest expense
                
Interest on deposits
     5,549       9,116  
Interest on short-term borrowings
     75       335  
Interest on long-term borrowings
     2,923       2,378  
       Total interest expense
     8,547       11,829  
Net interest income
     13,826       12,029  
Provision for loan losses
     2,049       1,387  
     Net interest income after provision for loan losses
      11,777        10,642  
Other operating income
                
Service charges
     1,315       1,447  
Trust department
     830       1,032  
Total other-than-temporary security impairment losses
     (3,342 )     —  
Less: Portion of loss recognized in other comprehensive income (before taxes)
         2,592        —  
Net security impairment losses recognized in earnings
     (750 )     —  
Securities losses - trading
     (367 )     —  
Securities gains
     42       399  
Insurance commissions
     723       551  
Bank owned life insurance 
     137        264  
Other income
     660       647  
        Total other operating income
     2,590       4,340  
Other operating expenses
                
 Salaries and employee benefits
     5,899       5,784  
 Occupancy, equipment and data processing
     2,051       1,906  
 Other expense
     3,036       2,664  
         Total other operating expenses
     10,986       10,354  
 Income before income taxes
     3,381       4,628  
 Applicable income taxes
     1,002       1,493  
Net Income
   $ 2,379     $ 3,135  
     Accumulated preferred stock dividends and discount  accretion
     (259 )     —  
 Net Income Available to Common Shareholders
   $ 2,120     $ 3,135  
Basic net income per common share
   $ .35     $ .51  
Diluted net income per common share
   $ .35       .51  
Dividends per common share
   $ .20     $ .20  
Weighted average number of common shares outstanding
     6,101       6,127  
 
See accompanying notes to the consolidated financial statements.

 
4
 

FIRST UNITED CORPORATION
Consolidated Statements of Changes in Shareholders’ Equity
         (dollars in thousands, except per share data)
   
Capital
Stock
    
Preferred
Stock
    
Surplus
    
Retained
Earnings
    
Accumulated
Other
Comprehensive
Loss
    
  Total Shareholders’ Equity
  
Balance at January 1, 2008
  
$
61
    
$
-
    
$
21,400
    
$
88,859
    
$
(5,655
)
 $ 
 104,665
  
                                           
       
  
Comprehensive income:
                                          
       
  
   Net income for the year
                            
8,871
            
    8,871
  
   Unrealized loss on securities available-for- sale, net of  income taxes of $20,748
                                    
(30,660
)
  
    (30,660
 ) 
   Change in accumulated unrealized losses for pension and SERP obligations, net of income taxes of $2,784
                                    
(4,668
)
  
    (4,668
 ) 
Comprehensive loss
                                          
    (26,457
 ) 
Issuance of 25,814 shares of  common stock under dividend reinvestment plan
                    
   362
                    
       362
  
Repurchase of common stock
                    
(1,391
)
                  
    (1,391
 ) 
Stock based compensation
                    
149
                    
    149  
  
Cash dividends declared - $.80 per share
                            
(4,638
)
          
    (4,638
 ) 
                                           
       
  
Balance at December 31, 2008
  
$
61
    
$
-
    
$
20,520
    
$
93,092
    
$
(40,983
)
$ 
72,690  
  
                                           
       
  
Comprehensive income:
                                          
       
  
   Net income for the quarter
                            
2,379
            
    2,379  
  
   Unrealized loss on securities available-for- sale, net of income taxes of $4,623
                                    
(6,832
)     
  
    (6,832
 ) 
 Unrealized loss on securities  available-for-sale related to
        impairment charges, net of income taxes of $2
                                    
(3
) 
  
    (3
 ) 
Comprehensive loss
                                          
    (4,456
 ) 
Issuance of 9,470 shares of common stock under dividend
       reinvestment plan
                    
   125
                    
       125
  
Stock based compensation
                    
49
                    
    49
  
Preferred stock issued pursuant to TARP – 30,000 shares
            
29,687
                            
     29,687
  
Preferred stock discount accretion
            
9
              
(9
)
          
    -
  
Warrants issued pursuant to TARP
                    
313
                    
    313
  
Cash dividends declared - $.20 per share
                            
(1,346
)
          
    (1,346
 ) 
                                           
       
  
Balance at March 31, 2009
  
$
61
    
$
29,696
    
$
21,007
    
$
94,116
    
$
(47,818
)
 $ 
97,062
  

See accompanying notes to the consolidated financial statements.

 
5
 

FIRST UNITED CORPORATION
Consolidated Statements of Cash Flows
(in thousands)
   
Three Months Ended March 31,
  
   
2009
    
2008
  
   
(Unaudited)
        
Operating activities
            
Net income
   $ 2,379     $ 3,135  
Adjustments to reconcile net income to net
                
    cash provided by operating activities:
                
        Provision for loan losses
         2,049         1,387  
        Depreciation
         677         694  
        Stock compensation
         49         —  
        Amortization of intangible assets
         209         171  
        Loss on other real estate owned
     78       —  
        Net amortization and (accretion) of investment securities discounts and  premiums 
          32         (36
) 
Other-than-temporary-impairment loss
          750         —  
        Loss (gain) on investment securities
         325         (399
) 
        Decrease(increase) in accrued interest receivable and other assets
     1,853         (1,916
) 
        Increase in deferred tax assets
         (49 )      
  (4
) 
        (Decrease) increase in accrued interest payable and  other liabilities
         (230 )         2,325  
        Earnings on bank owned life insurance
         (137 )         (264
) 
Net cash provided by operating activities
     7,985         5,093  
Investing activities
                
Proceeds from maturities of investment securities available-for-sale
          31,018          33,187  
Proceeds from sales of investment securities available-for-sale
            18,891            10,264  
Purchases of investment securities available-for-sale
         (42,789 )         (123,657
) 
Proceeds from sales of other real estate owned     264       —  
Net decrease (increase) in loans
         8,229         (12,283
) 
Net decrease (increase) in FHLB stock 
          70          (3,812
) 
Purchases of premises and equipment
         (844 )         (772
) 
Net cash used in investing activities
     14,839         (97,073
) 
Financing activities
                
Net (decrease) increase in short-term borrowings
         (8,165 )         34,041  
Payments on long-term borrowings
         (263 )         (262
) 
Proceeds from long-term borrowings
         —           40,000  
Net increase in deposits
         626         19,526  
Proceeds from issuance of preferred stock and warrants
          30,000          —  
Cash dividends paid
         (1,221 )         (1,226
) 
Proceeds from issuance of common stock
         125         115  
Stock repurchase
         —         (444
) 
Net cash provided by financing activities
         21,102         91,750  
Increase (decrease) in cash  and cash equivalents
     43,926         (230
) 
   Cash and cash equivalents at beginning of the year
     19,305       25,802  
Cash and cash equivalents at end of period
   $ 63,231     $ 25,572  
Supplemental information
                
Interest paid
   $ 9,453     $ 12,171  
Non-cash Investing Activities:
                
    Transfers from loans to other real estate owned
   $ 431     $ —  
 
See accompanying notes to the consolidated financial statements.

 
6
 

FIRST UNITED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2008

Note A – Basis of Presentation

The accompanying unaudited consolidated financial statements of First United Corporation (the “Corporation”) and its consolidated subsidiaries have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all the information and footnotes required for complete financial statements.  In the opinion of management, all adjustments considered necessary for a fair presentation, consisting of normal recurring items, have been included.  Operating results for the three-month period ended March 31, 2009 are not necessarily indicative of the results that may be expected for the full year or for any other interim period.  These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008.  For purposes of comparability, certain prior period amounts have been reclassified to conform with the 2009 presentation.  Such reclassifications had no impact on net income.

Note B – Earnings per Common Share

Basic earnings per common share is derived by dividing net income available to common shareholders by the weighted-average number of common shares outstanding, and does not include the impact of any potentially dilutive common stock equivalents. The diluted earnings per share is derived by dividing net income by the weighted-average number of shares outstanding, adjusted for the dilutive effect of outstanding non-vested employee stock awards and the outstanding warrant as well as any adjustment to income that would result from the assumed issuance. The number of potential shares issued was determined using the treasury stock method.  The outstanding warrant did not have a dilutive effect under the treasury stock method because the average market price of the common stock ($9.81 per share) during the period did not exceed the exercise price of the warrant ($13.79 per share).
.
The following table sets forth the calculation of basic and diluted earnings per common share:
                                                
   
March 31, 2009
    
March 31, 2008
  
   
Income
    
Average
Shares
    
Per
Share
Amount
    
Income
    
Average
Shares
    
Per
Share
Amount
  
Basic Earnings Per Share:
                                    
Net income
   $ 2,379                 $ 3,135              
Accumulated preferred stock dividends
     (250 )                 0              
Discount accretion on preferred stock
     (9 )                 0              
Net income available to common shareholders
   $ 2,120       6,101     $ .35     $ 3,135       6,127     $ .51  
                                                 
Diluted Earnings per share:
                                                
Net income available to common shareholders
   $ 2,120       6,101     $ .35     $ 3,135       6,127     $ .51  
Non-vested Employee Stock Award
             18                                  
Diluted net income available to common shareholders
   $ 2,120       6,119     $ .35     $ 3,135       6,127     $ .51  

Note C – Investments

Securities held for trading: Securities that are held principally for resale in the near future are reported at their fair values (See Note F) as investment securities – trading, with changes in fair value reported in earnings.  Interest and dividends on trading securities are included in interest income from investments.

Securities available-for-sale: Securities classified as available-for-sale are stated at their fair value (See Note F), with the unrealized gains and losses, net of tax, reported as a separate component of accumulated other comprehensive income (loss) in shareholders’ equity.   The fair values of investments are based upon information that is currently available and may not necessarily represent amounts that will ultimately be realized, which depend on future events and circumstances that are beyond the control of the Corporation.

 
7
 

The amortized cost of debt securities classified as available-for-sale is adjusted for the amortization of premiums to the first call date, if applicable, or to maturity, and for the accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security.  Such amortization and accretion is included in interest income from investments.  Interest and dividends are included in interest income from investments.  Gains and losses on the sale of securities are recorded using the specific identification method.

Management systematically evaluates securities for impairment on a quarterly basis.  Based upon application of the Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) No. FAS 115-2 and FAS 124-2 (“FSP No. FAS 115-2 and FAS 124-2”) Recognition and Presentation of Other-Than-Temporary Impairments, which was early adopted effective March 31, 2009, management must assess whether (a) it has the intent to sell the security and (b) if  it is more likely than not that it will be required to sell the security prior to its anticipated recovery.  If neither apply, declines in the fair value of securities below their cost that are considered other-than-temporary declines are split into two components.  The first is the loss attributable to declining credit quality.  Credit losses are recognized in earnings as realized losses in the period in which the impairment determination is made.  The second component consists of all other losses.  The other losses are recognized in other comprehensive loss.  Further discussion about FSP No. FAS 115-2 and FAS 124-2 and its application can be found in the “Investments” section of  Management's Discussion and Analysis of Financial Condition and Results of Operations .  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) adverse conditions specifically related to the security, an industry, or a geographic area, (3) the historic and implied volatility of the security,  (4) changes in the rating of a security by a rating agency, (5) recoveries or additional declines in fair value subsequent to the balance sheet date, (6) failure of the issuer of the security to make scheduled interest payments, and (7) the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future.

           Management also monitors cash flow projections for certain securities in accordance with Emerging Issues Task Force (EITF) Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets” (EITF 99-20) which was amended in FSP EITF 99-20-1, “Amendments to the Impairment Guidance of EITF 99-20”, effective for interim and annual reporting periods ending after December 15, 2008.

 
8
 

The following table shows the Corporation’s securities available-for-sale with gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized position, at March 31, 2009 and December 31, 2008 (in thousands):
 
   
 March 31, 2009
  
   
Less than 12 months
    
12 months or more
  
   
Fair
Value
    
Unrealized
Losses
    
Fair
Value
    
Unrealized
Losses
  
                         
U.S. government agencies
   $ 9,950     $ (55 )   $ 14,663     $ (337 )
Residential Mortgage-backed securities
     382       (2 )     37,769       (11,395 )
Obligations of states and political subdivisions
     48,227       (981 )     7,338       (516 )
Collateralized debt obligations
     —       —       10,203       (59,226 )
    $ 58,559     $ (1,038 )   $ 69,973     $ (71,474 )
                                 
   
December 31, 2008
  
   
Less than 12 months
    
12 months or more
  
   
Fair
Value
    
Unrealized
Losses
    
Fair
Value
    
Unrealized
Losses
  
                                 
U.S. government and agencies
   $ 19,822     $ (178 )   $ —     $ —
Residential Mortgage-backed securities 
      38,229       (9,942 )       3,216       (1,188 ) 
Obligations of states and political subdivisions
     66,735       (2,781 )     3,632       (315 )
Collateralized debt obligations
     2,159       (5,393 )     21,724       (40,665 )
    $ 126,945     $ (18,294 )   $ 28,572     $ (42,168 )

U.S. Government Agencies – The unrealized losses on the Corporation’s investments in U.S. government agencies are attributable to the lower interest rate environment and call features associated with the securities with premiums paid at the time of purchase.  All of these securities are of the highest investment grade.  The fair value of one security has been less than amortized cost for over 12 months and two securities have been impaired for less than 12 months.  Contractually, the issuer is not permitted to settle the securities at a price less than the amortized cost basis of the individual investments.  The Corporation does not intend to sell these investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity.  Accordingly, management does not consider these investments to be other-than-temporarily impaired at March 31, 2009.

Residential Mortgage-Backed Securities - The residential mortgage-backed securities are in an unrealized loss position of $11.4 million at March 31, 2009.  Nine of the securities are private label mortgage-backed securities and have been in an unrealized loss position for 12 months or more.  These securities are reviewed for factors such as loan to value ratio, credit support levels, FICO scores, geographic concentration, prepayment speeds, delinquencies, coverage ratios and credit ratings.  All of the securities continue to demonstrate adequate collateral coverage ratios to support the Corporation’s investment.  The Corporation purchased all of these securities at a discount relative to their face amount.  One federal agency mortgage-backed security has been in an unrealized loss position for less than 12 months.  The cash flows of this bond are guaranteed by the Federal Home Loan Mortgage Corporation, an agency of the U.S. government.  All of these securities were of the highest investment grade at the time of purchase although two have been downgraded to one level below investment grade currently. All of these securities continue to perform as expected at the time of purchase.  The Corporation does not intend to sell these investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity.  Accordingly, management does not consider these investments to be other-than-temporarily impaired at March 31, 2009.

 
9
 

Obligations of State and Political Subdivisions – The unrealized losses on the Corporation’s investments in state and political subdivisions were in an unrealized loss position of $1.5 million at March 31, 2009.  Ten securities carried a fair value less than amortized cost basis for over 12 months and 78 bonds have been in an unrealized loss position for less than 12 months (76 for two months or less).  All of the Corporation’s investments in states and other political subdivisions are of investment grade as determined by the major rating agencies.  This portfolio is well-diversified throughout the United States and all bonds continue to perform according to contractual agreement.  The Corporation does not intend to sell these investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity.  Accordingly, management does not consider these investments to be other-than-temporarily impaired at March 31, 2009.

Collateralized Debt Obligations - The total $59.2 million in unrealized losses reported for collateralized debt obligations at March 31, 2009 relates to 24 trust preferred securities.  See Note F for management’s methods used to determine the fair value of these securities and the Investments section of Management’s Discussion and Analysis of Continuing Operations for a full discussion of the other-than-temporary analysis performed on this portfolio.  Based upon a review of credit quality and the cash flow tests performed, management determined that one of the Corporation’s collateralized debt obligations was other-than-temporarily impaired.   As a result of this assessment, the Corporation recorded a $750,000 other-than-temporary impairment loss on this security as of March 31, 2009.  The unrealized losses on the remaining investment securities are primarily attributable to factors such as changes in market interest rates, marketability, liquidity and the current economic environment.
 
Note D – Interest-bearing Deposits in Other Banks

Interest-bearing deposits in banks, which represents funds invested at a correspondent bank, is carried at fair value and, as of March 31, 2009 and December 31, 2008, consists of daily funds invested at the Federal Home Loan Bank (“FHLB”) of Atlanta.

   
March 31,
2009
    
December 31,
2008
  
             
FHLB Daily investments, interest rate of .10% (at March 31, 2009)
   $ 16,165     $ 882  

Note E - Restricted Investment in Bank Stock

Restricted stock, which represents required investments in the common stock of a correspondent bank, is carried at cost and, as of March 31, 2009 and December 31, 2008, consists of the common stock of the Federal Home Loan Bank (“FHLB”) of Atlanta and Atlantic Central Bankers Bank.

Management evaluates the restricted stock for impairment in accordance with FASB Statement of Position (“SOP”) 01-6, “Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or Finance the Activities of Others.”  Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value.  The determination of whether a decline affects the ultimate recoverability of the cost of an investment is influenced by criteria such as (1) the significance of the decline in net assets of the issuing bank as compared to the capital stock amount for that bank and the length of time this situation has persisted, (2) commitments by the issuing bank to make payments required by law or regulation and the level of such payments in relation to the operating performance of that bank, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the issuing bank.

On March 25, 2009, the Federal Home Loan Bank (“FHLB”) of Atlanta announced that it will not pay a dividend for the fourth quarter of 2008.  The decision is based on the FHLB of Atlanta’s conservative financial management approach during this period of extended volatility in the financial markets.  The FHLB of Atlanta also announced that it will no longer provide dividend guidance prior to the end of each quarter due to the ongoing uncertainty in the financial markets.

Management believes that no impairment charge in respect of the restricted stock is necessary as of March 31, 2009.

 
10
 

Note F – Fair Value of Financial Instruments

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP No. FAS 107-1 and APB 28-1”).  This FSP amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. As required, the following table presents fair value information about financial instruments, whether or not recognized in the statement of financial condition, for which it is practicable to estimate that value.  Fair value is best determined by values quoted through active trading markets.  Active trading markets are characterized by numerous transactions of similar financial instruments between willing buyers and willing sellers.  Because no active trading market exists for various types of financial instruments, many of the fair values disclosed were derived using present value discounted cash flow or other valuation techniques as described below.  As a result, the Corporation’s ability to actually realize these derived values cannot be assumed.

The fair values disclosed under SFAS No. 107 may vary significantly between institutions based on the estimates and assumptions used in the various valuation methodologies.  The derived fair values are subjective in nature and involve uncertainties and significant judgment. Therefore, they cannot be determined with precision. Changes in the assumptions could significantly impact the derived estimates of fair value.  SFAS No. 107 excludes disclosure of non financial assets such as buildings as well as certain financial instruments such as leases.  Accordingly, the aggregate fair values presented do not represent the underlying value of the Corporation.

The actual carrying amounts and estimated fair values of the Corporation’s financial instruments that are included in the statement of financial condition are as follows (in thousands):
                                            
   
 March 31,
2009 
    
  December 31,
2008
 
   
Carrying
Amount
    
Fair
Value
    
Carrying
Amount
    
Fair
Value
  
Financial Assets:
                        
Cash and cash equivalents
   $ 47,066     $ 47,066     $ 18,423     $ 18,423  
Interest bearing deposits in banks
     16,165       16,165       882       882  
Investment securities
     334,907       334,907       354,595       354,595  
Federal Home Loan Bank stock
     13,863       13,863       13,933       13,933  
Loans, net
     1,109,921       1,116,786       1,120,199       1,125,029  
Accrued interest receivable
     7,438       7,438       7,713       7,713  
                                 
Financial Liabilities:
                                
Deposits
     1,223,515       1,231,079       1,222,889       1,229,834  
Borrowed funds
     319,470       335,612       327,898       346,110  
Accrued interest payable
     3,374       3,374       4,295       4,295  
Off Balance Sheet Financial Instruments
     —       —       —       —  

The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments:

Cash and cash equivalents:  The carrying amounts as reported in the statement of financial condition for cash and due from banks approximate their fair values.

Interest-bearing deposits in banks:  The carrying amount of interest-bearing deposits approximates their fair values.

Investment securities: The Corporation measures fair values of its investments based on the FASB Statement No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements.  SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements.  The Corporation measures fair values based on the fair value hierarchy established in SFAS 157.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of inputs that may be used to measure fair value under SFAS 157 are as follows:

 
11
 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets and liabilities.  This level is the most reliable source of valuation.

Level 2: Quoted prices that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.  Level 2 inputs include “inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates).”  It also includes “inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs).”  Several sources are utilized for valuing these securities including a contracted valuation service, Standard & Poor’s (S&P) evaluations and pricing services, and other valuation matrices.

Level 3: Prices or valuation techniques that require inputs that are both significant to the valuation assumptions and that are not readily observable in the market (i.e., supported with little or no market activity).  These Level 3 instruments are valued based on the best available data, some of which is internally developed, and considers risk premiums that a market participant would require.

An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

For assets measured at fair value on a recurring and non-recurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2009 and December 31, 2008 are as follows:

       
Fair Value Measurements at
March 31, 2009 Using
(Dollars in Thousands)
  
 
 
Description
  
Assets
Measured
at Fair
Value
03/31/09
  
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
 (Level 2)
    
Significant
Unobservable
Inputs
 (Level 3)
  
                     
Investment securities - trading
   $ 19       $ —     $ 19  
Investment securities available-for-sale:
                          
   U.S. Government Agencies
   $ 107,326       $ 107,326     $ —  
   Residential Mortgage-backed securities
   $ 116,337       $ 116,337     $ —  
   Obligations of states and political subdivisions
   $ 101,022       $ 101,022     $ —  
   Collateralized debt obligations
   $ 10,203       $ —     $ 10,203  
Impaired loans¹
   $ 6,778               $ 6,778  
Foreclosed Real Estate
   $ 2,513               $ 2,513  

¹ The impaired loans fair value consists of the total impaired loans balance of $9,196 net of the $2,418 valuation allowance.

 
12
 

       
Fair Value Measurements at
December 31, 2008 Using
(Dollars in Thousands)
  
 
Description
  
 
Assets
Measured
at Fair
Value
12/31/08
  
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
  
 
Significant
Other
Observable
Inputs
 (Level 2)
    
 
 
Significant
Unobservable
Inputs
 (Level 3)
  
Investment securities available-for-sale:
                    
    U.S. Government Agencies
   $ 113,645       $ 113,645     $ —  
    Residential Mortgage-backed securities
   $ 123,199       $ 123,199     $ —  
    Obligations of states and political subdivisions
   $ 93,485       $ 93,485          
    Collateralized debt obligations
   $ 24,266               $ 24,266  
Impaired loans¹
   $ 11,760               $ 11,760  
Foreclosed Real Estate
   $ 2,424               $ 2,424  

¹ The impaired loans fair value consists of the impaired loans with a valuation allowance balance of $16,519 net of the $4,759 valuation allowance.

In December 2007, the FASB issued FASB Staff Position 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”).  FSP 157-2 delays the effective date of SFAS 157 for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years.

FSP 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active, was issued on October 10, 2008 and is effective for current and prior periods.  The objective of FSP 157-3 is to clarify FASB Statement No. 157, Fair Value Measurements, in a market that is not active and to illustrate key considerations that may be used to determine the fair value of a financial asset when the market for that asset is not active.

In April 2009, FASB  issued FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP No. FAS 157-4”).  This standard provides additional guidance on determining when the volume and level of activity for the asset or liability has significantly decreased. The FSP also includes guidance on identifying circumstances when a transaction may not be considered orderly.

FSP No. FAS 157-4 provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with FASB Statement No. 157.

FSP No. FAS 157-4 clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The FSP provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.

FSP No. FAS 157-4 is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  An entity early adopting FSP No. FAS 157-4 must also early adopt FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP No. FAS 115-2 and FAS 124-2”).  The Corporation has elected to early adopt this standard for its March 31, 2009 financial statements.

The Corporation believes that its valuation techniques are appropriate and consistent with other market participants.  However, the use of different methodologies and assumptions could result in a different estimate of fair value at the reporting date.  The following valuation techniques were used to measure the fair value of assets in the table above which are measured on a recurring and non-recurring basis as of March 31, 2009.

 
13
 

Investments held for trading – The fair value of investments held for trading was determined using a market approach. The level 3 investments consisted of two trust preferred securities, which are preferred term securities issued by trust subsidiaries of financial institutions and insurance companies and collateralized by junior subordinated debentures issued to those trusts by the parent institution. These securities were deemed to be other-than-temporarily impaired at December 31, 2008 and were moved to trading during the first quarter of 2009.  The Corporation obtained fair values for these securities from an experienced independent third-party pricing provider, Moody’s Analytics.  Information such as performance of the underlying collateral, deferral/default rates, cash flow projections, related relevant trades, models and other analytical tools are utilized by the third-party in determining individual security valuations in accordance with proper accounting guidance.  A full explanation of the pricing methodology used by Moody’s Analytics is presented in the next section, under Investments available for sale.

Investments available for sale – The fair value of investments available-for-sale was determined using a market approach.  As of March 31, 2009, Level 2 investment securities available-for-sale included U.S. Government Agencies and residential mortgage backed securities, private label residential mortgage backed securities and municipal bonds which are not as actively traded.  Their fair values were determined based upon market-corroborated inputs and valuation matrices which are obtained through third party data service providers or securities brokers through which the Corporation has historically transacted both purchases and sales of investment securities. The Level 3 investments consisted of trust preferred securities.  The Corporation obtained fair values for these securities from Moody’s Analytics.  Information such as performance of the underlying collateral, deferral/default rates, cash flow projections, related relevant trades, models and other analytical tools are utilized by the third-party in determining individual security valuations in accordance with proper accounting guidance.

At March 31, 2009, the Bank owned 24 pooled trust preferred securities with a par value of $69.4 million and a fair value of $10.2 million. Based upon application of FSP No. FAS 157-4, management has determined that there has been a significant decrease in the volume and level of activity in these securities.  There are few recent transactions in the market for these securities relative to historical levels.  The market for trust preferred securities is virtually non-existent at this time.  There were no new pooled trust preferred issuances during 2008 or during the first quarter of 2009 and trading activity for this class of securities (buy side) shows only three total trades during the first quarter of 2009 compared to a high of 116 trades in the first quarter of 2008. The volume has declined from a high of $376 million in the first quarter of 2007 to only $1.2 million during the first quarter of 2009.  Price quotations are clearly indicative of distressed trades and vary significantly from prices achieved during an active market.  Based on the estimate of the issuing institutions’ cash flows and all available market data and nonperformance risk, there is a significant increase in the implied liquidity risk premiums and yields on the securities.  This has led to a wide bid-ask spread as buyers for the securities are seeking fire-sale prices and owners of the securities are not willing to accept such pricing.

Observable prices for these securities are available based upon broker models and these inputs have been considered in the pricing models used by Moody’s Analytics.  However, the few observable transactions and market quotations that are available are not reliable for purposes of determining fair value at March 31, 2009.  Accordingly, the trust preferred securities portion of the Corporation’s investment portfolio will be classified within Level 3 of the fair value hierarchy because management determined that significant adjustments are required to determine fair value at the measurement date.

In determining the fair value of the securities, Moody’s Analytics utilized an income valuation approach (present value technique) which maximizes the use of observable inputs and minimizes the use of unobservable inputs.  This approach is more indicative of fair value than the market approach that has been used historically, and involves several steps.  The credit quality of the collateral was estimated using the average probability of default values for each underlying issuer, adjusted for credit ratings.  The default probabilities also considered the potential for correlation among issuers within the same industry, such as banks with other banks.  The loss given default was assumed to be 95%, allowing for a 5% recovery of collateral.  Management elected to utilize the option assuming that there were no defaults or deferrals for a two-year time period for those banks who have publicly announced participation in the Treasury’s Capital Purchase Program. The cash flows for the securities were forecast for the underlying collateral and applied to each tranche in the structure to determine the resulting distribution among the securities.  These expected cash flows were then discounted to calculate the present value of the security.  The effective discount rate utilized by Moody’s Analytics for the various securities in the present value calculation was the three-month LIBOR plus 200 basis points (a risk free rate plus a premium for illiquidity).  The resulting prices are highly dependent upon the credit quality of the collateral, the relative position of the tranche in the capital structure of the security and the prepayment assumptions.   Moody’s Analytics modeled the calculations in several thousand scenarios using a Monte Carlo engine and the average price was used for valuation purposes.  Due to the current market conditions as well as the limited trading activity of these securities, the market value of the securities is highly sensitive to assumption changes and market volatility.

 
14
 

Impaired loans – Loans included in the table below are those that are accounted for under FASB Statement No. 114 (“SFAS 114”), Accounting by Creditors for Impairment of a Loan, for which the Corporation has measured impairment generally based on the fair value of the loan’s collateral.  Fair value is generally determined based upon independent third-party appraisals of the collateral or discounted cash flows based upon the expected proceeds.  These assets are included as Level 3 fair values based upon the lowest level of input that is significant to the fair value measurements.  The fair value consists of the loan balance less its valuation allowance as determined under SFAS 114.

Foreclosed real estate – Fair value of foreclosed assets was based on independent third party appraisals of the properties.  These values were determined based on the sales prices of similar properties in the approximate geographic area.

The following tables show a reconciliation of the beginning and ending balances for fair valued assets measured using Level 3 significant unobservable inputs for the three months ended March 31, 2009:
 
     
Fair Value Measurements Using Significant
Unobservable inputs
(Level 3)
(Dollars in Thousands) 
  
     
Investment
Securities
Available for Sale 
      
Investment
Securities -
Trading 
      
Impaired
Loans 
      
Foreclosed
Real
Estate 
  
Beginning balance January 1, 2009
   $ 24,266     $ —     $ 11,760     $ 2,424  
    Total gains/(losses) realized/unrealized:
                                
       Included in earnings (or changes in net assets)
     (750 )     (367 )                
       Included in other comprehensive loss
     (12,927 )     —       —       —  
    Purchases, issuances, and settlements
     —       —                  
    Transfers from Available for Sale to Trading
     (386 )     386                  
    Transfers in and/or out of Level 3
     —       —                  
    Sales
     —       —       —       (264 )
    Payments/credits
     —       —       (6,920 )     (78 )
    Properties/loans added
        —       —        1,938       431  
Ending balance March 31, 2009
   $ 10,203     $ 19     $ 6,778     $ 2,513  
                                 
The amount of total gains or losses for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains or losses related to assets still held at the reporting date
   $ (750 )   $ (367 )            —                —  

Gains and losses (realized and unrealized) included in earnings (or changes in net assets) for the period (above) are reported in the income statement.

Federal Home Loan Bank stock:  The carrying value of FHLB stock approximates fair value based on the redemption provisions of that stock.

Loans:  For variable rate loans and leases that reprice frequently or “in one year or less,” and with no significant change in credit risk, fair values are based on carrying values.  Fair values for fixed rate loans and leases and loans and leases that do not reprice frequently are estimated using a discounted cash flow calculation that applies current market interest rates being offered on the various loan products.

Deposits:  The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts).  Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on the various certificates of deposit to the cash flow stream.

 
15
 

Borrowed funds: The fair value of the Corporation’s FHLB borrowings and junior subordinated debt is calculated based on the discounted value of contractual cash flows, using rates currently existing for borrowings with similar remaining maturities.  The carrying amounts of federal funds purchased and securities sold under agreements to repurchase approximate their fair values.

Accrued Interest:  The carrying amount of accrued interest receivable and payable approximates their fair values.

Off-Balance-Sheet Financial Instruments:  In the normal course of business, the Corporation makes commitments to extend credit and issues standby letters of credit.  The Corporation expects most of these commitments to expire without being drawn upon; therefore, the commitment amounts do not necessarily represent future cash requirements.  Due to the uncertainty of cash flows and difficulty in the predicting the timing of such cash flows, fair values were not estimated for these instruments.  The Corporation did not have any derivative financial instruments at March 31, 2009 or December 31, 2008.
 
Note G – Comprehensive Loss

Unrealized gains and losses on investment securities available-for-sale and on pension obligations are included in accumulated other comprehensive loss.  Other comprehensive loss consists of the changes in unrealized gains (losses) on investment securities available-for-sale and pension obligations. Total comprehensive loss (which consists of net income available to common shareholders plus other comprehensive loss) was ($4.5) million and ($934,000) for the three months ended March 31, 2009 and 2008, respectively.

Note H – Junior Subordinated Debentures

In March 2004, the Corporation formed two Connecticut statutory business trusts, First United Statutory Trust I and First United Statutory Trust II (collectively, the “Trusts”), for the purpose of selling $30.9 million of mandatorily redeemable preferred securities to third party investors.  The Trusts used the proceeds of their sales of preferred securities to purchase an equal amount of junior subordinated debentures from the Corporation, as follows:

$20.6 million—6.02% fixed rate for five years payable quarterly, converting to floating rate based on three-month LIBOR plus 275 basis points, maturing in 2034, redeemable five years after issuance at the Corporation’s option.  This fixed rate will convert to a floating rate in June 2009.

$10.3 million—floating rate payable quarterly based on three-month LIBOR plus 275 basis points (4.06% at March 31, 2009) maturing in 2034, redeemable five years after issuance at the Corporation’s option.

The debentures represent the sole assets of the Trusts, and payments of the debentures by the Corporation are the only sources of cash flow for the Trusts.

In December 2004, the Corporation issued an additional $5.0 million of debentures.  The debentures have a fixed rate of 5.88% for the first five years, payable quarterly, and then convert to a floating rate based on the three month LIBOR plus 185 basis points in December 2009.  The debentures mature in 2014, but are redeemable five years after issuance at the Corporation’s option.

The Corporation has the right to defer interest on all of the foregoing debentures for up to 20 quarterly periods, in which case distributions on the preferred securities will also be deferred.  Should this occur, the Corporation may not pay dividends or distributions on, or repurchase, redeem or acquire any shares of its capital stock.

 
16
 

Note I – Borrowed Funds

           The following is a summary of short-term borrowings with original maturities of less than one year (dollars in thousands):

   
March 31,
 2009
    
December 31,
 2008
  
Short-term  advances,                 
Daily borrowings, interest rate of .46% at December 31, 2008
   $  0     $  8,500  
Securities sold under agreements to repurchase, with weighted average interest rate at end of period of .68% and 1.33%, respectively
        42,330          41,995  
    $ 42,330     $ 50,495  

The following is a summary of long-term borrowings with original maturities exceeding one year (dollars in thousands):

FHLB advances, bearing interest at rates ranging from 2.46% to 4.98% at March 31, 2009
   $ 241,211     $ 241,474  
Junior subordinated debentures, bearing interest at rates ranging from 4.06% to 6.02% at March 31, 2009
      35,929        35,929  
    $ 277,140     $ 277,403  

The long-term FHLB advances are secured by loans collateralized by 1-4 family mortgages and securities.

The contractual maturities of all long-term borrowings are as follows (in thousands):
   
March 31 December 31
  
   
2009
    
2008
  
             
Due in 2009
     13,750       14,000  
Due in 2010
     31,000       31,000  
Due in 2011
     51,000       51,000  
Due in 2012
     44,250       44,250  
Due in 2013 
     —       —  
Thereafter
     137,140       137,153  
Total long-term debt
   $ 277,140     $ 277,403  

Note J – Preferred Stock

On January 30, 2009, pursuant to the Treasury’s TARP Capital Purchase Program, the Corporation issued the following securities to Treasury for an aggregate consideration of $30,000,000:  (i) 30,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, having no par per share (the “Series A Preferred Stock”); and (ii) a warrant to purchase 326,323 shares of common stock, par value $.01 per share, for an exercise price of $13.79 per share.  The proceeds from this transaction qualify as Tier 1 capital and the warrant qualifies as tangible common equity.  The operative documents relating to this transaction are on file with the SEC and available to the public free of charge.
 
Holders of the Series A Preferred Stock are entitled to receive, if 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 Corporation from such offerings.  Notwithstanding the foregoing, however, the Corporation may redeem any shares of Series A Preferred Stock held by the Treasury at any time.  Any redemption of the Series A Preferred Stock requires prior regulatory approval.

 
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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 U.S. Treasury Department (Treasury).  Accordingly, the Corporation’s previously-announced common stock repurchase plan was suspended effective January 30, 2009.

Note K - Pension and SERP Plans

The following table presents the net periodic pension plan cost for the Corporation’s Defined Benefit Pension Plan, the Supplemental Executive Retirement Plan of First United Bank & Trust, the Corporation’s wholly-owned trust company subsidiary (the “Bank”), and their related components:
 
Pension
  
For the three months ended
March 31
  
(In thousands)
  
2009
    
2008
  
 Service cost
   $ 202     $ 231  
Interest cost
     304       316  
Expected return on assets
     (425 )     (585 )
Amortization of transition asset
     (10 )     (10 )
Recognized loss
     155       35  
Prior service cost
     3       3  
Net pension expense included in employee benefits
   $ 229     $ (10 )

SERP
  
For the three months ended
March 31
  
(In thousands)
  
2009
    
2008
  
 Service cost
   $ 33     $ 30  
Interest cost
     57       46  
Recognized loss
     —       2  
Prior service cost
     32       28  
Net pension expense included in employee benefits
   $ 122     $ 106  
 
The Corporation’s contribution to the pension plan in 2009 is dependent upon market conditions and a full evaluation of the plan.  The Corporation expects to fund the annual projected benefit payments for the SERP from operations.
 
Note L - 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 to employees or directors totaling up to 185,000 shares.
 
On June 18, 2008, the Board of Directors of the Corporation adopted a Long-Term Incentive Program (the “LTIP”).  This program was adopted as a sub-plan of the Omnibus Plan to reward participants for increasing shareholder value, align executive interests with those of shareholders, and serve as a retention tool for key executives.  Under the LTIP, participants are granted shares of restricted common stock of the Corporation.  The amount of an award is based on a specified percentage of the participant’s salary as of the date of grant.  These shares will vest if the Corporation meets or exceeds certain performance thresholds.  These performance-related shares are expensed ratably from the date that the likelihood of meeting the performance measures is probable through the end of a three year vesting period.

 
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As of March 31, 2009, a total of 18,519 shares had been granted to executive management under the LTIP at a fair market price of $19.02.  These grants were made in June 2008.  These shares will be vested at December 31, 2011 if the Corporation meets or exceeds certain performance measures.  In conjunction with the adoption of the LTIP, the Corporation adopted Statement of Financial Accounting Standards No. 123(R), Accounting for Share-Based Payments.  SFAS No. 123 (R) requires public companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award.  The cost will be recognized in expense over the period in which an employee is required to provide service in exchange for the award (the vesting period).

It must be noted, however, that the recently-enacted American Recovery and Reinvestment Act of 2009 (the “Recovery Act”) imposes restrictions on the type and timing of bonuses and incentive compensation that may be accrued for or paid to certain employees of institutions that participated in the Troubled Asset Relief Program (“TARP”) Capital Purchase Program that was adopted by the U.S. Department of the Treasury (the “Treasury”).  The Recovery Act generally limits bonuses and incentive compensation to certain grants of long-term restricted stock, but any compensation covered by a written employment contract that was created on or before February 11, 2009 is excluded from the restriction.  The Recovery Act requires Treasury to adopt rules to implement this restriction.  Accordingly, notwithstanding whether the restricted stock awards granted under the LTIP may vest by their terms, the rules adopted by Treasury (which have yet to be issued) may prohibit the Corporation from paying some or all of those awards.

Stock-based awards were also made to directors totaling 3,738 shares at a fair market price of $18.69 as defined in their annual compensation package. The directors’ shares were vested immediately.

Share-based compensation expense for the three months ended March 31, 2009 was $49,000.  Unamortized share-based compensation expense as of March 31, 2009 is $238,000.   The 18,519 unvested shares are considered in the diluted earnings per share.  There have not been any new grants in 2009.

Note M – Letters of Credit and Off Balance Sheet Liabilities

The Bank does not issue any guarantees that would require liability recognition or disclosure other than its standby letters of credit.  Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party.  Generally, the Bank’s letters of credit are issued with expiration dates within one year.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.  The Bank generally holds collateral and/or personal guarantees supporting these commitments.  The Bank had $5.9 million of outstanding standby letters of credit at March 31, 2009 and December 31, 2008.  Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payment required by the letters of credit.  Management does not believe that the amount of the liability associated with guarantees under standby letters of credit outstanding at March 31, 2009 and December 31, 2008 is material.

Note N – Adoption of New Accounting Standards and Effects of New Accounting Pronouncements

In April 2009, the FASB issued FSP No. FAS 157-4.  FASB Statement 157, Fair Value Measurements, defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. FSP No. FAS 157-4 provides additional guidance on determining when the volume and level of activity for the asset or liability has significantly decreased. The FSP also includes guidance on identifying circumstances when a transaction may not be considered orderly.

FSP No. FAS 157-4 provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with Statement 157.

FSP No. FAS 157-4 clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The FSP provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.

 
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FSP No. FAS 157-4 is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  An entity early adopting FSP No. FAS 157-4 must also early adopt FSP No. FAS 115-2 and FAS 124-2.  The Corporation has elected early adoption and application to its March 31, 2009 financial statements.  The financial impact of application of FSP No. FAS 157-4 is discussed above in Note F- Fair Value.

In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2.  FSP No. FAS 115-2 and FAS 124-2 clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired. For debt securities, management must assess whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. These steps are done before assessing whether the entity will recover the cost basis of the investment. Previously, this assessment required management to assert it has both the intent and the ability to hold a security for a period of time sufficient to allow for an anticipated recovery in fair value to avoid recognizing an other-than-temporary impairment. This change does not affect the need to forecast recovery of the value of the security through either cash flows or market price.

In instances when a determination is made that an other-than-temporary impairment exists but the investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, FSP No. FAS 115-2 and FAS 124-2 changes the presentation and amount of the other-than-temporary impairment recognized in the income statement. The other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.

FSP No. FAS 115-2 and FAS 124-2 is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  An entity early adopting FSP No. FAS 115-2 and FAS 124-2 must also early adopt FSP No. FAS 157-4.  The Corporation has elected early adoption and application to the Corporation’s March 31, 2009 financial statements.  The financial impact of application of FSP No. FAS 115-2 and FAS 124-2 is discussed in the “Investments” section of  Management's Discussion and Analysis of Financial Condition and Results of Operations.

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1.  This FSB amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods.

FSP No. FAS 107-1 and APB 28-1 is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  An entity early adopting FSP No. FAS 107-1 and APB 28-1 must also early adopt FSP No. FAS 157-4 and FSP No. FAS 115-2 and FAS 124-2.  The Corporation has elected early adoption and application to its March 31, 2009 financial statements.  The financial impact of application of FSP No. FAS 107-1 and APB 28-1 is discussed above in Note F- Fair Value.

In December 2008, the FASB issued FSP No. FAS 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets.  This FSP amends SFAS 132(R), Employers’ Disclosures about Pensions and Other Postretirement Benefits, to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan.  The disclosures about plan assets required by this FSP shall be provided for fiscal years ending after December 15, 2009.  The new pronouncement is not anticipated to have any effect on the Corporation’s consolidated financial statements.
 
In May 2008, FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles.  This standard identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements.  This statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.”  The new pronouncement is not anticipated to have any effect on the Corporation’s consolidated financial statements

 
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In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets.  This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”).  The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R, and other GAAP.  This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years.  The new pronouncement does not have any effect on the Corporation’s consolidated financial statements.

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION

The following discussion and analysis is intended as a review of material changes in and significant factors affecting the financial condition and results of operations of the Corporation and its consolidated subsidiaries for the periods indicated.  This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and the notes thereto contained in Item 1 of Part I of this report.  Unless the context clearly suggests otherwise, references in this report to “us”, “we”, “our”, and “the Corporation” are to First United Corporation and its consolidated subsidiaries.

FORWARD-LOOKING STATEMENTS

This report 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 we operate, 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 our loan and investment portfolios; our 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 report 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.  These and other risks are discussed in detail in the periodic reports that First United Corporation files with the Securities and Exchange Commission (the “SEC”) (see Item 1A of Part II of this report for further information).  Except as required by applicable laws, we do not intend to publish updates or revisions of any forward-looking statements we make to reflect new information, future events or otherwise.

THE COMPANY

First United Corporation is a Maryland corporation that was incorporated in 1985 and is a registered financial holding company under the federal Bank Holding Company Act of 1956, as amended.  The Corporation’s primary business activity is acting as the parent company of First United Bank & Trust, a Maryland trust company (the “Bank”), OakFirst Loan Center, Inc., a West Virginia finance company, OakFirst Loan Center, LLC, a Maryland finance company, the Trusts, and First United Insurance Group, LLC,  a full service insurance provider organized under Maryland law (the “Insurance Group”).  OakFirst Loan Center, Inc. has one subsidiary, First United Insurance Agency, Inc., which is a Maryland insurance agency.  The Bank provides a complete range of retail and commercial banking services to a customer base serviced by a network of 26 offices and 32 automated teller machines.

We maintain an Internet site at www.mybankfirstunited.com on which we make available, free of charge, First United Corporation’s 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 SEC.

 
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ESTIMATES AND CRITICAL ACCOUNTING POLICIES

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 to the Consolidated Financial Statements included in Item 8 of Part II of First United Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008). On an on-going basis, management evaluates its estimates, including those related to loan losses, intangible assets, other-than-temporary impairment of investment securities and pension plan assumptions.  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 described its critical accounting policies in First United Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008.  The following discussion updates a critical accounting policy that was contained in the Annual Report on Form 10-K to reflect recent changes in economic conditions.
 
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 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 securities for impairment on a quarterly basis.  Based upon application of Financial Accounting Standards Board Staff Position No. FAS 115-2 and FAS 124-2 (“FSP No. FAS 115-2 and FAS 124-2”), management must assess whether (a) it has the intent to sell the security and (b) if it is more likely than not that it will be required to sell the security prior to its anticipated recovery.  If neither apply, declines in the fair value of securities below their cost that are considered other-than-temporary declines are split into two components.  The first is the loss attributable to declining credit quality.  Credit losses are recognized in earnings as realized losses in the period in which the impairment determination is made.  The second component consists of all other losses.  The other losses are recognized in other comprehensive income.  Further discussion about FSP No. FAS 115-2 and FAS 124-2 and its application can be found in the “Investments” section of  Management's Discussion and Analysis of Financial Condition and Results of Operations.  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) Adverse conditions specifically related to the security, an industry, or a geographic area, (3) the historic and implied volatility of the security,  (4) changes in the rating of a security by a rating agency, (5) recoveries or additional declines in fair value subsequent to the balance sheet date, (6) Failure of the issuer of the security to make scheduled interest payments, and (7) the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future.

Other than as discussed above, management does not believe that any material changes in our critical accounting policies have occurred since December 31, 2008.

 
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SELECTED FINANCIAL DATA
 
The following table sets forth certain selected financial data for the three months ended March 31, 2009 and 2008 and is qualified in its entirety by the detailed information and unaudited financial statements including the notes thereto, included elsewhere in this quarterly report.

   
At or For the Three Months
  
   
Ended March 31
  
   
2009
    
2008
  
Per Share Data
            
   Basic net income per common share
   $ .35     $ .51  
   Diluted net income per common share
   $ .35     $ .51  
Dividends Declared
   $ .20     $ .20  
   Book Value
   $ 10.95     $ 16.69  
Significant Ratios
                
   Return on Average Assets (a)
     .58 %     .82 %