UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended
December 31,
2009
Commission
file number 0-14237
FIRST UNITED
CORPORATION
(Exact
name of registrant as specified in its charter)
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Maryland
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52-1380770
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(State or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification Number)
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19 South Second Street, Oakland,
Maryland
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21550-0009
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(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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Common
Stock, par value $.01 per share
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NASDAQ
Global Select Market
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No R
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 R
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 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 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.¨
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 R
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 R
The
aggregate market value of the registrant’s outstanding voting and non-voting
common equity held by non-affiliates as of June 30, 2009: $ 61,683,165.
The
number of shares of the registrant’s common stock outstanding as of February 28,
2010: 6,143,947
Documents
Incorporated by Reference
Portions
of the registrant’s definitive proxy statement for the 2010 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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PART
I
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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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18
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ITEM
2.
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Properties
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18
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ITEM
3.
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Legal
Proceedings
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18
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ITEM
4.
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[Reserved]
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18
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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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48
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ITEM
8.
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Financial
Statements and Supplementary Data
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48
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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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87
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ITEM
9A.
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Controls and
Procedures
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87
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ITEM
9B.
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Other
Information
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90
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PART
III
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ITEM
10.
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Directors,
Executive Officers and Corporate Governance
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90
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ITEM
11.
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Executive
Compensation
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90
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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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90
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ITEM
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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90
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ITEM
14.
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Principal
Accountant Fees and Services
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90
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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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90
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SIGNATURES
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91
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EXHIBITS
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92
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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 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 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.
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BUSINESS
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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 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 full service insurance provider organized
under Maryland law (the “Insurance Group”), First United Statutory Trust I
(“Trust I”) and First United Statutory Trust II (“Trust II”), both Connecticut
statutory business trusts and First United Statutory Trust III (“Trust III” and
together with Trust I and Trust II, the “Trusts”), a Delaware statutory business
trust. The Trusts were formed for the purpose of selling trust
preferred securities. The Bank has two wholly-owned subsidiaries:
OakFirst Loan Center, Inc., a West Virginia finance company; and OakFirst Loan
Center, LLC, a Maryland finance company (collectively, the “OakFirst Loan
Centers”); and owns 99.9% of the limited partnership interests in Liberty Mews
Limited Partnership, a Maryland limited partnership formed for the purpose of
acquiring, developing and operating low-income housing units in Garrett County,
Maryland. First United Insurance Agency, Inc. a subsidiary of
OakFirst Loan Center, Inc., was merged into the Insurance Group effective June
30, 2009.
At December 31, 2009, the Corporation
had assets of approximately $1.74 billion, net loans of approximately $1.10
billion, and deposits of approximately $1.30 billion. Shareholders’
equity at December 31, 2009 was approximately $101 million.
The
Corporation maintains an Internet site at www.mybank4.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 28 banking offices, one call center and 33 Automated Teller Machines
(“ATM’s”) in Allegany County, Frederick County, Garrett County, and Washington
County in Maryland, and in Berkeley County, Mineral County, Hardy, 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 accounts (“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— Our
lending activities are conducted through the Bank and OakFirst Loan
Centers.
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 business operations 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 throughout the duration of the loan 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 $50 million or more of
FDIC insurance. In addition, we offer our commercial customers
packages which include Treasury Management, Cash Sweep and various checking
opportunities.
[4]
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.
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.
At
December 31, 2009, 2008 and 2007, the total market value of assets under the
supervision of the Bank’s Trust Department was approximately $544 million, $472
million and $547 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. Information about income from insurance activities for each of
the years ended December 31, 2009, 2008 and 2007 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, 2009, the most recent date for which comparative
information is available.
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Offices
(in Market)
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Deposits (in thousands)
|
Market Share
|
||||||||||
|
Allegany
County, Maryland:
|
||||||||||||
|
Susquehanna
Bank
|
5 | $ | 271,328 | 40.79 | % | |||||||
|
Manufacturers
& Traders Trust Company
|
7 | 173,850 | 26.14 | % | ||||||||
|
First
United Bank & Trust
|
4 | 127,538 | 19.17 | % | ||||||||
|
PNC
Bank NA
|
3 | 54,102 | 8.13 | % | ||||||||
|
Standard
Bank
|
2 | 38,333 | 5.77 | % | ||||||||
Source: FDIC
Deposit Market Share Report
[5]
|
Frederick
County, Maryland:
|
||||||||||||
|
PNC
Bank NA
|
21 | 1,043,943 | 30.96 | % | ||||||||
|
Branch
Banking & Trust Co.
|
12 | 636,036 | 18.86 | % | ||||||||
|
Bank
Of America NA
|
5 | 259,180 | 7.69 | % | ||||||||
|
Manufacturers
& Traders Trust Company
|
8 | 232,450 | 6.89 | % | ||||||||
|
Frederick
County Bank
|
4 | 220,518 | 6.54 | % | ||||||||
|
Chevy
Chase Bank FSB
|
6 | 171,423 | 5.08 | % | ||||||||
|
Woodsboro
Bank
|
7 | 169,682 | 5.03 | % | ||||||||
|
First
United Bank & Trust
|
4 | 128,285 | 3.81 | % | ||||||||
|
SunTrust
Bank
|
3 | 127,001 | 3.77 | % | ||||||||
|
Middletown
Valley Bank
|
4 | 115,185 | 3.42 | % | ||||||||
|
Sandy
Spring Bank
|
4 | 84,654 | 2.51 | % | ||||||||
|
BlueRidge
Bank
|
1 | 47,261 | 1.40 | % | ||||||||
|
Columbia
Bank
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2 | 36,367 | 1.08 | % | ||||||||
|
Damascus
Community Bank
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2 | 31,131 | 0.92 | % | ||||||||
|
Sovereign
Bank
|
2 | 27,376 | 0.81 | % | ||||||||
|
Wachovia
Bank NA
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1 | 24,452 | 0.73 | % | ||||||||
|
Harvest
Bank of Maryland
|
1 | 16,952 | 0.50 | % | ||||||||
Source: FDIC
Deposit Market Share Report
|
Garrett
County, Maryland:
|
||||||||||||
|
First
United Bank & Trust
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5 | 599,431 | 72.18 | % | ||||||||
|
Manufacturers
& Traders Trust Co.
|
5 | 102,244 | 12.31 | % | ||||||||
|
Susquehanna
Bank
|
2 | 97,280 | 11.72 | % | ||||||||
|
Clear
Mountain Bank
|
1 | 26,718 | 3.22 | % | ||||||||
|
Miners
& Merchants Bank
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1 | 4,750 | 0.57 | % | ||||||||
Source: FDIC
Deposit Market Share Report
|
Washington
County, Maryland:
|
||||||||||||
|
Susquehanna
Bank
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10 | 501,480 | 25.83 | % | ||||||||
|
Hagerstown
Trust Co.
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11 | 453,446 | 23.35 | % | ||||||||
|
Manufacturers
& Traders Trust Company
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12 | 379,130 | 19.52 | % | ||||||||
|
PNC
Bank NA
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6 | 155,728 | 8.02 | % | ||||||||
|
Sovereign
Bank
|
4 | 150,082 | 7.73 | % | ||||||||
|
First
United Bank & Trust
|
3 | 83,889 | 4.32 | % | ||||||||
|
Centra
Bank, Inc.
|
2 | 64,358 | 3.31 | % | ||||||||
|
Graystone
Tower Bank
|
3 | 43,723 | 2.25 | % | ||||||||
|
Chevy
Chase Bank FSB
|
3 | 39,659 | 2.04 | % | ||||||||
|
Citizens
National Bank of Berkeley Springs
|
1 | 36,787 | 1.90 | % | ||||||||
|
Orrstown
Bank
|
2 | 23,588 | 1.22 | % | ||||||||
|
Jefferson
Security Bank
|
1 | 6,063 | 0.31 | % | ||||||||
|
Middletown
Valley Bank
|
1 | 3,837 | 0.20 | % | ||||||||
Source: FDIC
Deposit Market Share Report
[6]
|
Berkeley
County, West Virginia:
|
||||||||||||
|
Branch
Banking & Trust Co.
|
5 | 317,296 | 30.41 | % | ||||||||
|
Centra
Bank Inc.
|
4 | 214,385 | 20.55 | % | ||||||||
|
First
United Bank & Trust
|
5 | 127,653 | 12.24 | % | ||||||||
|
City
National Bank of West Virginia
|
4 | 113,984 | 10.93 | % | ||||||||
|
Susquehanna
Bank
|
3 | 103,640 | 9.93 | % | ||||||||
|
Jefferson
Security Bank
|
2 | 58,700 | 5.63 | % | ||||||||
|
Bank
of Charles Town
|
2 | 44,600 | 4.27 | % | ||||||||
|
Citizens
National Bank of Berkeley Springs
|
3 | 35,229 | 3.38 | % | ||||||||
|
Summit
Community Bank
|
1 | 15,338 | 1.47 | % | ||||||||
|
MVB
Bank Inc.
|
1 | 12,067 | 1.16 | % | ||||||||
|
Woodforest
National Bank
|
1 | 312 | 0.03 | % | ||||||||
Source: FDIC
Deposit Market Share Report
|
Hardy
County, West Virginia:
|
||||||||||||
|
Summit
Community Bank, Inc.
|
3 | 350,315 | 67.67 | % | ||||||||
|
Capon
Valley Bank
|
3 | 116,254 | 22.46 | % | ||||||||
|
Pendleton
Community Bank, Inc.
|
1 | 24,312 | 4.70 | % | ||||||||
|
First
United Bank & Trust
|
1 | 14,727 | 2.85 | % | ||||||||
|
Grant
County Bank
|
1 | 12,025 | 2.32 | % | ||||||||
Source: FDIC
Deposit Market Share Report
|
Mineral
County, West Virginia:
|
||||||||||||
|
Branch
Banking & Trust Co.
|
2 | 79,892 | 32.42 | % | ||||||||
|
First
United Bank & Trust
|
2 | 78,369 | 31.80 | % | ||||||||
|
Manufacturers
& Traders Trust Co.
|
2 | 50,113 | 20.34 | % | ||||||||
|
Grant
County Bank
|
1 | 38,050 | 15.44 | % | ||||||||
Source: FDIC
Deposit Market Share Report
|
Monongalia
County, West Virginia:
|
||||||||||||
|
Branch
Banking & Trust Co.
|
5 | 496,816 | 27.26 | % | ||||||||
|
Centra
Bank, Inc.
|
5 | 485,663 | 26.65 | % | ||||||||
|
Huntington
National Bank
|
5 | 380,607 | 20.89 | % | ||||||||
|
United
Bank
|
4 | 169,039 | 9.28 | % | ||||||||
|
Clear
Mountain Bank
|
5 | 107,660 | 5.91 | % | ||||||||
|
Wesbanco
Bank, Inc.
|
5 | 85,691 | 4.70 | % | ||||||||
|
First
United Bank & Trust
|
3 | 46,390 | 2.55 | % | ||||||||
|
First
Exchange Bank
|
5 | 29,748 | 1.63 | % | ||||||||
|
Citizens
Bank of Morgantown, Inc.
|
1 | 20,484 | 1.12 | % | ||||||||
|
PNC
Bank NA
|
1 | 89 | 0.01 | % | ||||||||
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.
[7]
SUPERVISION
AND REGULATION
The
following is a summary of the material regulations and policies applicable to
the Corporation and its subsidiaries and is not intended to be a comprehensive
discussion. Changes in applicable laws and regulations may have a
material effect on our business.
General
The Corporation is a financial holding
company registered with the Board of Governors of the Federal Reserve System
(the “FRB”) under the BHC Act and, as such, is subject to the supervision,
examination and reporting requirements of the BHC Act and the regulations of the
FRB.
The Bank
is a Maryland trust company subject to the banking laws of Maryland and to
regulation by the Commissioner of Financial Regulation of Maryland, who is
required by statute to make at least one examination in each calendar year (or
at 18-month intervals if the Commissioner determines that an examination is
unnecessary in a particular calendar year). The Bank also has offices
in West Virginia, and the operations of these offices are subject to West
Virginia laws and to supervision and examination by the West Virginia Division
of Banking. As a member of the FDIC, the Bank is also subject to
certain provisions of federal law and regulations regarding deposit insurance
and activities of insured state-chartered banks, including those that require
examination by the FDIC. In addition to the foregoing, there are a
myriad of other federal and state laws and regulations that affect, impact or
govern the business of banking, including consumer lending, deposit-taking, and
trust operations.
All
non-bank subsidiaries of the Corporation are subject to examination by the FRB,
and, as affiliates of the Bank, are subject to examination by the FDIC and the
Commissioner of Financial Regulation of Maryland. In addition, OakFirst Loan
Center, Inc. is subject to licensing and regulation by the West Virginia
Division of Banking, OakFirst Loan Center, LLC is subject to licensing and
regulation by the Commissioner of Financial Regulation of Maryland, and the
Insurance Group is 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 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”.
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, called the Transaction Accounts Guarantee Program (“TAG”), provided
full coverage for non-interest bearing transaction deposit accounts, IOLTAs, and
NOW accounts with interest rates of 0.50% or less, regardless of account
balance, initially until December 31, 2009. The TAG program has been
extended until June 30, 2010. We elected to participate in both
programs and paid additional FDIC premiums in 2009 as a result. See
the section below entitled “Deposit Insurance”.
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, 2009
may be found in Note 2 to the Consolidated Financial Statements, which is
included in Item 8 of Part II of this annual report.
Deposit
Insurance
The deposits of the Bank are insured to
a maximum of $100,000 per depositor through the Deposit Insurance Fund, which is
administered by the FDIC, and the Bank is required to pay quarterly deposit
insurance premium assessments to the FDIC. The Deposit Insurance Fund
was created pursuant to the Federal Deposit Insurance Reform Act of 2005 (the
“Reform Act”), which was signed into law on February 8, 2006. Under
this 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. Effective October 3, 2008, however, the Emergency Economic
Stabilization Act of 2008 (the “EESA”) was enacted and, among other things,
temporarily raised the basic limit on federal deposit insurance coverage from
$100,000 to $250,000 per depositor. EESA initially contemplated that
the coverage limit would return to $100,000 after December 31, 2009, but the
expiration date was recently extended to December 31, 2013. The
coverage for retirement accounts did not change and remains at
$250,000.
The Reform Act also gave the FDIC
greater latitude in setting the assessment rates for insured depository
institutions which could be used to impose minimum assessments. On
May 22, 2009, the FDIC imposed an emergency insurance assessment of
five basis points in an effort to restore the Deposit Insurance Fund to an
acceptable level. On November 12, 2009, the FDIC adopted a final rule
requiring insured depository institutions to prepay their estimated quarterly
risk-based deposit assessments for the fourth quarter of 2009, and for all of
2010, 2011, and 2012, on December 30, 2009, along with each institution’s risk
based deposit insurance assessment for the third quarter of 2009. It
was also announced that the assessment rate will increase by 3 basis points
effective January 1, 2011. The prepayment will be accounted for as a
prepaid expense to be amortized quarterly. The prepaid assessment
will qualify for a zero risk weight under the risk-based capital
requirements. The Bank paid $4 million in FDIC premiums for
2009. In December 2009, the Bank prepaid approximately $11 million in
FDIC premiums.
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 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.
[10]
Governmental
Monetary and Credit Policies and Economic Controls
The
earnings and growth of the banking industry and ultimately of the Bank are
affected by the monetary and credit policies of governmental authorities,
including the FRB. An important function of the FRB is to regulate
the national supply of bank credit in order to control recessionary and
inflationary pressures. Among the instruments of monetary policy used by the FRB
to implement these objectives are open market operations in U.S. Government
securities, changes in the federal funds rate, changes in the discount rate of
member bank borrowings, and changes in reserve requirements against member bank
deposits. These means are used in varying combinations to influence
overall growth of bank loans, investments and deposits and may also affect
interest rates charged on loans or paid on deposits. The monetary
policies of the FRB authorities have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to have
such an effect in the future. In view of changing conditions in the
national economy and in the money markets, as well as the effect of actions by
monetary and fiscal authorities, including the FRB, no prediction can be made as
to possible future changes in interest rates, deposit levels, loan demand or
their effect on the business and earnings of the Corporation and its
subsidiaries.
SEASONALITY
Management does not believe that our
business activities are seasonal in nature. Deposit, loan, and
insurance demand may vary depending on local and national economic conditions,
but management believes that any variation will not have a material impact on
our planning or policy-making strategies.
EMPLOYEES
At
December 31, 2009, we employed 487 individuals, of whom 377 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 success 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.
[11]
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, much of
which involves real estate lending, so a decline in the real estate and credit
markets could materially and adversely impact our financial condition and
results of operations.
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. Approximately 20%, or $226 million, of our total loans are
loans secured by real estate construction and development
projects. Commercial real estate development loans comprise $152
million of this amount. No industry or borrower comprises greater than 10% of
total loans as of December 31, 2009. 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 several years because of the ongoing
economic recession. 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.
Additionally, the FRB and the FDIC,
along with the other federal banking regulators, issued guidance in December
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, 2009, 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, which would reduce
our earnings.
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.
[12]
The
market value of our investments could decline.
As of December 31, 2009, we had
classified all but four of our investment securities as available-for-sale
pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) Topic 320, Investments – Debt and Equity
Securities, relating to accounting
for investments. Topic 320 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 March 25, 2009, the FHLB of Atlanta
announced that it would not pay a dividend for the fourth quarter of
2008. On June 3, 2009, the FHLB of Atlanta announced that it would
not pay a dividend for first quarter of 2009. During the first
quarter of 2009, the Corporation reversed approximately $28,000 in dividends
that were accrued for the fourth quarter of 2008. On August 12, 2009,
FHLB of Atlanta announced that a dividend for the second quarter of 2009 would
be paid. A dividend of $29,000 was posted during the third quarter of
2009. The Corporation did not accrue any dividends for the third or
fourth quarters of 2009.
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, and our inability to effectively compete
could adversely and materially impact our financial condition and results of
operations.
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.
[13]
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 federal laws, rules and programs
that have been enacted or adopted in response to the recent banking crisis and
the current national recession.
In response to the banking crisis that
began in 2008 and the resulting national recession, the federal government took
drastic steps to help stabilize the credit market and the financial
industry. These steps included the enactment of EESA, which, among
other things, raised the basic limit on federal deposit insurance coverage to
$250,000, and the FDIC’s adoption of the TLGP, which, under the TAG portion,
provides full deposit insurance coverage through June 30, 2010 for non-interest
bearing transaction deposit accounts, IOLTAs, and NOW accounts with interest
rates of 0.50% or less, regardless of account balance. The TLGP
requires participating institutions, like us, to pay 10 basis points per annum
for the additional insured deposits. These actions will cause our
regulatory expenses to increase. Additionally, due in part to the
failure of several depository institutions around the country since the banking
crisis began, the FDIC imposed an emergency insurance assessment to help restore
the Deposit Insurance Fund and further required insured depository institutions
to prepay their estimated quarterly risk-based deposit assessments through 2012
on December 30, 2009. Given the current state of the national
economy, there can be no assurance that the FDIC will not impose future
emergency assessments or further revise its rate structure.
Customer
concern about deposit insurance may cause a decrease in deposits held at the
Bank.
With 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.
[14]
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, imposed 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.
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.
[15]
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 FDIC 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. Moreover, the payment of dividends to shareholders, and the
amounts thereof, is at the discretion of the Corporation’s Board of
Directors. Accordingly, there can be no guarantee that we will
declare dividends in any fiscal quarter or, if declared, that the amount of a
dividend will remain unchanged from quarter to quarter.
Because
of the Corporation’s participation in TARP, it is subject to several
restrictions relating to shares of its securities, including restrictions on its
ability to declare or pay dividends on and repurchase its shares.
As stated above, the Corporation 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. Until the earlier of January 30, 2012 or the date on
which the Treasury no longer holds any Series A Preferred Stock, Treasury’s
consent generally is required for any repurchase by the Corporation of its
outstanding capital stock or any redemption by the Trusts of their outstanding
trust preferred securities. 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.
[16]
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 Trust I and
Trust II in connection with the sales by those trusts of $30.0 in mandatorily
redeemable preferred capital securities to third party investors. In
December 2004, the Corporation issued $5.0 million of additional junior
subordinated debentures. Between December 2009 and January 2010, the
Corporation issued approximately $10.8 million of junior subordinated debentures
to Trust III and Trust III issued approximately $10.5 million in mandatorily
redeemable preferred capital securities to third party investors. The
terms of these 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.
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.
[17]
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
|
ITEM 2.
|
PROPERTIES
|
The headquarters of the Corporation and
the Bank occupies approximately 29,000 square feet at 19 South Second Street,
Oakland, Maryland, a 30,000 square feet operations center located at 12892
Garrett Highway, Oakland Maryland and 8,500 square feet at 102 South Second
Street, Oakland, Maryland. These premises are owned by the Corporation. The Bank
owns 20 of its banking offices and leases eight. The Corporation also
leases eight offices of non-bank subsidiaries. Total rent expense on
the leased offices and properties was $.64 million in 2009.
|
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.
|
[RESERVED]
|
PART
II
|
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 26, 2010, the Corporation had 1,949
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 2009 and 2008 are set forth below. On March 10,
2010, the closing sales price of the common stock was $5.65 per
share.
|
2009
|
High
|
Low
|
Dividends Declared
|
|||||||||
|
1st
Quarter
|
$ | 14.96 | $ | 7.02 | $ | .200 | ||||||
|
2nd
Quarter
|
12.50 | 8.06 | .200 | |||||||||
|
3rd
Quarter
|
12.00 | 10.15 | .200 | |||||||||
|
4th
Quarter
|
11.80 | 5.88 | .100 | |||||||||
|
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 | |||||||||
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 16 of the Notes to 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.
[18]
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
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, 2009. 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
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
12/31/08
|
12/31/09
|
||||||||||||||||||
|
First
United Corporation
|
100.00 | 106.98 | 114.29 | 108.34 | 76.15 | 36.44 | ||||||||||||||||||
|
NASDAQ
Composite
|
100.00 | 101.37 | 111.03 | 121.92 | 72.49 | 104.31 | ||||||||||||||||||
|
SNL
Bank $1B-$5B Index
|
100.00 | 98.29 | 113.74 | 82.85 | 68.72 | 49.26 | ||||||||||||||||||
[19]
Issuer
Repurchases
On August 14, 2007, the Corporation’s
Board of Directors authorized a common stock repurchase plan, which was publicly
announced on August 21, 2007. The plan authorized 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 the Corporation determines to be appropriate. The
repurchase plan was suspended in January 2009 in connection with the
Corporation’s participation in the CPP, and no shares were repurchased by or on
behalf of the Company and its affiliates (as defined by Exchange Act Rule
10b-18) during the fourth quarter of 2009.
Equity
Compensation Plan Information
At the 2007 Annual Meeting of
Shareholders, the Corporation’s shareholders approved the First United
Corporation Omnibus Equity Compensation Plan (the “Omnibus Plan”), which
authorizes the grant of stock options, stock appreciation rights, stock awards,
stock units, performance units, dividend equivalents, and other stock-based
awards. The following table contains information about the Omnibus
Plan as of December 31, 2009:
|
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)
|
|||||||||
|
Equity
compensation plans approved by security holders
|
0 | N/A | 185,000 | (1) | ||||||||
|
Equity
compensation plans not approved by security holders
|
0 | N/A | N/A | |||||||||
|
Total
|
0 | N/A | 185,000 | |||||||||
Note:
|
(1)
|
In
addition to stock options and stock appreciation rights, the Omnibus Plan
permits the grant of stock awards, stock units, performance units,
dividend equivalents, and other stock-based awards. Subject to
the anti-dilution provisions of the Omnibus Plan, the maximum number of
shares for which awards may be granted to any one participant in any
calendar year is 20,000, without regard to whether an award is paid in
cash or shares.
|
[20]
|
ITEM
6.
|
SELECTED
FINANCIAL DATA
|
The following table sets forth certain
selected financial data for the five years ended December 31, 2009 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.
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Balance
Sheet Data
|
||||||||||||||||||||
|
Total
Assets
|
$ | 1,743,736 | $ | 1,639,104 | $ | 1,478,909 | $ | 1,349,317 | $ | 1,310,991 | ||||||||||
|
Net
Loans
|
1,101,794 | 1,120,199 | 1,035,962 | 957,126 | 954,545 | |||||||||||||||
|
Investment
Securities
|
273,784 | 354,595 | 304,908 | 263,272 | 230,095 | |||||||||||||||
|
Deposits
|
1,304,166 | 1,222,889 | 1,126,552 | 971,381 | 955,854 | |||||||||||||||
|
Long-term
Borrowings
|
270,544 | 277,403 | 178,451 | 166,330 | 128,373 | |||||||||||||||
|
Shareholders’
Equity
|
100,566 | 72,690 | 104,665 | 96,856 | 92,039 | |||||||||||||||
|
Operating
Data
|
||||||||||||||||||||
|
Interest
Income
|
$ | 85,342 | $ | 95,216 | $ | 93,565 | $ | 80,269 | $ | 69,756 | ||||||||||
|
Interest
Expense
|
32,104 | 43,043 | 49,331 | 39,335 | 29,413 | |||||||||||||||
|
Net
Interest Income
|
53,238 | 52,173 | 44,234 | 40,934 | 40,343 | |||||||||||||||
|
Provision
for Loan Losses
|
15,588 | 12,925 | 2,312 | 1,165 | 1,078 | |||||||||||||||
|
Other
Operating Income
|
(10,677 | ) | 13,769 | 15,092 | 14,041 | 14,088 | ||||||||||||||
|
Other
Operating Expense
|
46,793 | 40,573 | 38,475 | 35,490 | 34,654 | |||||||||||||||
|
Income
Before Taxes
|
(19,820 | ) | 12,444 | 18,539 | 18,320 | 18,699 | ||||||||||||||
|
Income
Tax (benefit)/expense
|
(8,496 | ) | 3,573 | 5,746 | 5,743 | 6,548 | ||||||||||||||
|
Net
(Loss) Income
|
$ | (11,324 | ) | $ | 8,871 | $ | 12,793 | $ | 12,577 | $ | 12,151 | |||||||||
|
Accumulated
preferred stock dividend and discount accretion
|
(1,430 | ) | — | — | — | — | ||||||||||||||
|
Net
(loss) attributable to/income available to common
shareholders
|
$ | (12,754 | ) | $ | 8,871 | $ | 12,793 | $ | 12,577 | $ | 12,151 | |||||||||
|
Per
Share Data
|
||||||||||||||||||||
|
Basic
net (Loss)/ Income per common share
|
$ | (2.08 | ) | $ | 1.45 | $ | 2.08 | $ | 2.05 | $ | 1.99 | |||||||||
|
Diluted
net (Loss)/Income per common share
|
$ | (2.08 | ) | $ | 1.45 | $ | 2.08 | $ | 2.05 | $ | 1.99 | |||||||||
|
Dividends
Paid
|
.80 | .80 | .78 | .76 | .74 | |||||||||||||||
|
Book
Value
|
11.49 | 11.89 | 17.05 | 15.77 | 15.04 | |||||||||||||||
|
Significant
Ratios
|
||||||||||||||||||||
|
Return
on Average Assets
|
(.67 | )% | .55 | % | .90 | % | .96 | % | .95 | % | ||||||||||
|
Return
on Average Equity
|
(11.02 | )% | 9.31 | % | 12.70 | % | 13.07 | % | 13.61 | % | ||||||||||
|
Dividend
Payout Ratio
|
(43.21 | )% | 55.17 | % | 37.50 | % | 37.07 | % | 37.44 | % | ||||||||||
|
Average
Equity to Average Assets
|
6.06 | % | 5.95 | % | 7.10 | % | 7.35 | % | 7.00 | % | ||||||||||
|
Total
Risk-based Capital Ratio
|
11.20 | % | 12.18 | % | 12.51 | % | 12.95 | % | 12.66 | % | ||||||||||
|
Tier
I Capital to Risk Weighted Assets
|
9.60 | % | 10.59 | % | 11.40 | % | 11.81 | % | 11.45 | % | ||||||||||
|
Tier
I Capital to Average Assets
|
8.53 | % | 8.10 | % | 8.91 | % | 9.08 | % | 8.64 | % | ||||||||||
[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, 2009, which appear in Item 8 of Part II
of this annual report.
Subsequent
Events
In January 2010, Trust III issued $3.5
million in trust preferred securities to third party investors, and the
Corporation issued $3.6 million in underlying junior subordinated
debentures.
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 28 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.
The net loss attributable to common
shareholders for the year ended December 31, 2009 was $12.8 million, compared to
net income available to common shareholders of $8.9 million for
2008. Basic and diluted losses per common share for the year ended
December 31, 2009 were ($2.08), compared to basic and diluted income per common
share of $1.45 for 2008. The decrease in net income resulted
primarily from an increase of $24.0 million of other-than-temporary impairment
charges related to available-for-sale securities, $2.7 million in increased loan
loss provision expense and $3.5 million of increased FDIC deposit insurance
premiums. The increase in FDIC premiums resulted from the special
assessment charge of $.8 million recognized in June 2009, the revised FDIC rate
structure and the credit which offset 2008 premiums charged. Core
operations remained strong as our net interest income for the year ended
December 31, 2009 increased $1.1 million when compared to the same period of
2008. Our net interest margin decreased from 3.68% at December 31,
2008 to 3.56% at December 31, 2009 as a result of an increase in non-accruing
loans and management’s desire to increase our liquidity position. The
provision for loan losses was $15.6 million for the year ended December 31,
2009, compared to $12.9 million for the same period of 2008. Interest
expense on our interest-bearing liabilities decreased $10.9 million due to the
low interest rate environment, our decision to only increase special pricing for
full relationship customers and certificates of deposit renewing at lower
interest rates due to the short duration of our portfolio. The
increased provision was necessary to provide specific allocations for impaired
loans where management has determined that the collateral supporting the loans
is not adequate to cover the loan balance and due to increases in the
qualitative factors affecting the allowance for loan losses as a result of the
current recession and distressed economic environment.
Other
operating income decreased $24.4 million during 2009 when compared to 2008. This
decrease is primarily attributable to the recognition of $26.7 million in
other-than-temporary impairment charges and $.3 million realized losses on the
investment portfolio. Trust department income and income earned on bank
owned life insurance have also declined as compared to 2008 due to decreases in
the market values of assets under management and reduced interest rates,
respectively. Management has also noted a decrease in consumer spending as
service charge income has shown a decline of $2.0 million during the 12 months
of 2009. These declines were offset slightly by $0.7 million of increased
insurance commissions as a result of the Insurance Group’s acquisition of books
of business late in 2008. Operating expenses increased $6.2 million in
2009 when compared to 2008. This increase is due primarily to a $3.5
million increase of FDIC premiums, which is inclusive of the $0.8 million
special assessment charge, and increases in personnel costs, other real estate
owned expenses, and amortization of intangibles.
Operations
in 2009 were impacted by the following factors and strategic
initiatives:
Loan and Deposit
Growth/Impact on Net Interest Margin – We experienced a decrease of $12.7
million in loans in 2009 when compared to 2008. The residential
mortgage and construction portfolio decreased $11.8 million and a decrease in
the installment portfolio of $29.3 million. These decreases were
offset by growth of $28.4 million in the commercial portfolio 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. Interest income on loans in 2009 decreased from the
amount generated in 2008 by $6.1 million (on a fully taxable equivalent basis)
due to the decrease in interest rates, flat rate environment throughout 2009,
and the increase in non-accrual loans. Interest income on investment
securities decreased slightly by $3.0 million (on a fully taxable equivalent
basis) due to a $44.6 million decrease in the portfolio. (Additional
information on the composition of interest income is available in Table 1 that
appears on page 26).
[22]
Funding
costs in 2009 decreased as a result of the flat interest rate environment
throughout 2009 and the enhanced efforts of the internal treasury
committee. Deposits at December 31, 2009 increased $81.3 million when
compared to deposits at December 31, 2008, primarily from a $75.7 million
increase in our IRA and regular certificates of deposit as a result of 13-month
and 24-month specials offset by declines in interest bearing demand and savings
products.
Although
deposits increased during 2009, the decline in the interest rate environment
decreased deposit interest expense by $10.6 million when compared to
2008. The reduction in interest expense resulted in a slight
increase in net interest income on a tax equivalent basis of $1.4 million (3%)
in 2009 when compared to 2008.
The
overall net interest margin decreased during 2009 to 3.56% from 3.68% in 2008 on
a fully taxable equivalent basis.
Other Operating
Income/Other Operating Expense - Other operating
income decreased $24.4 million during the 12 months of 2009 when compared to the
same period of 2008. The decrease is primarily attributable to the recognition
of $26.7 million in other-than-temporary impairment charges, a $.3 million
realized loss on the investment portfolio, as a result of moving four securities
to trading, and a decrease of $2.0 million in service charge income due to
decreased consumer spending. Trust department revenue and income on our bank
owned life insurance policies also decreased due to declines in the market
values of assets under management and reduced interest rates,
respectively. These declines were offset slightly by a $.7 million
increase in insurance commissions as a result of the Insurance Group’s
acquisition of books of business in December 2008.
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
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
2008. In 2008, declining market values negatively impacted the value
of assets under management and the resultant fees. This decline
in market values began to reverse in 2009. Assets under management
were $544 million, $472 million and $547 million at December 31, 2009, 2008 and
2007, respectively.
Securities
losses are the most variable component of other operating
income. During 2009, we recorded non-cash charges of approximately
$26.7 million as a result of an other-than-temporary impairment analysis
performed on our investment portfolio. This process is described more
fully in the Investment Securities section of the Consolidated Balance Sheet
Review.
Other
operating expenses increased $6.2 million for 2009 when compared to
2008. The increase was due to increases in personnel expenses,
occupancy and equipment expenses as we continued our expansion in Morgantown,
West Virginia, Frederick, Maryland and in the markets served by the Insurance
Group. In addition, expense for the Corporation’s defined benefit
pension plan increased $1.0 million in 2009 when compared to
2008. This increase is a result of the decline in market value of the
plan assets and the lower discount rate. We also recognized increases
in other expenses directly attributable to the FDIC assessments of $3.5 million
when compared to the same time period in 2008.
Dividends —
The Corporation continued its tradition of paying dividends to
shareholders during 2009, which totaled $0.80 per share. The
Corporation has paid quarterly cash dividends consistently since 1985, the year
in which it was formed. In December 2009, the Corporation reduced its
quarterly dividend to $.10 per common share effective for the dividend payable
on February 1, 2010.
As noted
above, the Corporation is generally prohibited from increasing this dividend
above $.20 per share without the prior consent of the Treasury until the earlier
of (i) January 30, 2012 or (ii) the date on which the Treasury no longer holds
any shares of the Series A Preferred Stock.
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.
[23]
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 of
America. 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
specific loans and the loan portfolio, current and historical trends in
delinquencies and charge-offs, and changes in the size and composition of the
loan portfolio. The analysis also requires consideration of the economic climate
and direction, changes in lending rates, political conditions, legislation
impacting the banking industry and economic conditions specific to Western
Maryland and Northeastern West Virginia. Because the calculation of
the allowance for loan losses relies on management’s estimates and judgments
relating to inherently uncertain events, actual results may differ from
management’s estimates.
The
allowance for loan losses is also discussed below in Item 7 under the caption
“Allowance for Loan Losses” and in Note 5 to Consolidated Financial Statements
contained in Item 8 of Part II of this annual report.
Goodwill
and Other Intangible Assets
ASC Topic
350, Intangibles - Goodwill
and Other, establishes standards for the amortization of acquired
intangible assets and the non-amortization and impairment assessment of
goodwill. We have $.5 million of core deposit intangible assets and
$2.9 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. ASC Topic 350 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 in the
accumulated other comprehensive income/(loss) component 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. Gains and losses on the sale of securities are recorded
using the specific identification method.
[24]
Management systematically evaluates
securities for impairment on a quarterly basis. Based upon
application of new accounting guidance for subsequent measurement in Topic 320
(ASC Section 320-10-35), which the Corporation early adopted effective March 31,
2009 according to the effective date provisions of ASC Paragraph 320-10-65-1,
management assesses whether (a) it has the intent to sell a security being
evaluated and (b) it is more likely than not that the Corporation will be
required to sell the security prior to its anticipated recovery. If
neither applies, then declines in the fair values 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, which are recognized in other
comprehensive loss. 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 fair value of the security, (4) changes in the rating of the
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 or principal 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 securities that are considered beneficial interests under
the guidance of ASC Subtopic 325-40, Investments – Other – Beneficial
Interests in Securitized Financial Assets, (ASC Section 325-40-35). This process
is described more fully in the Investment Securities section of the Consolidated
Balance Sheet Review.
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 ASC Topic 820, Fair Value Measurements and
Disclosures, which defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements
required under other accounting pronouncements. The Corporation
measures the fair market values of its investments based on the fair value
hierarchy established in Topic 820. The determination of fair value
of investments and other assets is discussed further in Note 18 to the
Consolidated Financial Statements contained in Item 8 of Part II of this annual
report.
Pension
Plan Assumptions
Our pension plan costs are calculated
using actuarial concepts, as discussed within the requirements of ASC Topic 715,
Compensation – Retirement
Benefits. 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 13 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 fully taxable equivalent (FTE) 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 fully
taxable equivalent basis) for the years 2007-2009 (dollars in
thousands).
[25]
|
2009
|
2008
|
2007
|
||||||||||
|
Interest
income
|
$ | 87,478 | $ | 97,062 | $ | 95,286 | ||||||
|
Interest
expense
|
32,104 | 43,043 | 49,331 | |||||||||
|
Net
interest income
|
$ | 55,374 | $ | 54,019 | $ | 45,955 | ||||||
|
Net
interest margin %
|
3.56 | % | 3.68 | % | 3.51 | % | ||||||
Net
interest income on an FTE basis increased $1.4 million during 2009 over the same
period in 2008 due to a $10.9 million decrease in interest expense, offset by a
$9.6 million decrease in interest income. The decrease in interest
income resulted primarily from a decrease in interest rates on loans, an
increase in non-accrual assets and our desire to maintain higher cash levels
when compared to 2008. A reversal of approximately $28,000 is
reflected in the “Other interest earning assets” line item for December 31, 2009
due to the accrual of stock dividends issued by the Federal Home Loan Bank
(“FHLB”) of Atlanta at a rate of 0.80% for the fourth quarter of
2008. The Corporation was notified during the first quarter of 2009
that the FHLB of Atlanta would not pay a dividend for the fourth quarter
2008. The decreases in interest rates throughout 2008 and the
increase in non-accrual assets during 2009 contributed to the decrease in the
average rate on our average earning assets of 99 basis points, from 6.62% at
December 31, 2008 to 5.63% for December 31, 2009 (on a fully tax equivalent
basis).
Interest
expense decreased during 2009 when compared to the same period of 2008 due
primarily to the significantly low level of interest rates on our interest
bearing liabilities. Average interest-bearing liabilities increased during 2009
by $82.4 million when compared to 2008, with interest-bearing deposits
increasing by approximately $73.1 million. The effect of the
decreasing rate environment throughout 2008 and continuing into 2009, our
decision to only increase special rates for full relationship customers and the
short duration of our portfolio resulted in a 92 basis point decrease in the
average rate paid on our average interest-bearing liabilities from 3.11% for the
12 months ended December 31, 2008 to 2.19% for the same period of
2009.
The net
result of the aforementioned factors was a 12 basis point decrease in the net
interest margin during the 12 months of 2009 to 3.56% from 3.68% for the same
time period of 2008.
Comparing
2008 to 2007, 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.
As shown
below, the composition of total interest income between 2008 and 2009 shifted
towards interest and fees on loans. This was the result of
accumulating cash from calls on securities in the investment portfolio in order
to enhance our liquidity position. The composition of total interest
income between 2007 and 2008 shows a slight 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.
[26]
|
%
of Total Interest Income
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Interest
and fees on loans
|
80 | % | 78 | % | 82 | % | ||||||
|
Interest
on investment securities
|
20 | % | 22 | % | 18 | % | ||||||
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 2009, 2008 and 2007. 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
2009, 2008 and 2007. Table 2 distinguishes between the changes
related to average outstanding balances (changes in volume created by holding
the interest rate constant) and the changes related to average interest rates
(changes in interest income or expense attributed to average rates created by
holding the outstanding balance constant).
Distribution
of Assets, Liabilities and Shareholders’ Equity
Interest
Rates and Interest Differential – Tax Equivalent Basis
(Dollars
in thousands)
Table
1
|
For
the Years Ended December 31
|
||||||||||||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||||||||||||||
|
AVERAGE
BALANCE
|
INTEREST
|
AVERAGE
YIELD/RATE
|
AVERAGE
BALANCE
|
INTEREST
|
AVERAGE
YIELD/RATE
|
AVERAGE
BALANCE
|
INTEREST
|
AVERAGE
YIELD/RATE
|
||||||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||||||
|
Loans
|
$ | 1,132,569 | $ | 68,271 | 6.03 | % | $ | 1,081,191 | $ | 74,415 | 6.88 | % | $ | 1,003,854 | $ | 77,158 | 7.69 | % | ||||||||||||||||||
|
Investment
Securities:
|
||||||||||||||||||||||||||||||||||||
|
Taxable
|
224,647 | 13,106 | 5.83 | 285,382 | 16,848 | 5.90 | 215,756 | 12,474 | 5.78 | |||||||||||||||||||||||||||
|
Non
taxable
|
98,960 | 5,962 | 6.02 | 82,844 | 5,229 | 6.31 | 73,467 | 4,847 | 6.60 | |||||||||||||||||||||||||||
|
Total
|
323,607 | 19,068 | 5.89 | 368,226 | 22,077 | 6.00 | 289,223 | 17,321 | 5.99 | |||||||||||||||||||||||||||
|
Federal
funds sold
|
48,979 | 96 | .20 | 368 | 4 | 1.09 | 285 | 11 | 3.86 | |||||||||||||||||||||||||||
|
Interest-bearing
deposits with
other banks
|
34,389 | 28 | .08 | 3,691 | 77 | 2.09 | 5,135 | 241 | 4.69 | |||||||||||||||||||||||||||
|
Other
interest earning assets
|
13,819 | 15 | .11 | 13,235 | 489 | 3.69 | 9,363 | 555 | 5.93 | |||||||||||||||||||||||||||
|
Total
earning assets
|
1,553,363 | 87,478 | 5.63 | % | 1,466,711 | 97,062 | 6.62 | % | 1,307,860 | 95,286 | 7.29 | % | ||||||||||||||||||||||||
|
Allowance
for loan losses
|
(14,960 | ) | (9,002 | ) | (6,584 | ) | ||||||||||||||||||||||||||||||
|
Non-earning
assets
|
157,741 | 142,076 | 118,780 | |||||||||||||||||||||||||||||||||
|
Total
Assets
|
$ | 1,696,144 | $ | 1,599,785 | $ | 1,420,056 | ||||||||||||||||||||||||||||||
|
Liabilities
and Shareholders’
Equity
|
||||||||||||||||||||||||||||||||||||
|
Interest-bearing
demand
deposits
|
$ | 391,299 | $ | 2,997 | .77 | % | $ | 414,750 | $ | 6,906 | 1.67 | % | $ | 333,443 | $ | 9,752 | 2.92 | % | ||||||||||||||||||
|
Savings
deposits
|
76,703 | 498 | .65 | 80,812 | 1,035 | 1.28 | 42,123 | 1,445 | 3.43 | |||||||||||||||||||||||||||
|
Time
deposits:
|
||||||||||||||||||||||||||||||||||||
|
Less
than $100
|
323,409 | 9,241 | 2.86 | 239,211 | 10,220 | 4.27 | 234,439 | 10,429 | 4.45 | |||||||||||||||||||||||||||
|
$100
or more
|
355,589 | 7,480 | 2.10 | 339,110 | 12,621 | 3.72 | 317,219 | 16,132 | 5.09 | |||||||||||||||||||||||||||
|
Short-term
borrowings
|
44,473 | 318 | .72 | 55,243 | 1,022 | 1.85 | 70,474 | 2,903 | 4.12 | |||||||||||||||||||||||||||
|
Long-term
borrowings
|
274,718 | 11,570 | 4.21 | 254,680 | 11,239 | 4.41 | 173,208 | 8,670 | 5.01 | |||||||||||||||||||||||||||
|
Total
interest-bearing liabilities
|
1,466,191 | 32,104 | 2.19 | % | 1,383,806 | 43,043 | 3.11 | % | 1,170,906 | 49,331 | 4.21 | % | ||||||||||||||||||||||||
|
Non-interest-bearing
Deposits
|
110,883 | 106,124 | 133,509 | |||||||||||||||||||||||||||||||||
|
Other
liabilities
|
16,240 | 14,595 | 14,885 | |||||||||||||||||||||||||||||||||
|
Shareholders’
Equity
|
102,830 | 95,260 | 100,756 | |||||||||||||||||||||||||||||||||
|
Total
Liabilities and Shareholders’
Equity
|
$ | 1,696,144 | $ | 1,599,785 | $ | 1,420,056 | ||||||||||||||||||||||||||||||
|
Net
interest income and Spread
|
$ | 55,374 | 3.44 | % | $ | 54,019 | 3.51 | % | $ | 45,955 | 3.08 | % | ||||||||||||||||||||||||
|
Net
interest margin
|
3.56 | % | 3.68 | % | 3.51 | % | ||||||||||||||||||||||||||||||
—The
above table reflects the average rates earned or paid stated on a tax equivalent
basis assuming a tax rate of 35% for 2009, 2008 and 2007. The fully
taxable equivalent adjustments for the years ended December 31, 2009, 2008, and
2007 were $1,613, $1,846, and $1,721, respectively.
—The
average balances of non-accrual loans for the years ended December 31, 2009,
2008 and 2007, which were reported in the average loan balances for these years,
were $39,851, $23,517, and $4,167, respectively.
[27]
—Net
interest margin is calculated as net interest income divided by average earning
assets.
—The
average yields on investments are based on amortized cost.
Interest
Variance Analysis (1)
(In
thousands and tax equivalent basis)
Table
2
|
2009 Compared to 2008
|
2008 Compared to 2007
|
|||||||||||||||||||||||
|
Volume
|
Rate
|
Net
|
Volume
|
Rate
|
Net
|
|||||||||||||||||||
|
INTEREST
INCOME:
|
||||||||||||||||||||||||
|
Loans
|
$ | 3,097 | $ | (9,241 | ) | $ | (6,144 | ) | $ | 5,323 | $ | (8,066 | ) | $ | (2,743 | ) | ||||||||
|
Taxable
Investments
|
(3,543 | ) | (199 | ) | (3,742 | ) | 4,111 | 264 | 4,375 | |||||||||||||||
|
Non-taxable
Investments
|
971 | (238 | ) | 733 | 592 | (210 | ) | 382 | ||||||||||||||||
|
Federal
funds sold
|
95 | (3 | ) | 92 | 1 | (8 | ) | (7 | ) | |||||||||||||||
|
Other
interest earning assets
|
59 | (582 | ) | (523 | ) | 140 | (370 | ) | (230 | ) | ||||||||||||||
|
Total
interest income
|
679 | (10,263 | ) | (9,584 | ) | 10,167 | (8,390 | ) | 1,777 | |||||||||||||||
|
INTEREST
EXPENSE:
|
||||||||||||||||||||||||