Item 1. BUSINESS
FIRST UNITED CORPORATION
First United Corporation (the "Corporation") headquartered in Oakland, Maryland, is a one-bank holding company with one non-bank subsidiary. The Corporation was organized under the laws of the State of Maryland in 1985. In 1995, the Corporation merged two of its three wholly owned banking subsidiaries, First United Bank of West Virginia, N.A. and Myersville Bank, with its other wholly owned banking subsidiary, First United National Bank & Trust.
First United National Bank & Trust and Oakfirst Life Insurance Corporation are the only operating subsidiaries of the Corporation.
FIRST UNITED NATIONAL BANK & TRUST
First United National Bank & Trust is a national banking association chartered in 1900 and is a member of the Federal Reserve System. The deposits of First United National Bank & Trust are insured by the Federal Deposit Insurance Corporation (FDIC).
First United National Bank & Trust operates twenty-two banking offices, five facilities in Garrett County, Maryland, six in Allegany County, Maryland, four in Washington County, Maryland, two in Frederick County, Maryland, two in Mineral County, West Virginia, one in Hampshire County, West Virginia, one in Berkeley County, West Virginia and one in Hardy County, West Virginia. First United also operates a total of twenty-six Automated Teller Machines (ATM's), six of which are located in Garrett County, Maryland, nine in Allegany County, Maryland, four in Washington County, Maryland, three in Frederick County, Maryland, and one each in Mineral, Hampshire, Berkeley and Hardy Counties in West Virginia. First United National Bank & Trust provides a complete range of retail and commercial banking services to a customer base in Garrett, Allegany, Washington and Frederick Counties in Maryland, in Mineral, Hampshire, Berkeley and Hardy Counties in West Virginia and to residents in surrounding regions of Pennsylvania and West Virginia. The customer base in the aforementioned geographical area consists of individuals, businesses and various governmental units. The services provided by First United National Bank & Trust include checking, savings, NOW and Money Market deposit accounts, business loans, personal loans, mortgage loans, lines of credit and consumer-oriented financial services including IRA and KEOGH accounts. In addition, First United National Bank & Trust provides full brokerage services through a networking arrangement with PrimeVest Financial Services, Inc., a full service broker-dealer. First United National Bank & Trust also provides safe deposit and night depository facilities and a complete line of trust services. As of December 31, 1996, First United National Bank & Trust had total deposits of $452.54 million and total loans of $382.78 million. The total market value of assets under the supervision of the Trust Department was approximately $158.88 million.
OAKFIRST LIFE INSURANCE CORPORATION
Oakfirst Life Insurance Corporation is a reinsurance company that reinsures credit life and credit accident and health insurance written by U.S. Life Credit Life Insurance Corporation on consumer loans made by First United National Bank & Trust. Oakfirst Life Insurance Corporation, which was chartered in 1989, is a wholly owned subsidiary of the Corporation.
Competition
The Corporation's banking subsidiary, First United National Bank & Trust competes with various other national banking associations, state banks, branches of major regional banks, savings and loan associations, savings banks, and credit unions, as well as other financial service institutions such as insurance companies, brokerage firms and various other investment firms. In addition to this local competition, First United National Bank & Trust also competes for banking business with institutions located outside the States of Maryland and West Virginia.
(3)
Supervision and Regulation of Banking Entities
The Corporation is a registered bank holding company subject to regulation and examination by the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956 (the "Act"). The Corporation is required to file with the board of governors quarterly and annual reports and any additional information that may be required according to the Act. The Act also requires every bank holding company to obtain the prior approval of the Federal Reserve Board before acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank which is not already majority owned. The Act also prohibits a bank holding company, with certain exceptions, from engaging in or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in non-banking activities. One of the principal exceptions to these provisions is for engaging in or acquiring shares of a company engaged in activities found by the Federal Reserve Board to be so closely related to banking or managing banks as to be a proper incident thereto.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was enacted in December 1991. FDICIA was primarily designed to provide additional financing for the FDIC by increasing its borrowing ability. The FDIC was given the authority to increase deposit insurance premiums to repay any such borrowing. In addition, FDICIA identifies capital standard categories for financial institutions: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions depending on the category in which an institution is classified. Pursuant to FDICIA, undercapitalized institutions must submit recapitalization plans, and a holding company controlling a failing institution must guarantee such institution's compliance with its plan.
During 1995, the Bank Insurance Fund (BIF) reached the funding levels required by FDICIA. As a result of the well capitalized position of First United National Bank & Trust, the Bank incurred a reduction in its FDIC premium from twenty-three cents per 100 dollars of deposits to seven cents per 100 dollars of deposits or a savings of approximately $.46 million. As a result of its continued well capitalized position, the Bank paid no FDIC premium in 1996.
FDICIA also requires the various regulatory agencies to prescribe certain non-capital standards for safety and soundness relating generally to operations and management, asset quality and executive compensation and permits regulatory action against a financial institution that does not meet such standards. The statute also imposes limitations on certain mergers and consolidations between insured depository institutions with different home states.
First United National Bank & Trust is a Federally insured national banking association. Its operation is subject to Federal and state laws applicable to commercial banks with trust powers and to regulation by the Comptroller of the Currency, the Federal Reserve Board, and the FDIC. The Corporation is examined periodically by the Federal Reserve Board, the national banking subsidiary is regularly examined by the Office of the Comptroller of the Currency and Oakfirst Life Insurance Corporation is periodically examined by the Arizona Department of Insurance.
In accordance with Federal Reserve regulations, the subsidiary bank is limited as to the amount it may loan affiliates, including the Corporation, unless such loans are collateralized by specific obligations. Additionally, banking law limits the amount of dividends that a bank can pay without prior approval from bank regulators.
Governmental Monetary and Credit Policies and Economic Controls
The earnings and growth of the banking industry and ultimately of First United National Bank & Trust are affected by the monetary and credit policies of governmental authorities, including the Federal Reserve System. An important function of the Federal Reserve System 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 Federal Reserve to implement these objectives are open market operations in U.S. Government securities, 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 for deposits. The monetary policies of the Federal Reserve 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 Federal Reserve System, no prediction can be made as to
(4)
possible future changes in interest rates, deposit levels, loan demand or their effect on the business and earnings of the Corporation and its subsidiaries.
Employees
At December 31, 1996, the Corporation and its subsidiaries employed approximately 389 individuals, of whom 59 were officers, 190 were full-time employees, and 140 part-time employees.
Executive Officers of the Corporation
Information concerning the executive officers of the Corporation is contained on page 5 of the Corporation's definitive Proxy Statement for the annual shareholders meeting to be held April 29, 1997, and in Part III, Item 10 of this Annual Report on Form 10-K under the caption "Directors and Executive Officers of the Registrant."
Item 2.
Item 2. PROPERTIES
The main office of the Corporation and First United National Bank & Trust occupies approximately 29,000 square feet at 19 South Second Street, Oakland, Maryland, and is owned by First United National Bank & Trust. First United National Bank & Trust operates a network of twenty-two banking offices throughout Garrett, Allegany, Washington and Frederick Counties, Maryland and Mineral, Hampshire, Berkeley and Hardy Counties, West Virginia. All of the banking offices of First United National Bank & Trust are owned by the Corporation except for seven of these offices, which are leased.
The properties of the Corporation which are not owned are held under long-term leases. Total rent expense for 1996, 1995 and 1994 was $.23, $.22 and $.17 million, respectively.
Item 3.
Item 3. LEGAL PROCEEDINGS
The Corporation and its subsidiaries are at times, and in the ordinary course of business, subject to legal actions. Management, upon the advice of counsel, is of the opinion that losses, if any, resulting from the settlement of current legal actions will not have a material adverse effect on the financial condition of the Corporation.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
(5)
PART II
Item 5.
Item 5.	MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The common stock of First United Corporation is traded on the Nasdaq National Market System. This listing became effective on September 2, 1992. There are 12,000,000 shares of common stock authorized and the total number of shares outstanding as of December 31, 1996, was 6,442,041. As of December 31, 1996, the Corporation had approximately 2,556 holders of record of its common stock. There are also 2,000,000 shares of preferred stock authorized with no shares outstanding as of December 31, 1996. The following tables reflect the high bid and high ask prices, and the cash dividends paid on common stock for the periods indicated.
The market value information has not been restated because no significant changes in the stock price occurred due to the 5% stock dividend.
1996	 High Ask 	High Bid 1st Quarter		 $18.00 	$15.50 2nd Quarter		 15.50 	14.37 3rd Quarter		 15.62	 14.75 4th Quarter 	16.25 	15.00	
1995 	High Ask High Bid 1st Quarter		 $23.50	 $20.50 2nd Quarter		 20.50	 17.50 3rd Quarter 		18.50	 16.50 4th Quarter 		18.50	 17.00	
Cash Dividends Cash dividends were paid by the Corporation on the dates indicated as follows:
	 1996	 1995 February		 $.12	 $.11 May		 .13	 .11 August		 .13	 .12 November		 .13 	.12
Quotes for the Stock can be found on the Nasdaq/NMS under the symbol "FUNC." Market Makers for the Stock are:
Ferris Baker Watts Legg Mason Wood Walker	 Wheat First Securities 12 North Liberty St.	 125 West Street, Suite 201	 33 West Franklin Street Cumberland, MD 21502	 Annapolis, MD 21401	 Hagerstown, MD 21740 (301) 724-7161	 (800) 638-9165	 (800) 388-1248 (800) 776-0629 	 29 North Liberty Street Parker/Hunter		 Cumberland, MD 21502 14th and Chaplin St.		 (301) 724-2660 700 Riley Building Wheeling, WV 26003 	107 South Second Street (800) 523-2153		 Oakland, MD 21550 		(301) 334-5806
The Board of Directors declared a 5% stock dividend on January 17, 1996, to shareholders of record at March 15, 1996, payable March 29, 1996. The dividend resulted in the issuance of 309,817 shares of common stock.
The Board of Directors authorized the Corporation's officers to repurchase up to 5% of its outstanding common stock. Purchases of the Corporation's stock under the program were completed in brokered transactions or directly from the Corporation's market makers. As of December 31, 1996, 64,240 shares have been repurchased and retired under the plan authorized by the Board of Directors.
(6)
Item 7.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section presents management's discussion and analysis of the financial condition and results of operations of First United Corporation and subsidiaries (collectively, the "Corporation") including First United National Bank & Trust (the "Bank"), and Oakfirst Life Insurance Corporation.
This discussion and analysis should be read in conjunction with the financial statements which appear elsewhere in this report.
On January 17, 1996, the Board of Directors declared a 5% stock dividend to shareholders on record at March 15, 1996, paid March 29, 1996. The dividend resulted in the issuance of 309,817 shares. Earnings and dividends per share have been restated to reflect the stock dividend.
As part of the Corporation's capital plan, the Board of Directors authorized the Corporation's officers to repurchase up to 5% of its outstanding common stock. Purchases of the Corporation's stock under this program were completed in brokered transactions or directly from the Corporation's market makers. The repurchased stock was retired as required by Maryland law. As of December 31, 1996, 64,240 shares were repurchased.
(7)
EARNINGS ANALYSIS
OVERVIEW
The Corporation's net earnings for 1996 increased to $6.48 million, or 15.71% over the $5.60 million reported for 1995. Earnings for the year represent a record level of performance for the Corporation, exceeding the previous record of $6.23 million achieved in 1994. Return on average assets was 1.29%, 1.18% and 1.40% in 1996, 1995 and 1994, respectively.
In 1996, the Corporation was able to realize savings from the one time restructuring charge of $1.08 million which occurred in 1995. The restructuring charge included the costs associated with the consolidation of First United Bank of West Virginia, N.A. and Myersville Bank into First United National Bank & Trust and the expenses associated with a voluntary retirement plan offered and accepted by eleven employees who met the Plan's requirement. The expense associated with the voluntary retirement plan was $0.81 million of the $1.08 million.
The return on average shareholders equity for 1996 increased to 11.28% from the 10.47% reported in 1995. The return on average equity was 12.32% in 1994. The earnings per share increased to $1.00 in 1996 from $0.86 in 1995, compared with $0.96 in 1994.
Net Interest Income
The primary source of earnings continued to be net interest income-the difference between interest income and related fees on earning assets, and the interest expense incurred on deposits and other borrowed funds. This segment of earnings is affected by changes in interest rates, account balances and the mix of earning assets and interest bearing funding sources.
Total interest income for 1996 increased 5.36% over 1995, from $37.27 million to $39.27 million, primarily due to growth in earning assets. Total interest expense at $16.38 million represented an increase of 11.24% from $14.72 in 1995. This increase was the result of growth in our depository accounts as well as the effect of higher rates being paid. The net effect of these changes was a 1.53% improvement in net interest income to $22.90 million in 1996 from $22.55 million in 1995. This compares to $21.79 million in 1994. The improvement in 1995 represents an increase of 3.48% over 1994's net interest income. Table 3 analyzes the changes in net interest income attributable to volume and rate components.
For analytical purposes, net interest income is adjusted to a taxable equivalent basis. This adjustment facilitates performance comparisons between taxable and tax-exempt assets by increasing tax-exempt income by an amount equal to the federal income taxes which would have been paid if this income were taxable at the statutorily applicable rate.
The taxable equivalent net interest margin decreased to 4.97% in 1996 from 5.19% in 1995, compared with 5.34% in 1994. Table 2 compares the components of the net interest margin and the changes occurring between 1996, 1995 and 1994.
Allowance for Loan Losses
The allowance for loan losses is based on management's continuing evaluation of the quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience and the amount of non-performing loans.
During 1996, management continued to place emphasis on procedures for credit analysis, problem loan detection, and delinquency follow-ups. As a result of these efforts, the provision for credit losses in 1996 was $0.75 million or 0.20% of gross loans. There was no provision for credit losses required in 1995 and the provision was $.17 million in 1994. Charge-offs for the years ended December 31, 1996, 1995, and 1994 totaled $.85, $.41, and $.32 million, respectively.
Table 8 presents the activity in the allowance for loan losses by major loan category for the past five years. Table 9 presents management's allocation of the allowance for loan losses by major loan catagory. Specific allocations in any particular category may be reallocated in the future to reflect current conditions. Accordingly, the entire allowance is considered available to absorb losses in any category.
(8)
Other Operating Income
Non-interest income for 1996, at $4.87 million, increased 13.50% over the $4.29 million earned in 1995. In 1996, the Corporation experienced an increase in income from insurance premiums, Trust and Fiduciary activities, service charges on depository accounts and real estate appraisal services. The Corporation and its Subsidiaries continue to seek ways of obtaining additional other operating income. In July, 1996, the Bank implemented a surcharge on foreign ATM activity and earned $.12 million in income. With the exception of insurance premium income, which declined $.19 million in 1995, similar improvements accounted for the 1995 increase of 12.01% in non-interest income over the $3.83 million earned in 1994.
Other Operating Expense
Non-interest expense decreased $1.0 million or 5.42% from $18.39 million in 1995 to $17.39 million in 1996. As previously discussed, the Corporation incurred one time restructuring costs in 1995 which totaled $1.08 million. The elimination of these costs in 1996 accounted for the majority of the decrease in other operating expense. Effective June 1, 1996, Richard G. Stanton, Chairman of the Board, President and Chief Executive Officer retired. Costs associated with Mr. Stanton's retirement were $.27 million. The combination of these two items resulted in a net savings of $.81 million.
The Corporation incurred a decrease of $.23 million in salary and employee benefits expense. This cost saving was attained even though staffing levels were increased during the year at our Customer Service Center and in anticipation of a January 1997 opening of a new branch in Martinsburg, West Virginia.
The Corporation incurred an increase in 1996 of $.16 million or 19.4% in occupancy expense of premises to $1.0 million. This increase was the result of increases in real estate taxes, utility costs and routine building repair and maintenance. Occupancy expense of premises was comparable at $.84 million and $.89 million in 1995 and 1994, respectively.
Expenditures to further increase the role of technology in improving the efficiency of customer service delivery and internal processing activities accounted for much of the increase in equipment expenses. An expansion in the Customer Service Center also contributed to an increase in equipment related expenses. It is anticipated that the long run efficiencies gained by projects such as these will be a net benefit to the earnings performance of the Corporation.
Applicable Income Taxes
Applicable income taxes are detailed in Note 10 of the Corporation's audited consolidated financial statements. Income tax expense amounted to $3.14 million in 1996 as compared with $2.85 million in 1995 and $3.01 million in 1994. These amounts represented effective tax rates of 32.67%, 33.70% and 32.58% for 1996, 1995 and 1994, respectively.
Investment Securities
Investment securities classified as available-for-sale are held for an indefinite period of time and may be sold in response to changing market and interest rate conditions as part of the asset/liability management strategy. Available-for-sale securities are carried at market value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity net of income taxes. Investment securities classified as held-to-maturity are those securities that management has both the positive intent and the ability to hold to maturity, and are reported at amortized cost. The Corporation does not currently follow a strategy of making security purchases with a view to near-term resales and therefore, does not own trading securities. For additional information, see Notes 1 and 4 to the Corporation's audited consolidated financial statements.
Total investment securties increased $13.92 million or 14.47% in 1996 from $96.15 million in 1995 to $110.07 million in 1996. The Corporation reported an increase of $8.85 million or 75.52% during 1996 in its U.S. Treasury securities from $11.72 million in 1995 to $20.58 million in 1996. This increase was a result of pledging required for increased balances in State, County and Municipal depository accounts. Total obligations of state and political subdivision investments increased $6.75 million or 78.74% in 1996 to $15.32 million as a result of efforts by management to increase the life of the portfolio and to obtain a higher yield. The Corporation also sought to increase the investments at the Parent Company level through the purchase of state and municipal bonds. Total investment securities were $95.62 million as of December 31, 1994.
(9)
The Corporation manages its investment portfolios utilizing policies which seek to achieve desired levels of liquidity, manage interest rate sensitivity risk, meet earnings objectives and provide required collateral support for deposit activities. Excluding the U.S. Government and U.S. Government sponsored agencies, the Corporation had no concentrations of investment securities from any single issues that exceeded 10% of shareholders' equity. Table 4 exhibits the distribution by type, of the investment portfolio for the three years ended December 31, 1996, 1995 and 1994, respectively.
Loan Portfolio
The Corporation, through its Bank, is actively engaged in originating loans to customers primarily in Garrett, Allegany, Washington and Frederick Counties in Maryland; Mineral, Hardy, Berkley and Hampshire Counties in West Virginia and the surrounding regions of West Virginia and Pennsylvania. The Corporation has policies and procedures designed to mitigate credit risk and to maintain the quality of the Corporation's loan portfolio. These policies include underwriting standards for new credits and the continuous monitoring and reporting of asset quality and the adequacy of the reserve for loan losses. These policies, coupled with ongoing training efforts, have provided an effective check and balance for the risk associated with the lending process. Lending authority is based on the level of risk, size of the loan and the experience of the lending officer. Table 5 presents the composition of the Corporation's loan portfolio by significant concentration.
The Corporation's policy is to make the majority of its loan commitments in the market area it serves. This tends to reduce risk because management is familiar with the credit histories of loan applicants and has an in-depth knowledge of the risk to which a given credit is subject. The Corporation had no foreign loans in its portfolio as of December 31, 1996.
During 1996, net loans increased $22.13 million or 6.17% to a total of $380.59 million. In comparison, net loans at year-end 1995 increased $25.08 million or 7.52% to a total of $358.46 million. Mortgage lending continued to be the primary source of loan growth in 1996. Part of the mortgage growth included 28.45% increase in our Home Equity product. Home Equity loans increased from $16.14 million at year-end 1995 to $20.74 million at year-end 1996. We anticipate our Home Equity product to continue to experience growth as more of our customers look for tax advantages associated with this product. Table 5 details the dollar amount and percentage distribution of the various key categories of credit in the loan portfolio.
Funding for loan growth during 1996 and 1995 was provided by increased levels of deposits.
It is the policy of the Corporation to place a loan in non-accrual status whenever there is substantial doubt about the ability of a borrower to pay principal or interest on any outstanding credit. Management considers such factors as payment history, the nature of the collateral securing the loan and the overall economic situation of the borrower when making a non-accrual decision. Non-accrual loans are closely monitored by management. A non-accruing loan is restored to accrual status when principal and interest payments have been brought current, it becomes well-secured or is in the process of collection and the prospects of future contractual payments are no longer in doubt. At December 31, 1996, the Corporation had $.98 million of non-accrual loans which were secured by collateral with an estimated value of $2.17 million. At December 31, 1995, the Corporation had $1.08 million of non-accrual loans that were secured by collateral with an estimated value of $2.15 million. The amount listed in Table 7 under restructured loans in 1992 is also included in the non-accrual loans total for that year.
As of December 31, 1996, the Corporation had $4.72 million in loans for which payments were current, but the borrowers were experiencing financial difficulties. The corresponding total for year-end 1995 was $3.48 million. These loans are subject to ongoing management attention and their classifications are reviewed monthly.
Deposit and Other Funding
Deposit liabilities increased to $452.54 million in 1996 from $424.29 million at the end of 1995, or an increase of 6.66%. The $28.25 million in deposit growth compares favorably to the $32.64 million growth in deposits experienced in 1995. Time deposits continue to be the main source of deposit growth during both 1996 and 1995. The Corporation continues to experience strong competition for deposits from other commercial banks, credit unions, and stock market and mutual funds. Table 10 displays the average balances and average rates paid on all major deposit classifications for 1996, 1995, and 1994. In addition to deposits, the Corporation also has available a line of credit with
(10)
the Federal Home Loan Bank ("FHLB") of Atlanta in an amount up to $75 million. The total borrowings from FHLB equaled $8 million and $3 million for the years ended December 31, 1996 and 1995, respectively.
Capital Resources
The Bank and the Corporation itself are subject to risk-based capital regulations which were adopted by Federal banking regulators and became fully phased in on December 31, 1992. These guidelines are used to evaluate capital adequacy, and are based on an institution's asset/risk profile and off-balance sheet exposures, such as unused loan commitments and stand-by letters of credit. The regulatory guidelines require that a portion of total capital be Tier 1 Capital, consisting of common shareholders' equity and perpetual preferred stock, less goodwill and certain other deductions. The remaining capital, or Tier 2 capital, consists of elements such as subordinated debt, mandatory convertible debt, and grandfathered senior debt, plus the allowance for credit losses, subject to certain limitations.
Under the risk-based capital regulations, banking organizations are required to maintain a minimum 8% total risk-based capital ratio (total qualifying capital divided by risk-weighted assets), including a Tier 1 ratio of 4%. The risk-based capital rules have been further supplemented by a leverage ratio, defined as Tier 1 capital divided by average assets, after certain adjustments. The minimum leverage ratio is 3% for banking organizations that do not anticipate significant growth and have well-diversified risk (including no undue interest rate risk exposure), excellent asset quality, high liquidity and good earnings. Other banking organizations not in this category are expected to have ratios of at least 4-5%, depending on their particular condition and growth plans. Higher capital ratios could be required if warranted by the particular circumstances or risk profile of a given banking organization. In the current regulatory environment, banking companies must stay well capitalized in order to receive favorable regulatory treatment on acquisition and other expansion activities and favorable risk-based deposit insurance assessments. The Corporation's capital policy establishes guidelines meeting these regulatory requirements, and takes into account current or anticipated risks and future growth opportunities.
On December 31, 1996, the Corporation's risk-based capital ratio was 17.92%, well above the regulatory minimum of 8%. The risk-based capital ratios for year-end 1995 and 1994 were 18.63% and 16.18%, respectively.
Retained earnings and shareholder participation in the Corporation's dividend reinvestment and stock purchase plan provided an additional $1.31 million in total shareholders' equity, which grew to $56.81 million at the end of 1996, from $55.50 million at the year-end 1995 and $51.13 million at year-end 1994. The equity to assets ratio at December 31, 1996, was 10.84%, compared with 11.39% and 11.14% at year-end 1995 and 1994. As a result of the Corporation's adoption of Statement of Financial Accounting Standards No. 115 "Accounting for Investments in certain Debt and Equity Securities", an adjustment to shareholders' equity as of January 1, 1994, of $0.51 million, net of taxes, was recorded.
The Board of Directors also authorized the Corporation's officers to repurchase up to 5% of its outstanding common stock. Purchases of the Corporation's stock under the program were completed in brokered transactions or directly from the Corporation's market makers. As of December 31, 1996, 64,240 shares have been repurchased and retired under the plan authorized by the Board of Directors.
Cash dividends of $.51 per share were paid during 1996, compared with $.46 and $.43 in 1995 and 1994. This represents a dividend payout rate (dividends per share divided by net income per share) of 51.57%, 52.75%, and 45.55% for 1996, 1995 and 1994, respectively.
ASSET AND LIABILITY MANAGEMENT
Introduction
The Investment and Funds Management Committee of the Corporation seeks to assess and manage the risks associated with fluctuating interest rates while maintaining adequate liquidity. This is accomplished by formulating and implementing policies that take into account the sources and uses of funds, maturity and repricing distributions of assets and liabilities, pricing strategies, and marketability of assets.
(11)
Liquidity
The objective of liquidity management is to assure that the withdrawal demands of depositors and the legitimate credit needs of the Corporation's delineated market areas are accommodated. Total liquid assets, represented by cash, investment securities (available-for-sale and held-to-maturity maturing within one year) and loans maturing within one year, amounted to $111.35 million, or 21.26% of total assets at December 31, 1996. This compares with $96.26 million, or 19.76% of 1994 year-end assets, and $102.71 million, or 22.4% of 1994 year-end assets.
Additional liquidity of $88 million is available from unused lines of credit at various upstream correspondent banks and the FHLB of Atlanta.
INTEREST RATE SENSITIVITY
Interest rate sensitivity refers to the degree that earnings will be impacted by changes in the prevailing level of interest rates. Interest rate risk arises from mismatches in the repricing or maturity characteristics between assets and liabilities. Management seeks to avoid fluctuating net interest margin, and to enhance consistent growth of net interest income through periods of changing interest rates. The Corporation uses interest sensitivity gap analysis and simulation models to measure and manage these risks. The gap report assigns each interest-earning asset and interest-bearing liability to a time frame reflecting its next repricing or maturity date. The differences between total interest-sensitive assets and liabilities at each time interval represent the interest sensitivity gap for that interval. A positive gap generally indicates that rising interest rates during a given interval will increase net interest income, as more assets than liabilities will reprice. A negative gap position would benefit the Corporation during a period of declining interest rates.
In order to manage interest sensitivity risk, management of the Corporation formulates guidelines regarding asset generation and pricing, funding sources and pricing and off-balance sheet commitments. These guidelines are based on management's outlook regarding future interest rate movements, the state of the regional and national economy, and other financial and business risk factors. Management uses computer simulations to measure the effect on net interest income of various interest rate scenarios. This modeling reflects interest rate changes and the related impact on net income over specified periods. Management does not use derivative financial instruments to effect its interest rate sensitivity.
Rates on different assets and liabilities within a single maturity category adjust to changes in interest rates to varying degrees and over varying periods of time. The relationships between prime rates and rates paid on purchased funds are not constant over time. The rate or growth in interest-free sources of funds will influence the level of interest-sensitive funding sources. In addition, the absolute level of interest rates will affect the volume of earning assets and funding sources. As a result of these limitations, the interest-sensitive gap is only one factor to be considered in estimating the net interest margin.
Table 13 presents the Corporation's interest rate gap position at December 31, 1996. This is a one-day position which is continually changing and is not necessarily indicative of the Corporation's position at any other time.
(12)
(13)
Interest Variance Analysis (1) ( In thousands ) Table 3 	 1996 COMPARED TO 1995	 1995 COMPARED TO 1994 	 INCREASE	 INCREASE 	 (DECREASE) DUE TO 	(DECREASE) DUE TO 	 Volume	 Rate	 Net 	Volume	 Rate 	Net -----------------------------------------------------
Interest income: Loans		 $1,053 	$ 194 	$1,247 	$2,564 	$ 821 	$3,385 Taxable Investments		 907	 (229)	 678	 (435) 	 1,315	 880 Non-Taxable Investments		 484 	(313)	 171	 (383)	 285	 (98) Federal Funds Sold		 (9)	 (17)	 (26)	 419	 (355)	 64 Total Interest Income 		 $2,435	 ($ 365)	 $2,070	 $2,165	 $2,066	 $4,231 Interest expense: Interest-bearing 		 $ 53	 $ 100	 $ 153	 $ 71	 $ 421	 $ 492 Savings 		 163	 (425)	 (262)	 (442)	 128	 (314) Time Deposits		 748	 743	 1,491	 1,657	 1,313	 2,970 Time Deposits $100,000 or more 225 	102	 327	 (36)	 494	 458 Other borowings 		 (4)	 (50)	 (54)	 (150)	 0	 (150) Total Interest Expense		 $1,185	 $ 470	 $1,655	 $1,101	 $2,355	 $ 3,456 Net Interest Income		 $1,250	 ($ 835)	 $ 415	 $1,064	 $ (289)	 $ 775
(1)	The change in interest income/expense due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. *The above table is compiled on a tax equivalent basis. The fully taxable equivalent adjustments for the years ended December 31, 1996 and 1995 were $541 and $470, respectively.
(14)
(15)
Maturities of Loan Portfolio (In thousands) Table 6 	December 31, 1996 		MATURING	 	MATURING 	AFTER ONE 	MATURING 	WITHIN	 BUT WITHIN	AFTER FIVE 	ONE YEAR 	FIVE YEARS 	YEARS	 TOTAL ------------------------------------------ Commercial, Financial & Agricultural 		$40,991 	$ 6,909 	$ 8,425 	$ 56,325 Real Estate-Construction		 0	 21,097	 0	 21,097 Real Estate-Mortgage	 	11,795 	50,216 	187,378	 249,389 Installment		 16,264 	33,419 	6,286 	55,969 ----------------------------------------- Total	 	$69,050 	$111,641 	$202,089 	$382,780 =========================================
Classified by Sensitivity to Change in Interest Rates Fixed-Interest Rate Loans		 $60,698 	$ 74,509 	$ 40,824 	$176,031 Adjustable-Interest Rate Loans		 8,352	 37,132	 161,265	 206,749 Total		 $69,050 	$111,641	 $202,089 	$382,780
(16)
Risk Elements of Loan Portfolio ( In thousands ) Table 7 	For the Years Ended December 31 	1996 	 1995 1994 	1993 	1992 ---------------------------------------- Non-accrual Loans		 $ 976 	$1,075 	$1,027	 $438 	$2,337 Accruing Loans Past Due 90 Days or More	 	659 	963 	489 	1,243 463 Restructured Loans		 0 	0 	0 	0 	 1,530
Information with respect to non-accrual loans at December 31,1996 and 1995 is as follows:	
	1996 	 1995 --------------- Non-accrual Loans	 $ 976 $1,075 Interest income that would have been recorded under original terms		 70 	 86 Interest income recorded during the period		 33	 18
(17)
Allocation of Allowance for Loan Losses 	( In thousands ) Table 9 	 1996 	1995 	1994 	1993	 1992 ----------------------------------------- Commercial		 $ 509 	$ 301 	$ 457 	$ 448 	$ 544 Real Estate-Mortgage 		923 	1,214 	661 	649 	787 Home Equity		 73 	48	 11	 11	 13 Consumer		 201 	206 	223 	219 	266 Commitments		 180 	171 	78 	77 	93 Unallocated		 300	 180 	920	 902	 1,095 ----------------------------------------- Total		 $2,186 	$2,120 	$2,350 	$2,306 	$2,798 =========================================
(18)
Maturity of Time Deposits 	( In thousands ) Table 11	 December 31, 1996 	 Greater than 	Less Than 	 $100,000 	$100,000 ------------------------------- Maturities 3 Months or Less	 	$ 8,205 	$ 33,294 3 - 6 Months		 5,265 	24,654 6-12 Months	 	5,710 	31,669 Over 1 Year		 14,634 	93,225 --------------------------- Total		 $33,814 	$182,842 ===========================
Summary of Significant Ratios
Table 12 	 1996	 1995	 1994 ------------------------------ Return on Average Assets		 1.29% 	1.18% 	1.40% Return on Average Equity		 11.48% 	10.47% 	12.32% Dividend Payout Ratio		 51.57% 	52.75% 	45.55% Total Equity to Total Assets at Year End 	 	10.84%	 11.39%	 11.14% Primary Capital Ratio 		11.66% 	11.76% 	10.02% Total Risk-based Capital Ratio		 17.92%	 18.63% 	16.18% Leverage Ratio		 11.31% 	11.48% 	11.52%
(19)
(20)
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (a)	The following audited consolidated financial statements and related documents are set forth in this Annual Report on Form 10-K on the following pages: 	 	Page Number 	Independent Auditors' Report 	23 	Consolidated Statements of Financial Condition	 24 	Consolidated Statements of Income	 25 	Consolidated Statements of Changes in Shareholders' Equity	 26 	Consolidated Statements of Cash Flows	 27 	Notes to Consolidated Financial Statements	 28
(b)	The following supplementary data is set forth in this Annual Report on Form 10-K on the following pages: 	Quarterly Results of Operations 	39
(21)
To the Shareholders:
The consolidated financial statements, accompanying notes and related financial data of First United Corporation were prepared by Management, who has the primary responsibility for the integrity of the financial information.
The Corporation has a comprehensive system of internal accounting controls designed to provide reasonable assurance that assets are safe guarded and reported financial information accurately reflects the condition of First United Corporation and its subsidiaries. This system of controls is reviewed by both internal auditors and independent auditors who monitor the adequacy and effectiveness of the control sytem.
The audit function, selection of independent auditors, and review of the results of regulatory examinations are under the general oversight of the Audit Committee of the Board of Directors. Regular meetings are held with the internal auditors and the independent auditors, both of whom have free, direct access to the Committee. Ernst & Young LLP, independent auditors, have audited the financial statements of First United Corporation and subsidiaries for the years ended December 31, 1996, 1995, and 1994, as stated in their report.
William B. Grant
/S/ WILLIAM B. GRANT
Chairman of the Board and Chief Executive Officer
(22)
Report of Independent Auditors Board of Directors and Shareholders First United Corporation
We have audited the accompanying consolidated statements of financial condition of First United Corporation and subsidiaries as of December 31, 1996 and 1995, the related consolidated statements of income, changes in shareholders'equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of First United Corporation and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
As discussed on Note 1 to the financial statements effective January 1, 1994, the Corporation changed its method of accounting for investments in debt and equity securities.
/S/ERNST & YOUNG LLP
Baltimore, Maryland February 7, 1997
(23)
(24)
(25)
(26)
First United Corporation and Subsidiaries Consolidated Statements of Cash Flows (In thousands)
	Year ended December 31 	1996 	1995 	1994 -------------------------- Operating activities Net income		 $ 6,479 	$ 5,604	$ 6,227 Adjustments to reconcile net income to net cash provided by operating activities: Provision for possible credit losses		 749 	0 	165 Provision for depreciation		 1,299	 1,145 	864 Net accretion and amortization of investment security discounts and premiums 		 345 	399	 717 (Gain) loss on sale of investment securities		 (24) 	20 	5 (Increase) in accrued interest receivable and other assets	 	 (483) 	 (782)	(1,544) Increase (decrease) in reserve for taxes, interest and other liabilities	 	 1,896 	(515)	(1,595) ------------------------ Net cash provided by operating activities		 10,261 	 5,871 	4,839 Investing activities Proceeds from maturities and sales of investment securities available for sale		 59,489 	105,834 	45,747 Purchases of available for sale investment securities		(65,444)(103,911)(59,770) Purchases of investment securities held-to-maturity	 	(13,041) 	(7,597)	(8,428) Proceeds from maturities of investment securities held-to-maturity	 	 4,777 	6,423 	6,133 Net (increase) in loans		 (22,879)	(25,089)(19,064) Purchase of premises and equipment		 (1,025) 	(1,396)	(2,192) ------------------------- Net cash used in investing activities		 (38,123) (25,736)(37,574) Financing activities Net increase (decrease) in demand deposits, NOW accounts and savings accounts		 (623) 	3,765 8,733 Net increase in certificates of deposit		 28,869 	28,879	 14,391 Increase (decrease) in federal funds purchased and other borrowed funds		 5,000 	(8,373)	11,373 Cash dividends paid or declared		 (4,243) 	(2,974)	(2,097) Proceeds from issuance of common stock		 28	 43	 136 Aquisition and retirement of common stock		 (973)	 0	 0 ----------------------- Net cash provided by financing activities		 28,058 	21,340 	32,536 ------------------------ Increase (decrease) in cash and cash equivalents		 196	 1,475 	(199) Cash and cash equivalents at beginning of year		 16,011	 14,536	 14,735 ------------------------ Cash and cash equivalents at end of year		 $16,207	 $16,011	$14,536 ========================
See notes to consolidated financial statements.
(27)
First United Corporation and Subsidiaries Notes to Consolidated Financial Statements (in thousands, except per share amounts)
1. Summary of Significant Accounting Policies
Principles of Consolidation The accompanying financial statements of First United Corporation (Corporation) include the accounts of its wholly owned subsidiaries, First United National Bank & Trust (Bank) and Oakfirst Life Insurance Corporation (Non-Bank). All significant intercompany accounts and transactions have been eliminated.
Business First United Corporation is a registered bank holding company, incorporated under the laws of Maryland. It is the parent company of First United National Bank & Trust and Oakfirst Life Insurance Corporation. First United National Bank & Trust provides a complete range of retail and commercial banking services to a customer base serviced by a network of twenty-two offices and twenty-six automated teller machines. This customer base includes individuals, businesses and various governmental units. Oakfirst Life Insurance Corporation is a reinsurance company that reinsures credit life and credit accident and health insurance written by U.S. Life Credit Life Insurance Corporation on consumer loans made by First United National Bank & Trust.
Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles that require the Corporation to make estimates and assumptions that affect the reported amounts of certain assets and liabilities at the date of the financial statements as well as the reported amount of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Investments The Corporation adopted Statements of Financial Accounting Standard No. 115, "Accounting for Certain Investments in Debt and Equity Securities" as of January 1, 1994, which resulted in a change in classification of $71 million of investment securities from held-to-maturity to available-for-sale. Securities held-to-maturity and available-for-sale: Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when the Corporation has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. Debt securities not classified as held-to-maturity and marketable equity securities are classified as available-for-sale. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of shareholders' equity. The amortized cost of debt securities classified as held-to-maturity or available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security. Such amortization is included in interest income from investments. Interest and dividends are included in interest income from investments. Realized gains and losses, and declines in value judged to be other-than-temporary are included in net securities gains (losses). The cost of securities sold is based on the specific identification method. At December 31, 1996, there were no securities held in the investment portfolio which were classified as trading.
Interest on Loans Interest on loans is recognized based upon the principal amount outstanding. It is the Corporation's policy to discontinue the accrual of interest on loans (including impaired loans) when circumstances indicate that collection of principal or interest is doubtful. After a loan is placed on non-accrual, interest is recognized only to the extent of cash received and principal is not in doubt.
Bank Premises and Equipment Bank premises and equipment are carried at cost, less accumulated provision for depreciation. The provision for depreciation for financial reporting generally has been made by using the straight-line method based on the estimated useful lives of the assets, which range from 18 to 50 years for buildings and 4 to 20 years for equipment. The provision for depreciation for general tax purposes and for the Alternative Minimum Tax generally has been made using the double-declining balance method and the ACRS method based on the estimated useful lives of the assets which range from 18 to 50 years for buildings and 4 to 10 years for equipment.
(28)
Reserve for Possible Credit Losses For financial reporting purposes, management regularly reviews the loan portfolio and determines a provision for possible credit losses based upon the impact of economic conditions on the borrower's ability to repay, past collection experience, the risk characteristics of the loan portfolio, estimated fair value of underlying collateral for collateral dependent loans, and such other factors which, in management's judgement, deserve current recognition. Management's evaluation is inherently subjective as it requires estimates concerning the underlying collateral values on impaired loans that may be susceptible to change.
Income Taxes The provision for income taxes is based on income and expense amounts reported in the Consolidated Statements of Income adjusted for the effects of the Alternative Minimum Tax. Under the liability method, the deferred tax liability or asset is determined based on the difference between the financial statement and tax bases of assets and liabilities (temporary differences) and is measured at the enacted tax rates that will be in effect when these differences reverse. Deferred tax expense is determined by the change in the liability or asset for deferred taxes adjusted for changes in any deferred tax asset allowance.
Statement of Cash Flow The Corporation has defined cash and cash equivalents as those amounts included in the balance sheet captions "Cash and due from banks" and "Federal funds sold." The Corporation paid $16,376, $14,721 and $11,265 in interest on deposits and other borrowed money for the years ending December 31, 1996, 1995 and 1994, respectively.
Earnings Per Share Earnings per share are based on the weighted average number of shares outstanding of 6,492, 6,503 and 6,501 for 1996, 1995 and 1994, respectively. For comparative purposes, earnings per share, dividends per share and weighted average shares outstanding for the years ended December 31, 1996, 1995 and 1994 have been restated to reflect the 50% stock dividend paid February 8, 1994, and the 5% stock dividend paid on March 29, 1996.
Accounting Change In May, 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Corporation adopted the provisions of the new standard for investments held as of or acquired after January 1, 1994. In accordance with the Statement, prior period financial statements have not been restated to reflect the change in accounting principle. The operating balance of shareholders' equity was increased by $506 (net of $261 in deferred income taxes) to reflect the net unrealized holding gains on securities classified as available-for-sale previously carried at amoritized cost.
Recently Issued Accounting Guidance In June 1996, the Financial Accounting Standards Board issued Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The Corporation is required to adopt this Statement for transactions occurring after December 31, 1996. The Corporation believes the impact of adopting Financial Accounting Standards Board Statement No. 125 will not have a material impact on the Corporation's financial position and results of operations.
2. Regulatory Capital Requirements The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets. Management believes, as of December 31, 1996, that the Corporation and the Bank meet all capital adequacy requirements to which it is subject. As of December 31, 1996, the Corporation and the Bank were well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, minimum total risk-based, Tier I risk-based, and Tier I leverage ratios must be maintained. Management is not aware of any condition or event which has caused the well capitalized position to change.
(29)
3. Consolidation During 1995, First United Corporation received regulatory approval to consolidate its three banking subsidiaries into one bank, First United National Bank & Trust. Effective August 28, 1995, First United National Bank & Trust merged with First United Bank of West Virginia, N.A. Effective November 20, 1995, First United National Bank & Trust merged with Myersville Bank. Both mergers were accounted for as a pooling of interests.
4. Investment Securities
The following is a comparison of book and market values of available-for-sale securities and held-to-maturity securities:
	Available-for-Sale Securities -------------------------------- 		Gross 	Gross	 Estimated 		 Unreal Unreal Fair 	Cost 	 Gains	Losses Value ------------------------------- December 31, 1996	 (In thousands) U. S. Treasury securities and obligations of U. S. government agencies		 $56,480 	$341	 $ 63	 $56,758 Obligations of states and political subdivisions		 6,892 	89 	25 	6,956 Mortgage-backed securities	 	19,990 	104 	97 	19,997 ------------------------------ Total debt securities		 $83,362 	$534 	$185 	$83,711 ==============================
	Held-to-Maturity Securities ------------------------------ 	 Gross 	Gross	Estimated 		 Unreal Unreal Fair 	 Cost	 Gains 	Losses 	Value ------------------------------ December 31, 1996	 (In thousands) U. S. Treasury securities and obligations of U. S. government agencies		 $ 1,518 	$ 0 $ 18 	$ 1,500 Obligations of states and political subdivisions		 8,362 	336	 6	 8,692 U. S. corporate securities		 13,559	 72	 17	 13,614 ------------------------------ Total debt securities		 23,439	 408	 41	 23,806 Equity securities		 2,918	 0	 0	 2,918 ------------------------------ Totals		 $26,357 	$408 	$ 41 	$26,724 ==============================
(30)
4. Investment Securities (continued)
	Available-for-Sale Securities ------------------------------ 		Gross 	Gross Estimated 	 	Unreal Unreal Fair 	Cost	 Gains	 Losses	 Value ------------------------------ December 31, 1995	 (In thousands) U. S. Treasury securities and obligations of U. S. government agencies		 $47,570	 $290 	$ 61	 $47,799 Obligations of states and political subdivisions		 3,929	 96	 2	 4,023 Mortgage-backed securities		 21,844 	122 	131 	21,835 ------------------------------ Total debt securities		 $73,343 	$508 	$194 	$73,657 ==============================
	Held-to-Maturity Securities ------------------------------- 		 Gross 	Gross 	Estimated 	 	Unreal Unreal Fair 	Cost 	Gains 	Losses 	Value -------------------------------
December 31, 1995	 (In thousands) U. S. Treasury securities and obligations of U. S. government agencies		 $ 800	 $ 0	$ 0 	$ 800 Obligations of states and political subdivisions		 4,546	 67	 9	 4,604 U. S. corporate securities		 14,209 	113 	9 	14,313 ------------------------------ Total debt securities	 	19,555 	180	 18	 19,717 Equity securities		 2,939 	0	 0	 2,939 ------------------------------ Totals	 	$22,494 	$180	$ 18 	$22,656 ==============================
During the year ended December 31, 1996, available-for-sale securities with a fair market value at the date of sale of $4.74 million were sold. The gross realized gains on such sales totaled $27, and the gross realized losses totaled $3.
The amortized cost and estimated fair value of debt and marketable equity securities at December 31, 1996, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties. Equity securities consist of Federal Reserve Bank and Federal Home Loan Bank Stock. These securities have no maturity and therefore are classified in the "Due after 10 years" maturity line.
	Available-for-sale Securities ----------------------------- 	 Amortized 	Market 		 Cost 	Value ----------------------------- Due in one year or less		 $23,711	 $23,744 Due after one year through five years		 47,672	 47,897 Due after five years through ten years		 5,600 	5,652 Due after ten years		 6,379 	6,418 ---------------------- 		 $83,362 	$83,711 ======================
	Held-to-Maturity Securities --------------------------- 	Amortized 	Market	 	Cost 	Value --------------------------- Due in one year or less		 $ 3,244 	$ 3,264 Due after one year through five years		 16,017 	16,068 Due after five years through ten years		 2,218	 2,437 Due after ten years		 4,878 	4,955 --------------------- 		$26,357 	$26,724 =====================
(31)
At December 31, 1996, investment securities with a book value of $33.41 million were pledged to secure public and trust deposits as required or permitted by law.
5. Reserve for Possible Credit Losses
Activity in the reserve for possible credit losses is summarized as follows:
	1996 	1995 	1994 ---------------------------- Balance at January 1		 $2,120 	$2,350 	$2,306 Provision charged to operating expense		 749 	0	 165 ----------------------------- 		 2,869 	2,350 	2,471 Gross credit losses		 (847) 	(410) 	(320) Recoveries		 164 	180 	199 ------------------------------ Net credit losses		 683 	230 	121 ------------------------------ Balance at December 31		 $2,186 	$2,120 	$2,350 ==============================
Non-accruing loans were $976, $1,075 and $1,027 at December 31, 1996, 1995 and 1994, respectively. Interest income not recognized as a result of non-accruing loans was $37, $68 and $34 during the years ended December 31, 1996, 1995, and 1994, respectively.
6. Loans and Concentrations of Credit Risk
The Corporation through its banking subsidiary is active in originating loans to customers primarily in Garrett, Allegany, Washington and Frederick counties in Maryland; and Mineral, Hardy, Berkeley and Hampshire Counties in West Virginia, and the surrounding regions of West Virginia and Pennsylvania. The following table presents the Corporation's composition of credit risk by significant concentration.
	December 31, 1996 ------------------------------- 		 Loans 	Loan 	Commitments 	Total ------------------------------- Commercial, financial and agricultural 		$ 54,115 	$15,497 	$ 69,612 Real estate-construction		 21,097 	9,750 	30,847 Real estate-mortgage		 249,389 	16,202	 265,591 Installment		 55,969 	4,703	 60,672 Letters of credit		 2,210	 713	 2,923 -------------------------------- 		 $382,780 	$46,865	 $429,645 ================================ 	 December 31, 1995 -------------------------------- 	 	Loans 	 Loan 	Commitments 	Total -------------------------------- Commercial, financial and agricultural		 $ 56,893 	$13,931 	$ 70,824 Real estate-construction	 	10,696 	5,075 	15,771 Real estate-mortgage		 242,789 	12,823 	255,612 Installment	 	50,206 	3,003 	53,209 Letters of credit	 	0 	856 	856 --------------------------------- 		$360,584 	$35,688 	$396,272 =================================
Loan commitments are made to accommodate the financial needs of the Corporation's customers. Letters of credit commit the Corporation to make payments on behalf of customers when certain specified future events occur. Letters of credit are issued to customers to support contractual obligations and to insure job performance. Historically, more than 99 percent of letters of credit expire unfunded. Loan commitments and letters of credit have credit risk essentially the same as that involved in extending loans to customers and are subject to normal credit policies. Collateral is obtained based on management's credit assessment of the customer.
(32)
Commercial, financial and agricultural loans are collateralized by real estate and equipment, and the loan-to-value ratios generally do not exceed 70 percent. Real estate mortgage loans are collateralized by the related property, and the loan-to-value ratios generally do not exceed 80 percent.
Any customer real estate mortgage loan exceeding a loan-to-value ratio of 80 percent will require private mortgage insurance. Installment loans are typically collateralized with loan-to-value ratios which are established based on historical experience and the financial condition of the borrower and generally range from 80 percent to 90 percent of the amount of the loan. The Corporation will also make unsecured consumer loans to qualified borrowers meeting the underwriting standards of the Corporation.
7. Bank Premises and Equipment
The composition of Bank premises and equipment is as follows:
	 1996	 1995 -------------------------- Bank premises		 $ 8,653	 $ 8,721 Equipment		 11,289 	10,329 --------------------------- 		 19,942 	19,050 Less accumulated depreciation	 	(10,611) 	(9,445) --------------------------- Total		 $ 9,331 	$ 9,605 ===========================
The Corporation recorded depreciation expense of $1,299, $1,145 and $864 in 1996, 1995, and 1994, respectively.
8. Fair Value of Financial Instruments
As required by the Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures about Fair Value of Financial Instruments," the Corporation has presented fair value information about financial instruments, whether or not recognized in the statement of financial condition, for which it is practicable to estimate that value. Fair value is best determined by values quoted through active trading markets. Active trading markets are characterized by numerous transactions of similar financial instruments between willing buyers and willing sellers. Because no active trading market exists for various types of financial instruments, many of the fair values disclosed were derived using present value discounted cash flow or other valuation techniques. As a result, the Corporation's ability to actually realize these derived values cannot be assumed.
The fair values disclosed under SFAS No. 107 may vary significantly between institutions based on the estimates and assumptions used in the various valuation methodologies. SFAS No. 107 excludes disclosure of non financial assets such as buildings as well as certain financial instruments such as leases. Accordingly, the aggregate fair values presented do not represent the underlying value of the Corporation.
The actual carrying amounts and estimated fair values of the Corporation's financial instruments that are included in the statement of financial condition at December 31 are as follows:
	1996	 1995 ----------------------------------------- 	Carrying 	Fair 	 Carrying	 Fair 	Amount 	Value 	Amount 	Value ------------------------------------------ Cash and due from banks		 $ 15,307 	$ 15,307 	$ 16,011 	16,011 Investment securities		 110,068 	110,435 	96,151 	96,312 Loans		 382,780	 382,458	 360,584 	360,169 Deposits 		 452,539 	451,112 	424,294 	423,832 Federal funds purchased and other borrowed funds		 8,000	 8,000 	3,000 	3,000
The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments:
Cash and Cash Equivalents: The carrying amounts as reported in the statement of financial condition for cash and short-term instruments approximate those assets' fair values.
(33)
Investment Securities: Fair values for investment securities are based on quoted market values.
8. Fair Value of Financial Instruments (continued)
Loans Receivable: For variable rate loans that reprice frequently or "in one year or less," and with no significant change in credit risk, fair values are based on carrying values. Fair values for fixed rate loans and loans that do not reprice frequently are estimated using a discounted cash flow calculation that applies current interest rates being offered on the various loan products.
Federal Funds Purchased and Other Borrowed Funds: Federal funds purchased and other borrowed funds include federal funds purchased, Federal Home Loan Bank borrowings and other short-term borrowings. The fair value of short-term borrowings approximates the carrying value of these instruments based upon their short-term nature.
Deposit Liabilities: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts.) The carrying amounts for variable rate certificates of deposit approximate their fair values at the reporting date. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on the various certificates of deposit to the cash flow stream.
Off-balance-sheet Financial Instruments: In the normal course of business, the Corporation makes commitments to extend credit and issues standby letters of credit. As a result of excessive costs, the Corporation considers estimation of fair values for commitments and standby letters of credit to otherwise be impracticable. The Corporation's estimate of impairment due to collectibility concerns related to these off-balance-sheet financial instruments is included in the reserve for possible credit losses. The Corporation does not have any derivative financial instruments at December 31, 1996.
9. Federal Home Loan Bank (FHLB) Advances and Other Borrowings
Borrowings consist of the following:
December 31, 1996 FHLB advances payable to FHLB Atlanta, secured by all FHLB advances and certain first mortgage loans: Due January 3, 1997 @ 5.70%		 $3,500 Due January 6, 1997 @ 5.65%		 2,200 Due January 7, 1997 @ 5.63%		 2,300 ------- Total		 $8,000 ======= December 31, 1995 FHLB advances payable to FHLB Atlanta, secured by all FHLB advances and certain first mortgage loans: Due January 3, 1996 @ 6.14%		 $3,000 ------- Total		 $3,000 =======
The Corporation, through its banking subsidiary, First United National Bank & Trust, has a credit agreement with FHLB of Atlanta in an amount up to $75 million. The line of credit is secured with the first lien on the 1-4 family mortgage portfolio totaling $208.82 million on December 31, 1996.
The Corporation's banking subsidiary First United National Bank & Trust has established various unsecured lines of credit totaling $5 million at various upstream correspondent banks. The Bank has also established a $7 million reverse repurchase lines of credit with correspondent banks. As of December 31, 1996, there was nothing outstanding on either of these facilities. The Corporation utilizes the lines to meet daily liquidity requirements and does not rely on lines as a source of long term liquidity.
(34)
10. Income Tax
A reconciliation of the statutory income tax at the applicable rates to the income tax expense included in the statement of income is as follows: 	 Liability 	Method ---------------------------- 	 1996 	1995 	1994 ---------------------------- Income before income taxes	 	$9,623 	$8,453 	$9,241 Statutory income tax rate		 34% 	34% 	34% ---------------------------- Income tax		 3,272 	2,874 	3,142 State franchise tax, net of federal tax benefit		 274	 233	 283 Effect of nontaxable interest and loan income		 (360) 	(249) 	(283) Effect of TEFRA interest limitation		 31	 27	 27 Other		 (73)	 (36)	 (155) ----------------------------- Income tax expense for the year		 $3,144 	$2,849 	$3,014 ============================= Taxes currently payable		 3,309 	2,862 	$2,738 Deferred taxes (benefit)		 (165)	 (13)	 366 ----------------------------- Income tax expense for the year		 $3,144 	$2,849 	$3,014 =============================
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Corporation's deferred tax assets and liabilities as of December 31 are as follows:
	1996 	1995 ------------------ Deferred tax assets: Reserve for possible credit losses		 $407 	$335 Deferred loan origination fees	 	228 	271 Pension expense		 120 	144 Merger costs		 122 	122 Unrealized loss on real property		 120 	0 Accrued expenses		 89 	0 Other	 	32 	25 ---------------- Total deferred tax assets		 1,118 	897 Valuation allowance	 (122) 	(122) ----------------- Total deferred tax assets less valuation allowance		 996 	775 Deferred tax liabilities: Market discount		 (19) 	(45) Excess depreciation	 	(546) 	(535) Employee compensation	 	(37) 	(28) Unrealized gain on investment securities		 (134) 	(112) Prepaid expenses	 	(100) 	(91) Other	 	(8)	 0 ---------------- Total deferred tax liability	 	(844) 	(811) ---------------- Net deferred tax (liability) asset		 152 	($ 36) ================
The Corporation made income tax payments of $3,529, $2,675, and $3,142 for the years ending December 31, 1996, 1995 and 1994, respectively.
11. Employee Benefit Plans
The Bank sponsors a noncontributory pension plan covering substantially all full-time employees who qualify as to age and length of service.
Pension expense charged to operations was $240, $711 and $243 in 1996, 1995, and 1994, respectively. The
(35)
11. Employee Benefit Plans (continued) benefits are based on years of service and the employees compensation during the last five years of employment. The Corporation's funding policy is to make annual contributions in amounts sufficient to meet the current year's funding requirements.
	1996	1995	1994 Net pension cost included the following components: Service costs-benefits earned during the year		 $301 	$270 	$261 Interest cost on projected benefit obligation		 523	 475 	417 Actual return on plan assets		 (545) 	(1,087) 	177 Net amortization and deferral	 	(39) 	640	 (612) Charge associated with early retirement window		 0	 413	 0 ------------------------ Net pension expense included in employee benefits		 $240	 $711 	$243 ========================
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.5% for 1996, 1995, and 1994. The expected long-term rate of return on plan assets was 8.0% in 1996 and 1995, and 7.5% in 1994. Salaries were assumed to increase at 4% in 1996, 1995 and 1994.
12. Federal Reserve Requirements
The banking subsidiaries are required to maintain reserves with the Federal Reserve Bank. During 1996, the daily average amount of these required reserve was approximately $5,665.
13. Restrictions on Subsidiary Dividends, Loans or Advances
Banking law limits the amount of dividends which a bank can pay without obtaining prior approval from bank regulators. Under this law the banking subsidiaries could, without regulatory approval, declare additional dividends in 1996 of approximately $2,612 plus an additional amount equal to the net profits for 1997 up to the date of any such dividend declaration.
Under Federal Reserve regulations, the banking subsidiaries are also limited to the amount they may loan to their affiliates, including the Corporation, unless such loans are collateralized by specified obligations. At December 31, 1996, the maximum amount available for transfer from the bank to the Corporation in the form of loans was approximately $5,900.
(36)
14. Parent Company Financial Information (Parent Company Only)
Condensed Statements of Financial Condition 	 December 31, 	 1996	 1995 ------------------------ Assets Cash		 $ 2,127 	$ 2,068 Investment securities		 6,966 	4,024 Investment in bank subsidiary		 43,693 	44,003 Dividend receivable and other assets	 	112 	65 Investment in non-bank subsidiary	 	5,564	 5,255 ----------------------- Total Assets		 $58,462 	$55,415 ======================= Liabilities and Shareholder's Equity Reserve for taxes, interest and other liabilities		 $ 918 	$ 46 Dividends payable		 902 	0 Shareholders' equity		 56,642	 55,369 ----------------------- Total Liabilities and Shareholder's Equity 		$58,462 	$55,415 =======================
	 Year ended December 31 Condensed Statement of Income 	1996 	1995	 1994 ------------------------ Income: Dividend income from subsidiaries	 	$ 6,170	$ 5,000	 $4,959 Other income		 329 	200	 147 ------------------------ Total income	 	6,499 	5,200 	5,106 Expense: Other expenses	 	13 	23 	73 ------------------------ Total expense		 13 	23	 73 ------------------------ Income before income taxes and equity in undistributed net income of subsidiaries	 	6,486 	5,177 	5,033 ------------------------ Equity in undistributed net income of subsidiaries: Bank	 	(326)	 95 	939 Non-bank		 324 	332 	270 Less income tax	 	(5) 	0	 (15) ----------------------- Net income	 	$6,479 	$5,604 	$6,227 =======================
(37)
Condensed Statement of Cash Flows 	Year ended December 31 	1996 	1995 	1994 ------------------------ Operating activities Net income		 $6,479 	$5,604 $6,227 Adjustments to reconcile net income to net cash provided by operating activities: Increase in dividends payable		 902 	0	 0 Undistributed equity in subsidiaries: Bank		 326	 (95)	 (939) Non-bank		 (324)	 (332) 	(270) Increase in other assets		 (47) 	17	 578 Increase (decrease) in other liabilities		 872 	36	 (649) ------------------------ Net cash provided by operating activities		 8,208	 5,230 	4,947 Investing activities Disposal of premises and equipment	 	0	 0	 548 Purchase of investment securities		 (2,962) 	(1,006)	(2,959) Proceeds from investment maturities		 0 	0	 200 ------------------------ Net cash used in investing activities		 (2,962)	 (1,006)	(2,211) Financing activities Cash dividends		 (4,243) 	(2,974)	(2,097) Proceeds from issuance of common stock	 	28 	43	 136 Acquisition and retirement of common stock		 (972) 	0 0 ------------------------ Net cash used by financing activities	 	(5,187) 	(2,931)	(1,961) ------------------------ Increase in cash and cash equivalents		 59	 1,293 	775 Cash and cash equivalents at beginning of year		 2,068 	775	 0 ------------------------ Cash and cash equivalents at end of year	 	$2,127 	$2,068 	$ 775 ========================
15. Commitments and Contingent Liabilities
The Corporation and its subsidiaries are at times, and in the ordinary course of business, subject to legal actions. Management, upon the advice of counsel, is of the opinion that losses, if any, resulting from the settlement of current legal actions will not have a material adverse effect on the financial condition of the Corporation.
Oakfirst Life Insurance Corporation, a wholly owned subsidiary of the Corporation, had $10,467 of life, accident and health insurance in force at December 31, 1996. In accordance with state insurance laws, this subsidiary is capitalized at $5,581.
16. Related Party Transactions
In the ordinary course of business, executive officers and directors of the Corporation, including their families and companies in which certain directors are principal owners, were loan customers of the Corporation and its subsidiaries. Pursuant to the Corporation's policy, such loans were made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectibility. Changes in the dollar amount of loans outstanding to officers, directors and their associates were as follows for the years ended December 31: 	 1996 	1995	 1994 -------------------------------- Balance, January 1 		$6,626 	$7,477 	$2,940 Loans or advances	 	2,775 	144	 5,971 Repayments	 	(1,420) 	(995)	 (1,434) -------------------------------- Balance, December 31	 	$7,981 	$6,626 	$7,477 ================================
(38)
17. Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the years ended December 31, 1996 and 1995.
	Three months ended 	 Mar. 31 	Jun. 30 	 Sept. 30 Dec. 31 -------------------------------------- Interest income	 	$9,585 	$9,652 	$9,890 	$10,146 Interest expense 		3,972 	3,928 	4,131 	4,345 --------------------------------------- Net interest income	 	$5,613 	$5,724 	$5,759 	$ 5,801 Provision for possible credit losses		 99	 99	 158	 393 Other income 		1,080 	1,199 	1,312	 1,278 Other expenses	 	4,176 	4,385 	4,268 	4,565 -------------------------------------- Income before income taxes	 	$2,418 	$2,439 	$2,645 	$ 2,121 Applicable income taxes		 819 	821 	839 	665 -------------------------------------- Net income	 	$1,599 	$1,618 	$1,806 	$ 1,456 ====================================== Earnings per share		 $0.25	 $0.25 	$0.28 	$0.22 ======================================
	Three months ended 	March 31	June 30	September 30	December 31 Interest income		 $8,847 	$9,220 $9,498 	$9,709 Interest expense		 3,364	 3,589	 3,810	 3,958 -------------------------------------- Net interest income		 $5,483 	$5,631 	$5,688 	$5,751 Provision for possible credit losses		 30 	(30) 	0 	0 Other income		 949 	987	 1,078 	1,276 Restructuring expense		 0 	819 	266 	0 Other expenses		 4,305 	4,332 	4,048 	4,620 -------------------------------------- Income before income taxes 		$2,097 	$1,497 	$2,452 	$2,407 Applicable income taxes		 698 	467 	850 	834 -------------------------------------- Net income		 $1,399 	$1,030 	$1,602 	$1,573 ====================================== Earnings per share	 	$0.21 	$0.16 	$0.25 	$0.24 ======================================
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
(39)
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to Directors of the Registrant is incorporated by reference from the Registrant's definitive Proxy Statement for the annual shareholders meeting to be held April 29, 1997, from pages 2 through 6.
Effective June 1, 1996, Richard G. Stanton, President and Chief Executive Officer of First United Corporation since 1987, Chairman of the Board of First United Corporation since 1990 and First United National Bank & Trust since 1987, retired. In his succession, William B. Grant was appointed Chairman of the Board and Chief Executive Officer of First United Corporation. Robert W. Kurtz was appointed President and Chief Operating Officer of the Corporation.
Executive Officers of the Registrant are:
NAME	 POSITION 	AGE
William B. Grant 	Chairman of the Board and 	43 	Chief Executive Officer
Robert W. Kurtz 	President and	 50 	Chief Financial Officer
Benjamin W. Ridder	 Executive Vice President and 	55 	Director of Retail Banking
No family relationships, as defined by the rules and regulations of the Securities and Exchange Commission, exist among any of the Directors, Nominees, or Executive Officers.
All officers are elected annually by the Board of Directors and hold office at the pleasure of the Board.
Mr. Grant has been Chairman of the Board and Chief Executive Officer since 1996. Previously, he had been Secretary of First United Corporation since 1990 and Executive Vice-President of First United National Bank & Trust since 1987.
Mr. Kurtz has been President of First United Corporation since 1996 and Chief Financial Officer since 1997. Previously, he had been Chief Operating Officer of First United Corporation since 1996, Treasurer of First United Corporation since 1990 and Executive Vice-President of First United National Bank & Trust since 1987.
Mr. Ridder has been Executive Vice President and Director of Retail Banking of First United Corporation since 1997. Previously, he had been Senior Vice President of the Corporation since 1987.
OTHER SIGNIFICANT EMPLOYEES OF THE REGISTRANT ARE:
NAME	 POSITION 	AGE
Jeannette R. Fitzwater	 Senior Vice President and	 36 	Director of Human Resources
Philip D. Frantz 	Senior Vice President and	 36 	Director of Operations & Support
Steven M. Lantz 	Senior Vice President and	 40 	Director of Lending
Eugene D. Helbig, Jr.	 Senior Vice President	 44 	Senior Trust Officer
Frederick A. Thayer IV	 Senior Vice President	 38 	Director of Sales
(40)
Mrs. Fitzwater was appointed Senior Vice President and Director of Human Resources in 1997. She had been First Vice President, Director of Marketing and Regional Sales Manager of First United National Bank & Trust since 1994.
Mr. Frantz was appointed Senior Vice President in 1993 and previously had been the Controller of the organization since 1988. He was appointed Director of Operations & Support of the Corporation in 1997.
Mr. Lantz was appointed Senior Vice President and Director of Lending of the Corporation in 1997. He had been First Vice President and Commercial Services Manager of First United National Bank & Trust since 1993.
Mr. Helbig was appointed Senior Vice President in 1997 and Senior Trust Officer in 1993. He had been a First Vice President since 1993.
Mr. Thayer was appointed Senior Vice President and Director of Sales in 1997. Previously, he had been First Vice President, Regional Executive Officer and Regional Sales Manager of First United National Bank & Trust since 1995.
Item 11. EXECUTIVE COMPENSATION
Information required by Item 11 is incorporated by reference from pages 4 and 5 of the definitive Proxy Statement of the Corporation for the annual meeting of shareholders to be held on April 29, 1997.
Item 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by Item 12 is incorporated by reference from pages 2 and 3 of the definitive Proxy Statement of the Corporation for the annual meeting of shareholders to be held on April 29, 1997.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from page 6 of the definitive Proxy Statement of the Corporation for the annual meeting of shareholders to be held on April 29, 1997, and from Note 15 on page 33 of this Form 10-K. There are no other relationships required to be disclosed in this item pursuant to the instructions for this report.
PART IV.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) and (2) Finaincial Statements and Financial Statement Schedules.
The consolidated financial statements of the Corporation are listed in Item 6