| FIRST UNITED CORP/MD/ ITEM 1A RISK FACTORS The following factors should be considered carefully in evaluating an investment in shares of common stock of the Corporation |
| The Corporation’s future depends on the successful growth of its subsidiaries |
| The Corporation’s primary business activity for the foreseeable future will be to act as the holding company of the Bank and its other direct and indirect subsidiaries |
| Therefore, the Corporation’s future profitability will depend on the success and growth of these subsidiaries |
| In the future, part of the Corporation’s growth may come from buying other banks and buying or establishing other companies |
| Such entities may not be profitable after they are purchased or established, and they may lose money, particularly at first |
| A new bank or company may bring with it unexpected liabilities, bad loans, or bad employee relations, or the new bank or company may lose customers |
| The majority of our business is concentrated in Maryland and West Virginia; a significant amount of our business is concentrated in real estate lending |
| Because most of our loans are made to Western Maryland and Northeastern West Virginia borrowers, a decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose loan portfolios are geographically diverse |
| Further, we make many real estate secured loans, which are in greater demand when interest rates are low and economic conditions are good |
| Even when economic conditions are favorable and interest rates are low, these conditions may not continue |
| Additionally, the market values of the real estate securing these loans may deteriorate, and we may lose money if a borrower fails to repay a real estate loan |
| [10] _________________________________________________________________ The Bank may experience loan losses in excess of its allowance |
| The risk of credit losses on loans varies with, among other things, general economic conditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the value and marketability of the collateral for the loan |
| Management of First United Bank & Trust maintains an allowance for credit 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 managementapstas assumptions and judgments prove to be incorrect and the allowance for loan losses is inadequate to absorb future losses, or if the bank regulatory authorities require us to increase the allowance for loan losses as a part of its examination process, our earnings and capital could be significantly and adversely affected |
| Although management uses the best information available to make determinations with respect to the allowance for loan losses, future adjustments may be necessary if economic conditions differ substantially from the assumptions used or adverse developments arise with respect to our non-performing or performing loans |
| Material additions to the allowance for loan losses could result in a material decrease in our net income and capital, and could have a material adverse effect on our financial condition |
| Interest rates and other economic conditions will impact our results of operations |
| Our results of operations may be materially and adversely affected by changes in prevailing economic conditions, including declines in real estate values, rapid changes in interest rates and the monetary and fiscal policies of the federal government |
| Our profitability is in part a function of the spread between the interest rates earned on assets and the interest rates paid on deposits and other interest-bearing liabilities (ie, net interest income), including advances from the Federal Home Loan Bank of Atlanta |
| Interest rate risk arises from mismatches (ie, 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 (ie, 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 (ie, a negative gap) could enhance earnings in a falling interest rate environment and negatively impact earnings in a rising interest rate environment |
| Fluctuations in interest rates are not predictable or controllable |
| We have attempted to structure our asset and liability management strategies to mitigate the impact on net interest income of changes in market interest rates, but there can be no assurance that these attempts will be successful in the event of such changes |
| The market value of our investments could decline |
| As of December 31, 2005, we had classified 100prca of our investment securities as available-for-sale pursuant to Statement of Financial Accounting Standards ( "e SFAS "e ) Nodtta 115 relating to accounting for investments |
| SFAS Nodtta 115 requires that unrealized gains and losses in the estimated value of the available-for-sale portfolio be "e marked to market "e and reflected as a separate item in shareholders &apos 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 &apos 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 &apos equity |
| Management believes that several factors will affect the market values of our investment portfolio |
| These include, but are not limited to, changes in interest rates or expectations of changes, the degree of volatility in the securities markets, inflation rates or expectations of inflation and the slope of the interest rate yield curve (the yield curve refers to the differences between shorter-term and longer-term interest rates; a positively sloped yield curve means shorter-term rates are lower than longer-term rates) |
| 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 |
| [11] _________________________________________________________________ The Corporation’s ability to pay dividends is limited |
| The Corporation’s ability to pay dividends to shareholders is largely dependent upon the receipt of dividends from the Bank |
| Both federal and state laws impose restrictions on the ability of the Bank to pay dividends |
| Federal law prohibits the payment of a dividend by an uninsured depository institution if the depository institution is considered "e undercapitalized "e or if the payment of the dividend would make the institution "e undercapitalized "e |
| This policy statement is applicable only to troubled institutions |
| For a Maryland state-chartered commercial bank, dividends may be paid out of undivided profits or, with the prior approval of the Commissioner, from surplus in excess of 100prca of required capital stock |
| If however, the surplus of a Maryland bank is less than 100prca of its required capital stock, cash dividends may not be paid in excess of 90prca of net earnings |
| In addition to these specific restrictions, bank regulatory agencies also have the ability to prohibit proposed dividends by a financial institution which would otherwise be permitted under applicable regulations if the regulatory body determines that such distribution would constitute an unsafe or unsound practice |
| Because of these limitations, there can be no guarantee that we will declare dividends in any fiscal quarter |
| Shares of the Corporation’s common stock are not heavily traded |
| The shares of the Corporation’s common stock are listed on the Nasdaq National Market and are not heavily traded |
| Securities that are not heavily traded can be more volatile than stock trading in an active public market |
| Factors such as our financial results, the introduction of new products and services by us or our competitors, and various factors affecting the banking industry generally may have a significant impact on the market price of our common stock |
| Management cannot predict the extent to which an active public market for our securities will develop or be sustained in the future |
| In recent years, the stock market has experienced a high level of price and volume volatility, and market prices for the securities of many companies have experienced wide price fluctuations that have not necessarily been related to their operating performance |
| Therefore, our shareholders may not be able to sell their shares at the volumes, prices, or times that they desire |
| Shares of the Corporation’s common stock are not insured |
| Shares of the Corporation’s common stock do not represent deposits and investments in these shares are not insured against loss by the government |
| We operate in a competitive environment |
| We operate in a competitive environment, competing for loans, deposits, and customers with commercial banks, savings associations and other financial entities |
| Competition for deposits comes primarily from other commercial banks, savings associations, credit unions, money market and mutual funds and other investment alternatives |
| Competition for loans comes primarily from other commercial banks, savings associations, mortgage banking firms, credit unions and other financial intermediaries |
| Competition for other products, such as insurance and securities products, comes from other banks, securities and brokerage companies, insurance companies, insurance agents and brokers, and other non-bank financial service providers in our market area |
| Many of these competitors are much larger in terms of total assets and capitalization, have greater access to capital markets, and/or offer a broader range of financial services than those that we offer |
| In addition, banks with a larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are thereby able to serve the needs of larger customers |
| In addition, current banking laws facilitate interstate branching, merger activity among banks, and expanded activities |
| Since September 1995, certain bank holding companies are authorized to acquire banks throughout the United States |
| In addition, since June 1, 1997, certain banks are permitted to merge with banks organized under the laws of different states |
| As a result, interstate banking is now an accepted element of competition in the banking industry and the Corporation may be brought into competition with institutions with which it does not presently compete |
| Moreover, as discussed above, the GLBA revised the BHC Act in 2000 and repealed the affiliation provisions of the Glass-Steagall Act of 1933, which, taken together, limited the securities, insurance and other non-banking activities of any company that controls an FDIC insured financial institution |
| These laws will likely 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 |
| [12] _________________________________________________________________ The loss of key personnel could disrupt our operations and result in reduced earnings |
| Our growth and profitability will depend upon our ability to attract and retain skilled managerial, marketing and technical personnel |
| Competition for qualified personnel in the financial services industry is intense, and there can be no assurance that we will be successful in attracting and retaining such personnel |
| Our current executive officers provide valuable services based on their many years of experience and in-depth knowledge of the banking industry |
| Due to the intense competition for financial professionals, these key personnel would be difficult to replace and an unexpected loss of their services could result in a disruption to the continuity of operations and a possible reduction in earnings |
| The banking industry is heavily regulated; significant regulatory changes could adversely affect our operations |
| Our operations will be impacted by current and future legislation and by the policies established from time to time by various federal and state regulatory authorities |
| The Corporation is subject to supervision by the FRB The Bank is subject to supervision and periodic examination by the Maryland Commissioner of Financial Regulation, the West Virginia Division of Banking, and the FDIC Banking regulations, designed primarily for the safety of depositors, may limit a financial institutionapstas growth and the return to its investors by restricting such activities as the payment of dividends, mergers with or acquisitions by other institutions, investments, loans and interest rates, interest rates paid on deposits, expansion of branch offices, and the offering of securities or trust services |
| The Corporation and the Bank are also subject to capitalization guidelines established by federal law and could be subject to enforcement actions to the extent that either is found by regulatory examiners to be undercapitalized |
| It is not possible to predict what changes, if any, will be made to existing federal and state legislation and regulations or the effect that such changes may have on our future business and earnings prospects |
| Management also cannot predict the nature or the extent of the effect on our business and earnings of future fiscal or monetary policies, economic controls, or new federal or state legislation |
| Further, the cost of compliance with regulatory requirements may adversely affect our ability to operate profitably |
| We may be adversely affected by recent legislation |
| As discussed above the GLBA repealed restrictions on banks affiliating with securities firms and it also permitted bank holding companies that become financial holding companies to engage in additional financial activities, including insurance and securities underwriting and agency activities, merchant banking, and insurance company portfolio investment activities that are currently not permitted for bank holding companies |
| Although the Corporation is a financial holding company, this law may increase the competition we face from larger banks and other companies |
| The Sarbanes-Oxley Act of 2002 requires management of publicly traded companies to perform an annual assessment of their internal controls over financial reporting and to report on whether the system is effective as of the end of the Company’s fiscal year |
| Disclosure of significant deficiencies or material weaknesses in internal controls could cause an unfavorable impact to shareholder value by affecting the market value of our stock |
| The Patriot Act reinforced the importance of implementing and following procedures required by the Bank Secrecy Act and money laundering issues |
| Non-compliance with this act or failure to file timely and accurate documentation could expose the company to adverse publicity as well as fines and penalties assessed by regulatory agencies |
| We may be subject to claims and the costs of defensive actions |
| Our customers may sue us for losses due to alleged breaches of fiduciary duties, errors and omissions of employees, officers and agents, incomplete documentation, our failure to comply with applicable laws and regulations, or many other reasons |
| Also, our employees may knowingly or unknowingly violate laws and regulations |
| Management may not be aware of any violations until after their occurrence |
| This lack of knowledge may not insulate us from liability |
| Claims and legal actions may result in legal expenses and liabilities that may reduce our profitability and hurt our financial condition |
| We may not be able to keep pace with developments in technology |
| We use various technologies in conducting our businesses, including telecommunication, data processing, computers, automation, internet-based banking, and debit cards |
| Technology changes rapidly |
| Our ability to compete successfully with other financial institutions may depend on whether we can exploit technological changes |
| We may not be able to exploit technological changes, and any investment we do make may not make us more profitable |
| [13] _________________________________________________________________ The Corporation’s Articles of Incorporation and By-Laws may discourage a corporation takeover |
| The Amended and Restated Articles of Incorporation and By-Laws of the Corporation contain certain provisions designed to enhance the ability of the Board of Directors to deal with attempts to acquire control of the corporation |
| These provisions provide for the classification of the Board of Directors into three classes; directors of each class generally serve for staggered three-year periods |
| 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 |
| In addition, Maryland law contains anti-takeover provisions that apply to First United Corporation |
| Although these provisions do not preclude a takeover, they may have the effect of discouraging a future takeover attempt that would not be approved by the Board of Directors, but pursuant to which shareholders might receive a substantial premium for their shares over then-current market prices |
| As a result, shareholders who might desire to participate in such a transaction might not have the opportunity to do so |
| Such provisions will also render the removal of the Board of Directors and of management more difficult and, therefore, may serve to perpetuate current management |
| Such provisions could potentially adversely affect the market price of our common stock |