INTRODUCTION

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

FORWARD-LOOKING STATEMENTS

This report may contain forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Readers of this report should be aware of the speculative nature of "forward-looking statements." Statements that are not historical in nature, including those that include the words "anticipate", "estimate", "should", "expect", "believe", "intend", and similar expressions, are based on current expectations, estimates and projections about, among other things, the industry and the markets in which we operate, and they are not guarantees of future performance. Whether actual results will conform to expectations and predictions is subject to known and unknown risks and uncertainties, including risks and uncertainties discussed in this report; general economic, market, or business conditions; changes in interest rates, deposit flow, the cost of funds, and demand for loan products and financial services; changes in our competitive position or competitive actions by other companies; changes in the quality or composition of our loan and investment portfolios; our ability to manage growth; changes in laws or regulations or policies of federal and state regulators and agencies; and other circumstances beyond our control. Consequently, all of the forward-looking statements made in this report are qualified by these cautionary statements, and there can be no assurance that the actual results anticipated will be realized, or if substantially realized, will have the expected consequences on our business or operations. These and other risks are discussed in detail in the periodic reports that First United Corporation files with the Securities and Exchange Commission (the "SEC") (see Item 1A of Part II of this report for further information). Except as required by applicable laws, we do not intend to publish updates or revisions of any forward-looking statements we make to reflect new information, future events or otherwise.

THE CORPORATION

First United Corporation is a Maryland corporation that was incorporated in 1985 and is a registered financial holding company under the federal Bank Holding Company Act of 1956, as amended. The Corporation's primary business activity is acting as the parent company of First United Bank & Trust, a Maryland trust company (the "Bank"), First United Insurance Group, LLC, a full service insurance provider organized under Maryland law (the "Insurance Group"), and First United Statutory Trust I and First United Statutory Trust II, Connecticut statutory business trusts that we formed for the purpose of selling trust preferred securities. The Bank has two subsidiaries: OakFirst Loan Center, Inc., a West Virginia finance company; and OakFirst Loan Center, LLC, a Maryland finance company. First United Insurance Agency, Inc, a subsidiary of OakFirst Loan Center, Inc., was merged into the Insurance Group effective June 30, 2009. The Bank provides a complete range of retail and commercial banking services to a customer base serviced by a network of 27 offices and 33 automated teller machines.

We maintain an Internet site at www.mybank4.com on which we make available, free of charge, First United Corporation's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the foregoing as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the SEC.

ESTIMATES AND CRITICAL ACCOUNTING POLICIES

This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. (See Note 1 to the Consolidated Financial Statements included in Item 8 of Part II of First United Corporation's Annual Report on Form 10-K for the year ended December 31, 2008). On an on-going basis, management evaluates its estimates, including those related to loan losses, intangible assets, other-than-temporary impairment of investment securities and pension plan assumptions. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management described its critical accounting policies in First United Corporation's Annual Report on Form 10-K for the year ended December 31, 2008. The following discussion updates a critical accounting policy that was contained in the Annual Report on Form 10-K to reflect recent changes in economic conditions.

Other-Than-Temporary Impairment of Investment Securities

Investments available-for-sale: Securities available-for-sale are stated at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of accumulated other comprehensive loss in shareholders' equity.

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

Management systematically evaluates securities for impairment on a quarterly basis. Based upon application of new accounting guidance for subsequent measurement in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 320, Investments - Debt and Equity Securities, (ASC Section 320-10-35), which the Corporation early adopted effective March 31, 2009 according to the effective date provisions of ASC Paragraph 320-10-65-1 management must assess whether (a) it has the intent to sell the security and (b) it is more likely than not that the Corporation will be required to sell the security prior to its anticipated recovery. If neither applies, then declines in the fair values of securities below their cost that are considered other-than-temporary declines are split into two components. The first is the loss attributable to declining credit quality. Credit losses are recognized in earnings as realized losses in the period in which the impairment determination is made. The second component consists of all other losses. The other losses are recognized in other comprehensive income. Further discussion can be found below under the heading "Investments Securities". In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) adverse conditions specifically related to the security, an industry, or a geographic area, (3) the historic and implied volatility of the fair value of the security,
(4) changes in the rating of the security by a rating agency, (5) recoveries or additional declines in fair value subsequent to the balance sheet date, (6) failure of the issuer of the security to make scheduled interest or principal payments, and (7) the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future.

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

SELECTED FINANCIAL DATA

The following table sets forth certain selected financial data for the nine
months ended September 30, 2009 and 2008 and is qualified in its entirety by the
detailed information and unaudited financial statements, including the notes
thereto, included elsewhere in this quarterly report.

                                                As of or For the Nine Months
                                                     Ended September 30,
                                                    2009                 2008
Per Share Data

  Basic net (loss)/income per common share      ($        0.51 )        $  1.49
  Diluted net (loss)income per common share     ($        0.51 )        $  1.49

Dividends Declared                               $         .60          $   .60
  Book Value                                     $       12.35          $ 14.70

Significant Ratios
  Return on Average Assets (a)                            (.16 %)           .77 %
  Return on Average Equity (a)                           (2.68 %)         12.31 %
  Dividend Payout Ratio (b)                            (178.16 %)         53.70 %
  Average Equity to Average Assets                        6.15 %           6.25 %

Note: (a) Annualized

(b) Cash dividends paid on common stock as a percent of net income (loss)

RESULTS OF OPERATIONS

Overview

Consolidated net loss available to common shareholders for the nine months ended September 30, 2009 was $3.1 million, compared to net income of $9.1 million for the same period of 2008. Basic and diluted losses per common share for the first nine months of 2009 were ($.51), compared to basic and diluted income per common share of $1.49 for the same period of 2008. The decrease in net income resulted primarily from $10.8 million of other-than-temporary impairment charges related to available-for-sale securities, $4.3 million in increased loan loss provision expense and $2.3 million of increased Federal Deposit Insurance Corporation ("FDIC") deposit insurance premiums. The increase in FDIC premiums resulted from the special assessment charge of $.8 million recognized in June 2009, the revised FDIC rate structure and the credit which offset 2008 premiums charged. Core operations remained strong as our net interest income for the first nine months of 2009 increased $2.0 million when compared to the same period of 2008. Our net interest margin increased from 3.67% for the first nine months of 2008 to 3.68% for the first nine months of 2009. The provision for loan losses was $10.8 million for the nine months ended September 30, 2009, compared to $6.6 million for the same period of 2008. Interest expense on our interest-bearing liabilities decreased $8.6 million due to the low interest rate environment, our decision to only increase special pricing for full relationship customers and certificates of deposit renewing at lower interest rates due to the short duration of our portfolio. The increased provision was necessary to provide specific allocations for impaired loans where management has determined that the collateral supporting the loans is not adequate to cover the loan balance and due to increases in the qualitative factors affecting the allowance for loan losses as a result of the current recession and distressed economic environment.

Other operating income decreased $12.1 million during the first nine months of 2009 when compared to the same period of 2008. This decrease is primarily attributable to the recognition of $10.8 million in other-than-temporary impairment charges and $.2 million realized losses on the investment portfolio. Trust department income and income earned on bank owned life insurance have also declined as compared to the same time period in 2008 due to decreases in the market values of assets under management and reduced interest rates. Management has also noted a decrease in consumer spending as service charge income has shown a decline of $.6 million during the first nine months of 2009. These declines were offset slightly by $.5 million of increased insurance commissions as a result of the Insurance Group's acquisition of books of business late in 2008. Operating expenses increased $4.1 million in the first nine months of 2009 when compared to the same period of 2008. This increase is due primarily to a $2.3 million increase of FDIC premiums, which is inclusive of the $.8 million special assessment charge, and increases in personnel costs, other real estate owned expenses, and amortization expenses of intangibles.

Consolidated net loss available to common shareholders for the third quarter of 2009 was $6.0 million, compared to net income of $1.9 million for the same period of 2008. Basic and diluted losses per common share were ($.97) for the third quarter of 2009, compared to basic and diluted income per common share of $.30 for the same period of 2008. The net interest margin for the third quarter of 2009 was 3.53%, compared to 3.67% for the same period of 2008. This decrease is primarily attributable to the increase in interest-earning assets of $77.3 million and a decrease in rates during the third quarter 2009 when compared to the third quarter 2008. Third quarter 2009 operating expenses increased by 15% when compared to operating expenses for the third quarter of 2008 due to increased personnel costs, increased FDIC premiums and increases in other real estate owned and amortization of intangibles.

Net Interest Income

Net interest income is the largest source of operating revenue and is the difference between the interest earned on interest-earning assets and the interest expense incurred on interest-bearing liabilities. For analytical and discussion purposes, net interest income is adjusted to a fully taxable equivalent (FTE) basis to facilitate performance comparisons between taxable and tax-exempt assets. Fully taxable equivalent income is determined by increasing tax-exempt income by an amount equal to the federal income taxes that would have been paid if this income were taxable at the statutorily applicable rate. The following table sets forth the average balances, net interest income and expense, and average yields and rates of our interest-earning assets and interest-bearing liabilities for the nine months ended September 30, 2009 and 2008.

                                                    For the nine months ended September 30,
                                                2009                                       2008

                                Average                      Average        Average                      Average
(Dollars in thousands)          Balance       Interest        Rate          Balance       Interest        Rate

Interest-Earning Assets:

  Loans                       $ 1,132,999     $  51,606          6.09 %   $ 1,064,525     $  55,935          7.02 %

  Investment securities           330,823        14,827          5.99         367,494        16,391          5.96

  Other interest earning
assets                             65,614            65           .14          17,530           538          4.09

    Total earning assets      $ 1,529,436        66,498          5.81 %   $ 1,449,549        72,864          6.71 %

Interest-bearing
liabilities

  Interest-bearing deposits   $ 1,122,255        15,385          1.83 %   $ 1,052,791        23,972          3.04 %

  Short-term borrowings            44,231           237           .72          53,629           852          2.12

  Long-term borrowings            277,033         8,768          4.23         247,053         8,208          4.44

    Total interest-bearing
liabilities                   $ 1,443,519        24,390          2.26 %   $ 1,353,473        33,032          3.25 %

Net interest income and
spread                                        $  42,108          3.55 %                   $  39,832          3.46 %

Net interest margin                                              3.68 %                                      3.67 %

Note: Interest income and yields are presented on a fully taxable equivalent basis using a 35% tax rate.

Net interest income on an FTE basis increased $2.3 million during the first nine months of 2009 over the same period in 2008 due to an $8.6 million (26.2%) decrease in interest expense, offset by a $6.4 million (8.7%) decrease in interest income. The decrease in interest income resulted primarily from a decrease in interest rates on loans, an increase in non-accrual assets and our desire to maintain higher cash levels when compared to the first nine months of 2008. A reversal of approximately $28,000 is reflected in the "Other interest earning assets" line item for September 30, 2009 due to the accrual of stock dividends issued by the Federal Home Loan Bank ("FHLB") of Atlanta at a rate of 0.80% for the fourth quarter of 2008. The Corporation was notified during the first quarter of 2009 that the FHLB of Atlanta would not pay a dividend for the fourth quarter 2008. The decreases in interest rates throughout 2008 and the increase in non-accruing assets during 2009 contributed to the decrease in the average rate on our average earning assets of 90 basis points, from 6.71% for the first nine months of 2008 to 5.81% for the first nine months of 2009 (on a fully tax equivalent basis).

Interest expense decreased during the first nine months of 2009 when compared to the same period of 2008 due to a reduction in interest rates on interest-bearing liabilities. Average interest-bearing liabilities increased in the first nine months of 2009 by $90.0 million when compared to the same time period for 2008, with interest-bearing deposits increasing by approximately $69.5 million. The effect of the decreasing rate environment throughout 2008, our decision to only increase special rates for full relationship customers and the short duration of our portfolio resulted in a 99 basis point decrease in the average rate paid on our average interest-bearing liabilities from 3.25% for the nine months ended September 30, 2008 to 2.26% for the same period of 2009.

The net result of the aforementioned factors was a 1 basis point increase in the net interest margin during the first nine months of 2009 to 3.68% from 3.67% for the same time period of 2008.

The following table sets forth the average balances, net interest income and expense, and average yields and rates of our interest-earning assets and interest-bearing liabilities for the three months ended September 30, 2009 and 2008.

                                                   For the Three Months Ended September 30,
                                                2009                                       2008

                                Average                      Average        Average                      Average
(Dollars in thousands)          Balance       Interest        Rate          Balance       Interest        Rate

Interest-Earning Assets:

  Loans                       $ 1,140,369     $  17,076          5.94 %   $ 1,088,725     $  18,485          6.75 %

  Investment securities           326,413         4,541          5.52         370,462         5,621          6.04

  Other interest earning
assets                             89,996            61           .29          20,283           128          2.51

    Total earning assets      $ 1,556,778        21,678          5.52 %   $ 1,479,470        24,234          6.52 %

Interest-bearing
liabilities

  Interest-bearing deposits   $ 1,103,462         4,835          1.74 %   $ 1,060,458         7,330          2.75 %

  Short-term borrowings            45,523            82           .71          52,095           230          1.76

  Long-term borrowings            276,770         2,916          4.18         277,825         3,016          4.32

    Total interest-bearing
liabilities                   $ 1,425,755         7,833          2.18 %   $ 1,390,378        10,576          3.03 %

Net interest income and
spread                                        $  13,845          3.34 %                   $  13,658          3.49 %

Net interest margin                                              3.53 %                                      3.67 %

Note: Interest income and yields are presented on a fully taxable equivalent basis using a 35% tax rate.

On a fully tax-equivalent basis, net interest income for the third quarter of 2009 increased $0.2 million in comparison to the third quarter of 2008. This slight increase resulted from a $2.7 million decrease in interest expense during the period offset by a decrease in interest income of $2.6 million. The decrease in interest expense resulted from a decrease in rates paid on interest-bearing deposits, which offset the $35.4 million increase in average liabilities. The decrease in interest income is due to a combination of decreased interest rates and the increase in non-accruing assets. Average loans increased by $51.6 million while the average balance in investment securities declined by $44.0 million. Average interest-bearing liabilities increased by $35.4 million (2.5%) during the third quarter of 2009 when compared to the third quarter of 2008. This increase resulted primarily from increases in interest-bearing deposits offset by a decrease in short-term borrowings. The effective rate on these liabilities decreased by 85 basis points when comparing the third quarter of 2009 to the third quarter of 2008. Overall, the net interest margin decreased by 14 basis points from 3.67% to 3.53% when comparing the third quarter of 2009 to the third quarter of 2008.

Provision for Loan Losses

The provision for loan losses was $10.8 million for the first nine months of 2009, compared to $6.6 million for the same period of 2008. The increase in the provision was in response to the increase in net charge-offs, specific allocations for impaired loans (primarily acquisition and development loans) where management has determined that the collateral supporting the loans is not adequate to cover the loan balance and increases in the qualitative factors as a result of the current recession and distressed economic environment during 2008 and the first nine months of 2009. Additional information regarding risk elements in the loan portfolio and management's assessment of the adequacy of the allowance for loan losses is provided below under the heading "Allowance and Provision for Loan Losses".

Other Operating Income

Other operating income decreased $12.1 million during the first nine months of 2009 when compared to the same period of 2008. The decrease is primarily attributable to the recognition of $10.8 million in other-than-temporary impairment charges, a $.2 million realized loss on the investment portfolio, as a result of moving two securities to trading, and a decrease of $.6 million in service charge income due to decreased consumer spending. Trust department revenue and income on our bank owned life insurance policies also decreased due to declines in the market values of assets under management and reduced interest rates, respectively. These declines were offset slightly by a $.5 million increase in insurance commissions as a result of the Insurance Group's acquisition of books of business late in 2008.

Other operating income for the third quarter of 2009 decreased $8.3 million when compared to the third quarter of 2008. The decrease is primarily attributable to the $8.7 million other-than-temporary impairment charge on the investment portfolio. Insurance commissions increased 30.9% in the third quarter compared to the same period in 2008 due primarily to acquisitions late in 2008. The composition of operating income is illustrated in the following table. For comparative purposes, the securities losses of $10.9 million for the nine months ended September 30, 2009 and securities gain of $.5 million for the nine months ended September 30, 2008 have been excluded from the nine-month ended table as well as the securities losses of $8.5 million for the three-month period in 2009. However, these amounts are reflected in other operating income on the consolidated statements of operations.

                                                                 Income as % of Total Other Operating                    Income as % of Total Other Operating
                                                                                Income                                                  Income
                                                                           Nine Months Ended                                      Three Months Ended
                                                           September 30, 2009             September 30, 2008       September 30, 2009             September 30, 2008
Service charges                                                             36 %                           39 %                     37 %                           42 %
Trust department                                                            23 %                           24 %                     24 %                           26 %
Insurance commissions                                                       18 %                           13 %                     17 %                           14 %
Bank owned life insurance                                                    3 %                            5 %                      3 %                            4 %
Other income                                                                20 %                           19 %                     19 %                           14 %
                                                                           100 %                          100 %                    100 %                          100 %

Other Operating Expenses

Other operating expenses increased $4.1 million (13%) for the first nine months of 2009 when compared to the first nine months of 2008. For the third quarter 2009, other operating expenses increased $1.5 million (15%) when compared to the same time period of 2008. The increases for both periods were due to increases in personnel expenses, occupancy and equipment expenses as we continue our expansion in Morgantown, West Virginia, Frederick, Maryland and in the markets served by the Insurance Group. In addition, expense for the Corporation's defined benefit pension plan increased $.7 million in the first nine months of 2009 when compared to the first nine months of 2008. This increase is a result of the decline in market value of the plan assets and the lower discount rate. We have also recognized increases in other expenses directly attributable to the FDIC assessments of $2.3 million when compared to the same time period in 2008. The composition of operating expense is illustrated in the following table.

. . .