First United Corporation — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Unaudited consolidated results. First United is a bank holding company whose principal subsidiary, First United Bank & Trust, provides retail and commercial banking services.
Financial results and position
- Earnings: Q3 net income was $0.7 million, or $0.05 per diluted share, versus net income of $0.3 million and a $0.01 loss per common share in Q3 2010. Nine-month net income was $2.8 million, or $0.26 per share, compared with a $5.7 million net loss and $1.12 loss per share in 2010. Net income available to common shareholders was $0.3 million for Q3 and $1.6 million year to date.
- Net interest and margin: Nine-month GAAP net interest income was $28.4 million, down from $32.7 million. On a fully taxable-equivalent basis, it was $29.7 million versus $34.2 million. Net interest margin improved to 2.89% for the first nine months (2.78% in 2010) and 2.97% in Q3 (2.51% in Q3 2010).
- Other income and expenses: Nine-month total other operating income was $11.1 million, versus a $0.2 million loss in 2010, reflecting much lower securities impairment losses and a $1.4 million gain on an indirect-auto loan sale. Operating expenses fell 8% to $31.2 million, including lower personnel costs and FDIC premiums.
- Cash flow: Operating activities provided $48.6 million, compared with $140.6 million in the prior-year period. Investing activities provided $2.9 million; financing activities used $265.9 million. Cash and cash equivalents declined $214.4 million to $84.9 million, largely alongside deposit runoff and debt repayments.
- Balance sheet and liquidity: Total assets were $1.434 billion, down $262.3 million from year-end 2010. Net loans were $898.9 million and deposits were $1.066 billion. Deposits declined $235.4 million, including repayment of brokered deposits and CDARS maturities. Management said liquidity was adequate.
- Debt and capital: Short-term borrowings were $44.5 million and long-term borrowings $207.3 million. Consolidated total risk-based capital was 13.01%, Tier 1 risk-based capital 11.25%, and Tier 1 leverage 8.93%; the company and bank were classified as well capitalized.
- Credit quality: Allowance for loan losses was $20.1 million, or 2.19% of loans, versus $22.1 million at year-end. Nine-month net charge-offs were $7.9 million, up from $6.5 million. Non-accrual loans were $37.5 million (4.1% of loans), versus $34.9 million (3.5%) at year-end; impaired loans totaled $66.4 million and TDRs $19.7 million.
Material changes versus comparable periods
- The year-to-date return to profitability primarily reflected a $4.7 million lower loan-loss provision and substantially lower securities and other-real-estate losses, including OTTI charges of $19,000 versus $8.3 million in 2010. These benefits were partly offset by lower net interest income and higher income tax expense.
- Loans fell $90.7 million from December 2010; the company sold $32.5 million of indirect auto loans in Q2. Deposits fell $235.4 million, while available-for-sale securities increased $48.1 million.
- Net interest income declined despite a higher margin, as lower average earning-asset balances and yields reduced interest income. Management attributed lower funding costs to deposit pricing and a smaller average interest-bearing liability base.
Outlook, commentary, risks and unusual items
- Management expected net interest margin to continue improving and intended to repay a $15 million FHLB advance at its December 2011 maturity, subject to maintaining sufficient liquidity. The filing gives no quantified earnings or revenue guidance.
- Credit risks remain material: $5.1 million of partial charge-offs related to two large CRE loans contributed to higher net charge-offs. Past-due loans rose during Q3; after quarter-end, a borrower in a relationship with $9.9 million of loans filed for bankruptcy. The bank said the loans were well secured. Another delinquent CRE participation was being refinanced, and management expected delinquencies to be remedied before year-end.
- The $36.3 million amortized-cost CDO portfolio had a $9.4 million fair value and $26.9 million in unrealized losses. It comprised 18 pooled trust-preferred securities valued using significant unobservable inputs (Level 3); management reported no credit-related OTTI in Q3 and $19,000 year to date.
- At the Federal Reserve Bank of Richmond’s request, the company continued deferring interest on trust-preferred debentures; deferred interest was approximately $1.5 million. It also continued to defer Series A preferred dividends, which accrue at about $0.4 million per quarter. Common dividends were suspended. The board did not intend to declare the November 15, 2011 preferred dividend; six unpaid quarterly periods could give preferred holders rights to elect up to two directors.
- Other identified exposures include $86.0 million in loan commitments and $1.8 million in standby letters of credit. Management cited interest-rate, economic, credit, deposit-flow, and regulatory risks. It reported effective disclosure controls and no material change in internal control over financial reporting; no legal proceedings were reported.
Important facts for investors to verify
- Whether margin improvement continues to offset pressure from lower loan balances, yields, and net interest income.
- Trends in non-accrual loans, delinquencies, TDRs, CRE charge-offs, and the adequacy of the loan-loss allowance.
- Valuation assumptions and potential further losses in the Level 3 CDO portfolio, including its reliance on illiquid markets and unobservable inputs.
- Liquidity and funding developments following substantial deposit runoff, including repayment of the December FHLB maturity.
- Timing and conditions for resuming trust-preferred interest, Series A preferred dividends, and common dividends, and the implications of continued preferred-dividend arrears.