First United Corporation: Q1 2011 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 2011. First United Corporation is a financial holding company headquartered in Oakland, Maryland, operating primarily through its subsidiary, First United Bank & Trust. The company provides retail and commercial banking services through a network of 28 offices. As of the reporting date, the company was classified as a smaller reporting company.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Net Income (Loss) | $957,000 | $(5,111,000) |
| Net Income Available to Common Shareholders | $563,000 | $(5,501,000) |
| Diluted EPS | $0.09 | $(0.90) |
| Total Assets | $1,516,551,000 | $1,696,445,000 (Dec 31, 2010) |
| Net Loans | $914,631,000 | $987,615,000 (Dec 31, 2010) |
| Total Deposits | $1,127,580,000 | $1,301,646,000 (Dec 31, 2010) |
| Net Interest Income | $9,411,000 | $11,993,000 |
| Net Interest Margin (FTE) | 2.73% | 3.19% |
| Provision for Loan Losses | $1,344,000 | $3,555,000 |
| Allowance for Loan Losses | $21,409,000 | $22,138,000 (Dec 31, 2010) |
| Cash and Cash Equivalents | $153,363,000 | $299,313,000 (Dec 31, 2010) |
Material Changes vs. Prior Period
- Return to Profitability: The company reported a net income of $957,000, a significant improvement from the $5.1 million net loss in Q1 2010. This turnaround was driven by a $2.2 million reduction in the provision for loan losses and a $7.5 million decrease in other-than-temporary impairment (OTTI) charges on securities.
- Balance Sheet Contraction: Total assets decreased by approximately $180 million from year-end 2010. This was primarily due to a $146 million reduction in cash and interest-bearing deposits and a $174 million decrease in total deposits as the company repaid brokered deposits and wholesale borrowings to "right-size" the balance sheet.
- Net Interest Margin Compression: The net interest margin declined to 2.73% from 3.19% in the prior year. This was attributed to a shift in asset mix toward higher levels of cash and lower-yielding investment securities, as well as lower reinvestment rates in a low-interest-rate environment.
- Loan Portfolio Shift: Gross loans decreased by $29.2 million. A notable change was the movement of $44.5 million of motor vehicle retail installment contracts to "Loans Held for Sale" in anticipation of a sale (consummated in May 2011).
Outlook, Risks, and Management Commentary
- Asset Quality: Non-accrual loans increased to $38.6 million (4.0% of total loans) from $34.9 million (3.5%) at year-end 2010. However, management noted improvements in delinquency ratios across most segments, except for acquisition and development loans.
- Investment Portfolio Risks: The company holds a portfolio of Collateralized Debt Obligations (CDOs) valued at $10.7 million (fair value) with an amortized cost of $36.1 million. These securities carry significant unrealized losses ($25.5 million) and are classified as Level 3 assets due to a lack of active markets. Management recorded a $19,000 credit-related OTTI charge in Q1 2011.
- Liquidity Strategy: Management intends to continue deploying excess cash into the investment portfolio and repaying brokered deposits and wholesale borrowings at maturity to improve the net interest margin.
- Dividend Policy: The company has suspended cash dividends on common stock and deferred interest payments on junior subordinated debentures (TPS) and Series A Preferred Stock to preserve capital.
- Recent Transaction: A sale of $32.5 million in auto loan contracts was consummated in May 2011, generating a gain of approximately $1.4 million, which is expected to positively impact earnings and capital.
Key Facts for Investor Verification
- CDO Valuation: Verify the methodology and assumptions used by the independent third party to value the $36.1 million CDO portfolio, which is trading at a significant discount to amortized cost.
- Loan Sale Impact: Confirm the final financial impact of the May 2011 auto loan sale, including the $1.4 million gain and the restoration of $0.2 million in loan loss reserves for unsold contracts.
- Dividend Deferrals: Monitor the status of deferred interest on TPS debentures and preferred stock dividends, as future payments depend on earnings performance.
- Non-Performing Assets: Track the trend of non-accrual loans, particularly in the acquisition and development and commercial real estate segments, which showed increased delinquency ratios.
- Deposit Composition: Assess the stability of the deposit base following the significant runoff of brokered deposits and CDARS products.