Business Context and Reporting Period
Company: First United Corporation (Maryland)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Six months and three months ended June 30, 2009
Business Overview: First United Corporation is a financial holding company primarily operating through its subsidiary, First United Bank & Trust. The bank provides retail and commercial banking services through 27 offices and 33 ATMs. The corporation also operates an insurance group and finance subsidiaries.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 | Three Months Ended June 30, 2009 |
|---|---|---|---|
| Net Interest Income | $27,189 | $25,253 | $13,363 |
| Net Income | $3,528 | $7,249 | $1,149 |
| Net Income Available to Common Shareholders | $2,876 | $7,249 | $756 |
| Diluted EPS (Common) | $0.47 | $1.19 | $0.12 |
| Provision for Loan Losses | $3,920 | $2,353 | $1,871 |
| Total Assets (as of June 30, 2009) | $1,634,380 | - | - |
| Total Deposits (as of June 30, 2009) | $1,201,858 | - | - |
| Cash and Cash Equivalents (as of June 30, 2009) | $48,632 | - | - |
| Net Interest Margin (Six Months) | 3.76% | 3.67% | - |
Material Changes vs. Prior Period
- Net Income Decline: Net income available to common shareholders dropped 60% year-over-year for the six-month period ($2.88M vs. $7.25M). This was driven primarily by a $2.2 million other-than-temporary impairment (OTTI) charge on securities, a $0.4 million realized loss on the investment portfolio, a $1.6 million increase in the provision for loan losses, and an $0.8 million FDIC special assessment.
- Net Interest Income Growth: Despite lower interest rates, net interest income increased by $1.9 million (7.7%) due to a significant decrease in interest expense ($5.9 million) outpacing the decrease in interest income ($3.8 million). The net interest margin improved to 3.76% from 3.67%.
- Loan Portfolio: Total loans decreased by $5.9 million to $1.13 billion. Commercial loans grew by $21.4 million, offset by declines in residential mortgage/construction ($9.2M) and installment loans ($18.1M).
- Non-Performing Assets: Non-accrual loans increased significantly to $46.7 million (4.20% of total loans) from $24.6 million (2.47%) at year-end 2008.
- Capital Injection: In January 2009, the company participated in the Treasury's Capital Purchase Program (CPP), issuing $30 million in preferred stock and a warrant, which increased shareholders' equity by approximately $28.4 million.
Guidance, Outlook, Risks, and Unusual Items
- Unusual Items:
- OTTI Charges: The company recognized $2.2 million in credit losses related to trust preferred securities (collateralized debt obligations) deemed other-than-temporarily impaired. Total OTTI losses were $5.8 million, with $3.6 million recorded in other comprehensive income.
- FDIC Assessment: An $0.8 million special assessment charge was recognized in the second quarter.
- Stock Compensation Reversal: Approximately $148,000 in previously recognized stock-based compensation expense was reversed due to the unlikelihood of meeting performance thresholds for 2008 LTIP grants.
- Investment Portfolio Risks: The portfolio contains $16.7 million in Level 3 assets (trust preferred securities) with significant unrealized losses ($51.6 million). Management notes the market for these securities is inactive and inefficient, contributing to depressed pricing. While management does not intend to sell, the securities are subject to credit risk and potential further impairment.
- Loan Quality Risks: The increase in the provision for loan losses reflects specific allocations for impaired loans (primarily acquisition and development) where collateral is insufficient, as well as qualitative factors related to the recession. Net charge-offs were $3.9 million for the six months ended June 30, 2009.
- Liquidity and Capital: The company is categorized as "well capitalized" under federal regulatory requirements. Liquidity is being managed by reducing indirect lending and increasing short-term investments. The company repaid $41 million in brokered money market deposits in Q2 2009.
- Dividend Restrictions: Due to the CPP participation, the company is restricted from increasing common dividends above $0.20 per share or repurchasing common stock without Treasury consent until the preferred stock is redeemed or January 30, 2012.
Investor Verification Checklist
- OTTI Methodology: Verify the assumptions used in the cash flow testing for the trust preferred securities, specifically the default rates and recovery rates applied to determine the $2.2 million credit loss.
- Allowance Adequacy: Review the specific allocations for impaired loans and the qualitative factors used to justify the $14.4 million allowance for loan losses given the 4.20% non-accrual rate.
- Level 3 Valuations: Assess the sensitivity of the $16.7 million Level 3 asset valuation to changes in credit spreads and liquidity premiums, given the lack of active market trading.
- Loan Concentration: Confirm the exposure to real estate acquisition and development loans ($61.7 million) and the status of collateral appraisals for these assets.
- Deposit Stability: Monitor the trend of brokered deposits versus retail deposits following the repayment of $41 million in brokered funds.