Business Context and Reporting Period
Company: First United Corporation (FUNC)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: A Maryland financial holding company operating primarily through First United Bank & Trust. The company serves Western Maryland and Northeastern West Virginia with 28 banking offices, offering retail and commercial banking, insurance, and trust services. As of December 31, 2009, total assets were approximately $1.74 billion.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Total Assets | $1,743.7 million | $1,639.1 million |
| Net Loans | $1,101.8 million | $1,120.2 million |
| Total Deposits | $1,304.2 million | $1,222.9 million |
| Net Interest Income | $53.2 million | $52.2 million |
| Net Interest Margin | 3.56% | 3.68% |
| Provision for Loan Losses | $15.6 million | $12.9 million |
| Net Loss | $(11.3) million | $8.9 million (Income) |
| Loss Per Share (Basic/Diluted) | $(2.08) | $1.45 |
| Shareholders' Equity | $100.6 million | $72.7 million |
| Total Risk-Based Capital Ratio | 11.20% | 12.18% |
Material Changes vs. Prior Period
- Net Loss vs. Income: The company reported a net loss of $11.3 million in 2009, a reversal from the $8.9 million net income in 2008. This was primarily driven by $26.7 million in other-than-temporary impairment (OTTI) charges on investment securities and a $2.7 million increase in the provision for loan losses.
- Investment Portfolio Impairment: Significant non-cash charges were recognized on pooled trust preferred securities and collateralized mortgage obligations due to the distressed market environment. Approximately $26.5 million of OTTI losses were recognized in earnings.
- Loan Portfolio Quality: Non-accrual loans increased significantly from $24.6 million in 2008 to $46.6 million in 2009. The allowance for loan losses increased to $20.1 million (1.79% of total loans) from $14.3 million (1.26% of total loans).
- FDIC Premiums: Operating expenses increased by $3.5 million due to higher FDIC deposit insurance premiums, including a special assessment charge.
- Capital Injection: Shareholders' equity increased by $27.8 million, largely due to the receipt of $30 million from the U.S. Treasury under the Capital Purchase Program (CPP) in January 2009.
Guidance, Outlook, and Risks
- Dividend Reduction: In December 2009, the quarterly common stock dividend was reduced by 50% to $0.10 per share, effective February 1, 2010. The company is restricted from increasing dividends above $0.20 per share without Treasury consent until January 2012 or until the TARP preferred stock is redeemed.
- Economic Outlook: Management anticipates continued challenges from the national recession, specifically regarding real estate values and credit availability in their core markets (Western Maryland and West Virginia).
- Key Risks:
- Real Estate Concentration: Approximately 20% of the loan portfolio is secured by real estate construction and development projects. A decline in local real estate markets poses a significant risk.
- Investment Valuation: The company holds Level 3 assets (pooled trust preferred securities) with significant unrealized losses. Continued market illiquidity could lead to further impairments.
- Regulatory Compliance: Increased regulatory expenses and capital requirements due to the banking crisis and TARP participation.
Investor Verification Checklist
- OTTI Methodology: Verify the assumptions used in the cash flow models for the $26.7 million impairment charge on trust preferred securities.
- Non-Accrual Trends: Monitor the trajectory of non-accrual loans, which nearly doubled year-over-year, and the adequacy of the allowance for loan losses.
- TARP Restrictions: Confirm the impact of TARP restrictions on capital management, specifically the inability to repurchase stock or increase dividends without Treasury approval.
- Real Estate Exposure: Assess the specific performance of the $226 million real estate construction and development loan portfolio.
- Liquidity Position: Review the company's reliance on brokered deposits (14% of total deposits) and wholesale funding sources.