First United Corporation — Q1 2013 Form 10-Q
Business context and period. First United Corporation is a bank holding company whose primary subsidiary is First United Bank & Trust. This unaudited report covers the three months ended March 31, 2013; balance-sheet comparisons are to December 31, 2012, and operating results are compared with Q1 2012. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions unless stated otherwise.
Financial results and condition
- Earnings: Net income was $1.92 million, versus a $2.67 million loss in Q1 2012. Net income available to common shareholders was $1.49 million, or $0.24 per share, compared with a $3.08 million loss, or $0.50 per share. Return on average assets was 0.59% and return on average equity was 7.81% (both annualized).
- Revenue and margin: GAAP net interest income was $9.33 million, down from $9.88 million. Fully tax-equivalent net interest income was $9.57 million versus $10.20 million; the FTE net interest margin declined to 3.26% from 3.30%. Total other operating income was $3.66 million versus $4.76 million, including lower securities gains and the absence of a $0.7 million BOLI death benefit recognized in Q1 2012. Operating expenses rose to $9.63 million from $9.14 million.
- Credit costs: Provision for loan losses fell to $0.87 million from $8.12 million, principally because Q1 2012 included large charge-offs. Net charge-offs were $0.89 million versus $10.39 million; the annualized net-charge-off ratio was 0.41% versus 4.47%. The allowance for loan losses was $16.03 million, or 1.86% of loans.
- Balance sheet and liquidity: Total assets were $1.323 billion, net loans $843.6 million, deposits $975.8 million, and shareholders’ equity $101.9 million. Cash and cash equivalents totaled $84.8 million. Deposits declined $1.1 million from year-end, while non-interest-bearing deposits increased $22.8 million. Cash from operating activities was $2.51 million; investing activities provided $0.97 million and financing activities used $1.72 million. Cash increased $1.76 million during the quarter.
- Debt and capital: Short-term borrowings were $38.6 million and long-term borrowings $182.7 million. The Corporation reported total capital of 14.68%, Tier 1 risk-based capital of 13.12%, and Tier 1 leverage of 11.02%; the Bank’s corresponding ratios were 15.19%, 13.91%, and 11.67%. Both were categorized as well capitalized by regulators.
Material changes and notable items
- Net income improved by $4.59 million year over year, driven chiefly by the $7.26 million lower loan-loss provision. Lower interest income, lower non-interest income, and higher operating expenses partly offset that improvement.
- Gross loans declined $15.2 million from year-end to $859.7 million. Commercial real estate and acquisition-and-development balances fell; residential mortgages increased, including an approximately $8.4 million loan-pool purchase.
- Non-accrual loans increased to $22.6 million from $19.9 million at year-end, but were below $28.6 million in March 2012. They represented 2.63% of loans. Other real estate owned declined to $16.2 million from $17.5 million at year-end.
- Available-for-sale securities had a $20.6 million net unrealized loss at quarter-end. The $13.8 million fair value of the Level 3 collateralized debt obligation portfolio compared with $36.9 million amortized cost; $23.1 million of unrealized losses related to 17 pooled trust preferred securities. Management reported no credit-related OTTI charges in Q1 2013 and attributed remaining unrealized losses principally to marketability, liquidity, and market conditions.
Outlook, risks, and contingencies
- Management said loan-credit trends were stabilizing, with fewer downgrades and improved delinquency levels, and considered the allowance adequate. Results for the quarter are not necessarily indicative of full-year results. The filing provides no numerical earnings or revenue guidance.
- Management identified interest-rate changes, deposit flows and funding costs, loan demand and credit quality, portfolio composition, economic conditions, and regulatory changes as risks. The Corporation reported being asset-sensitive to interest rates and said portfolio restructuring had better positioned it for a rising-rate environment.
- At the Reserve Bank’s request, the Corporation continued deferring interest on trust preferred debentures; cumulative deferred interest was approximately $4.9 million. Dividends on Series A preferred stock remained suspended, with approximately $4.0 million accrued. Common dividends had also been suspended; resumption timing was uncertain and common dividends require payment of accrued deferred interest and preferred dividends first.
- Loan commitments were $81.9 million and standby letters of credit $1.2 million. Management said it believed liquidity was adequate and reported no material legal proceedings. Disclosure controls were assessed as effective at a reasonable-assurance level.
Most important facts for investors to verify
- Whether non-accrual loans, impaired commercial real estate and acquisition-and-development credits, and collateral values continue to improve—and whether the allowance remains adequate.
- The assumptions and sensitivities underlying the Level 3 CDO valuations, including the potential effect of further defaults, deferrals, or reduced collateral support.
- Whether net interest margin and recurring revenue can stabilize as loans reprice or run off and low-rate securities replace maturing assets.
- The Corporation’s ability to resume trust-debenture interest and preferred dividends, the accumulated obligations, and the resulting restrictions on common dividends.
- The implications of final U.S. Basel III capital rules, including whether trust preferred debentures continue to qualify as regulatory capital.