First United Corporation — Q1 2014 Form 10-Q
Business context and reporting period. First United Corporation is a Maryland bank holding company whose primary subsidiary is First United Bank & Trust. This unaudited report covers the three months ended March 31, 2014; balance-sheet comparisons are to December 31, 2013. Amounts below are in millions unless otherwise indicated.
Key financial metrics
| Metric | Q1 2014 | Comparable period / date |
|---|---|---|
| Total assets | $1,355.5 | $1,333.5 at Dec. 31, 2013 |
| Total loans | $814.0 | $810.2 at Dec. 31, 2013 |
| Total deposits | $1,001.0 | $977.4 at Dec. 31, 2013 |
| Net interest income | $8.9 | $9.3 in Q1 2013 |
| Net interest margin, FTE | 3.07% | 3.26% in Q1 2013 |
| Net income | $1.4 | $1.9 in Q1 2013 |
| Net income available to common shareholders; diluted EPS | $0.9; $0.15 | $1.5; $0.24 in Q1 2013 |
| Operating cash flow | $(4.4) | $2.5 provided in Q1 2013 |
| Cash and cash equivalents | $43.8 | $43.1 at Dec. 31, 2013 |
| Short-term and long-term borrowings | $43.6 and $182.7 | $43.7 and $182.7 at Dec. 31, 2013 |
| Shareholders’ equity | $107.9 | $101.3 at Dec. 31, 2013 |
Interest income was $11.8 million and interest expense was $2.8 million. Provision for loan losses was $0.4 million; operating expenses were $9.8 million. Annualized return on average assets was 0.41%, and return on average equity was 5.18%.
Material changes and management commentary
- Common earnings declined year over year, with diluted EPS down from $0.24 to $0.15. Management attributed the reduction mainly to lower loan interest income, weaker other income—including a shift from net gains to net losses—and higher expenses, partly offset by a lower loan-loss provision.
- Net interest margin fell to 3.07% from 3.26%. Average loans were lower year over year, and loan yields also declined; lower funding costs provided a partial offset. Management said it would continue focusing deposit pricing on full-relationship customers and shifting balances toward lower-cost transaction and money-market accounts.
- Loans grew $3.8 million from year-end. Commercial and industrial loans rose $18.9 million, largely due to one new relationship, while commercial real estate and acquisition-and-development loans declined. Deposits increased $23.6 million, including a $22.7 million increase in non-interest-bearing deposits.
- The allowance for loan losses declined to $12.6 million from $13.6 million at year-end and $16.0 million a year earlier. Net charge-offs increased to $1.4 million from $0.9 million in Q1 2013; the allowance was 1.54% of loans versus 1.86% a year earlier. Non-accrual loans were $17.1 million, slightly below year-end, while loans past due 30 days or more fell to 1.69% of the portfolio from 2.10%.
- Other real estate owned declined to $15.6 million from $17.0 million, but OREO expense rose to $0.46 million from $0.02 million, mainly reflecting higher valuation write-downs.
- Available-for-sale securities were $361.5 million at fair value, up from $336.6 million at year-end. The portfolio included $23.1 million of Level 3 collateralized debt obligations (CDOs), with $15.1 million in unrealized losses. Management reported no credit-related OTTI charges on these securities in Q1; valuations depend on discounted-cash-flow models and significant unobservable inputs.
Liquidity, debt, capital, and outlook
- Cash and cash equivalents increased $0.7 million during the quarter. Investing cash outflow was $18.4 million, principally reflecting $38.4 million of securities purchases, partly offset by maturities and sales. Financing cash inflow was $23.6 million, largely from deposit growth.
- Operating cash flow was negative $4.4 million. The cash-flow statement reports $9.6 million of interest paid, including deferred trust-preferred debt interest paid after regulatory approval; accrued interest payable and other liabilities fell $8.5 million. These timing effects are important when assessing cash generation.
- Management said liquidity was adequate and identified available borrowing capacity of $40.0 million through correspondent-bank lines, $30.1 million at the Fed Discount Window, and approximately $13.3 million at the FHLB. The company described itself as asset-sensitive to interest-rate movements and said its investment restructuring better positioned it for rising rates.
- At March 31, consolidated and Bank total risk-based capital ratios were 15.70% and 16.50%, respectively; both were above the stated 10% well-capitalized threshold. Regulators categorized the Corporation and Bank as well capitalized. Management expected to comply with forthcoming Basel III requirements.
- Common-stock dividends remained suspended at quarter-end. In April, the Corporation received Federal Reserve approval for June trust-preferred interest payments and declared the Series A preferred dividend due May 15, authorizing payment of accrued unpaid preferred dividends. Future payments remain subject to regulatory approvals and the Bank’s ability to pay dividends; the filing provides no assurance that approvals will continue. The filing gives no earnings or revenue guidance.
- Key risks include credit losses and collateral values, interest-rate and deposit-cost changes, valuation uncertainty in the CDO portfolio, and restrictions on upstream Bank dividends and parent-company payments. The Corporation also reported $89.4 million of loan commitments and $1.1 million of standby letters of credit at quarter-end.
Important facts for investors to verify
- Whether the improved delinquency and non-accrual trends persist, and whether higher Q1 net charge-offs—particularly in acquisition-and-development loans—require additional provisions.
- The assumptions and sensitivity underlying the $23.1 million Level 3 CDO valuation, including the $15.1 million unrealized loss position and performance of underlying issuers.
- Cash-flow normalization after the quarter’s deferred trust-preferred interest payments, and the company’s ability to obtain approvals for future debt interest and preferred-dividend payments.
- Whether deposit growth and mix improvements can offset pressure from lower loan balances and yields and support net interest margin.
- The timing and conditions for resuming common dividends; preferred dividends and regulatory constraints remain material to common shareholders.