First United Corporation — 2013 Form 10-K
Business context and reporting period. This filing covers the fiscal year ended December 31, 2013; it is an annual report, and the supplied text does not provide a separate fourth-quarter results breakdown. First United is a community banking holding company operating mainly in western Maryland and northeastern West Virginia through First United Bank & Trust, with 25 banking offices. The consolidated financial statements received an unqualified audit opinion.
Financial performance and condition
| Metric | 2013 | 2012 |
|---|---|---|
| Total assets | $1.334 billion | $1.321 billion |
| Net loans | $796.6 million | $858.8 million |
| Deposits | $977.4 million | $976.9 million |
| Shareholders’ equity | $101.3 million | $98.9 million |
| Interest income | $49.9 million | $53.1 million |
| Net interest income | $38.2 million | $39.1 million |
| Net income | $6.4 million | $4.7 million |
| Net income available to common shareholders | $4.7 million; $0.75 per share | $3.0 million; $0.48 per share |
| Provision for loan losses | $0.4 million | $9.4 million |
| Net interest margin, FTE | 3.25% | 3.30% |
- Profit and earnings drivers: Common income increased $1.7 million, primarily because net interest income after provision improved by $8.0 million as credit costs fell. This was partly offset by lower other income and higher expenses, including a $2.0 million increase in other real estate owned (OREO) expense, and higher tax expense.
- Cash flow: Operating activities provided $18.7 million, compared with $15.2 million in 2012. Investing activities used $63.6 million, mainly reflecting $205.1 million of securities purchases, partly offset by maturities, sales, and loan runoff. Financing activities provided $4.9 million. Cash and cash equivalents fell to $43.1 million from $83.1 million.
- Debt and liquidity: Total borrowings were $226.3 million, including $135.9 million of FHLB advances, $43.7 million of repurchase agreements, and $46.7 million of junior subordinated debt. Management reported $11.2 million of additional FHLB borrowing capacity, $25 million of unused correspondent lines, a $30 million Federal Reserve line, and approximately $49 million available through wholesale money-market funds. Management considered liquidity adequate.
- Capital: At year-end, the Corporation’s total risk-based capital ratio was 15.29% and the Bank’s was 16.17%; both were classified as well capitalized under then-current prompt-corrective-action rules. The Corporation’s Tier 1 leverage ratio was 10.97%.
Material changes versus 2012
- Loans declined $64.6 million, or 7.4%, while deposits were nearly unchanged. Management attributed the reduction in time deposits to a strategy of shifting toward lower-cost core deposits; non-interest-bearing demand deposits increased by $28.0 million.
- The allowance for loan losses fell to $13.6 million from $16.0 million. Net charge-offs declined to $2.8 million from $12.8 million; non-accrual loans declined to $17.4 million from $19.9 million. Management reported fewer downgrades and improved delinquency levels, though some portfolio risks remained.
- Other operating expenses rose 7.3% to $42.4 million, principally because OREO expense increased to $2.9 million from $0.9 million, including higher property valuation write-downs.
- Investment securities increased in fair value to $336.6 million from $223.3 million. The available-for-sale portfolio had amortized cost of $368.3 million and fair value of $336.6 million at year-end, reflecting a net unrealized loss of about $31.7 million.
- FTE net interest margin narrowed by five basis points. Lower loan balances and yields reduced interest income, partly offset by reduced funding costs.
Outlook, risks, contingencies, and unusual items
- Outlook: Management gave no quantified earnings or revenue guidance. It cited local economic conditions, competition and yield pressure, interest-rate changes, and regulatory changes as continuing challenges. The Bank was asset-sensitive at year-end; modeled net interest income increased under rising-rate scenarios and declined under a 100-basis-point decline, subject to modeling assumptions.
- Credit and concentration risk: Lending is concentrated in the company’s regional markets and heavily involves real estate. Approximately 13% of loans, or $107 million, were acquisition, construction, and development loans. A downturn in local real estate or borrower conditions could increase losses or impair collateral values.
- OREO and credit reserves: OREO totaled $17.0 million. Management said the $13.6 million loan-loss allowance was adequate, but emphasized that estimates depend on uncertain economic, collateral, and borrower conditions.
- Structured securities and Volcker Rule: The Bank held $37.1 million principal amount of collateralized debt obligations (CDOs) backed primarily by trust preferred securities or subordinated debt; fair value was $17.5 million. These Level 3 holdings rely on significant unobservable valuation inputs. No new credit-related other-than-temporary impairment was recorded in 2013, but the securities remain exposed to valuation and liquidity risk. Management concluded its holdings were not prohibited under the Volcker Rule; regulatory interpretation and potential required disposal remained a risk.
- Dividend and payment restrictions: Common-stock dividends were suspended, with no stated plan to resume in the foreseeable future. Preferred dividends had been deferred since 2010; approximately $5.3 million was accrued at year-end. Interest on trust-preferred-related junior subordinated debentures had also been deferred, with approximately $6.7 million accrued. In February 2014, regulators approved a March 2014 payment and termination of that deferral, but future payments remained subject to approval and available Bank dividends. The preferred dividend rate increased from 5% to 9% beginning February 15, 2014.
- Other items: A one-time BOLI death benefit increased 2012 income by approximately $0.7 million. Goodwill of $11.0 million was not impaired under management’s valuation analysis. Net deferred tax assets were $29.2 million; realization depends in part on future taxable income and tax-planning strategies. Management reported no material adverse effect expected from pending legal actions.
- Regulation: Basel III capital rules were scheduled to phase in beginning in 2015. Management expected the company to comply, while acknowledging that regulatory changes could raise costs or constrain distributions and activities.
Important facts for investors to verify
- Whether credit improvement and lower provisioning are sustainable, particularly given real-estate and regional loan concentrations.
- The quality, valuation assumptions, liquidity, and regulatory treatment of the $17.5 million fair-value CDO portfolio.
- Whether the Bank can maintain capital and liquidity while supporting the holding company’s debt-service needs and any future regulatory requirements.
- The status of approvals and payments on deferred trust-preferred interest and preferred dividends, and the implications for common-shareholder distributions.
- The assumptions supporting deferred tax asset realization and the absence of a goodwill impairment charge.
- Cash-flow and balance-sheet effects of continued securities purchases, loan runoff, and the shift in deposit composition.