Business Context and Reporting Period
Company: First United Corporation (FUNC)
Reporting Period: Fiscal year ended December 31, 2010
Business Overview: A Maryland financial holding company operating primarily through its subsidiary, First United Bank & Trust. The company provides retail and commercial banking services, insurance products, and trust services across four counties in Western Maryland and four counties in Northeastern West Virginia. As of December 31, 2010, the Corporation had total assets of approximately $1.70 billion, net loans of $988 million, and deposits of $1.30 billion.
Key Financial Metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Total Assets | $1,696.4 million | $1,743.8 million |
| Net Loans | $987.6 million | $1,101.8 million |
| Total Deposits | $1,301.6 million | $1,304.2 million |
| Net Interest Income | $41.6 million | $53.2 million |
| Net Interest Margin (FTE) | 2.71% | 3.56% |
| Provision for Loan Losses | $15.7 million | $15.6 million |
| Net Loss | $(10.2) million | $(11.3) million |
| Net Loss Attributable to Common Shareholders | $(11.8) million | $(12.8) million |
| Diluted EPS | $(1.91) | $(2.08) |
| Shareholders' Equity | $95.6 million | $100.6 million |
| Total Risk-Based Capital Ratio | 11.57% | 11.20% |
Material Changes vs. Prior Period
- Net Loss Improvement: The net loss attributable to common shareholders decreased by $1.0 million compared to 2009, driven primarily by a significant reduction in non-cash credit-related other-than-temporary impairment (OTTI) charges on the investment portfolio ($8.4 million in 2010 vs. $26.7 million in 2009).
- Net Interest Income Decline: Net interest income fell by $11.7 million (22%) due to a compressed net interest margin. This was caused by a shift in asset mix toward higher liquidity (cash and cash equivalents) to mitigate risk, lower interest rates, and a decline in loan balances.
- Loan Portfolio Contraction: Total loans decreased by $112.1 million (10%). Notable declines occurred in the acquisition and development category ($74.8 million decrease) and consumer loans ($31.3 million decrease), partially offset by growth in commercial real estate loans ($21.8 million increase).
- Asset Quality: Non-accrual loans decreased to $34.9 million from $46.6 million in 2009. However, net charge-offs increased to $13.7 million from $9.8 million. The allowance for loan losses increased to $22.1 million (2.19% of total loans).
- Investment Portfolio Restructuring: The company restructured its available-for-sale portfolio, transferring $117.1 million of securities to a trading portfolio to reduce interest rate and credit risk. This resulted in net losses of $6.5 million recognized in earnings.
Guidance, Outlook, and Risks
- Dividend and Interest Deferrals: At the request of the Federal Reserve Bank of Richmond, the Corporation deferred quarterly cash dividends on its Series A Preferred Stock (TARP) starting November 2010 and deferred interest payments on $41.73 million of Trust Preferred Securities (TPS) debentures starting March 2011. These deferrals prohibit the payment of common stock dividends.
- Strategic Plan for 2011: Management plans to reduce excess cash levels by paying off maturing liabilities (brokered deposits, FHLB advances) and shifting the deposit mix toward lower-cost core deposits to improve net interest margin.
- Regulatory Environment: The company faces increased regulatory compliance costs and capital requirements due to the Dodd-Frank Act. It is currently categorized as "well capitalized" by regulators.
- Key Risks:
- Geographic Concentration: Significant exposure to Western Maryland and Northeastern West Virginia real estate markets.
- Investment Portfolio: Continued unrealized losses on Collateralized Debt Obligations (CDOs), which are valued at $9.8 million (fair value) against an amortized cost of $36.5 million.
- Liquidity: While liquidity is high, the cost of maintaining this position negatively impacts earnings.
Investor Verification Checklist
- Dividend Status: Verify the current status of the deferral on Series A Preferred Stock and TPS debentures, as this legally prohibits common dividends.
- CDO Portfolio Valuation: Review the specific assumptions used by the third-party valuator for the Level 3 CDO portfolio, given the significant unrealized losses ($26.7 million).
- Loan Concentration: Assess the quality of the remaining $157 million in acquisition and development loans, which historically carry higher risk.
- Capital Adequacy: Confirm the "well capitalized" status remains intact given the deferral of TPS interest payments and potential future OTTI charges.
- Liquidity Deployment: Monitor the execution of the 2011 plan to deploy excess cash into higher-yielding assets to reverse the margin compression.