Business Context and Reporting Period
Company: First United Corporation (Maryland corporation, parent of First United Bank & Trust).
Filing Type: Form 10-Q (Unaudited).
Reporting Period: Nine months and three months ended September 30, 2009.
Business Overview: The Corporation operates as a financial holding company providing retail and commercial banking services through 27 offices and 33 ATMs, alongside insurance services. The period was significantly impacted by the economic recession and the Troubled Asset Relief Program (TARP) Capital Purchase Program.
Key Financial Metrics
| Metric | Nine Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2008 | Three Months Ended Sep 30, 2009 |
|---|---|---|---|
| Net Interest Income | $40.5 million | $38.5 million | $13.3 million |
| Provision for Loan Losses | $10.8 million | $6.6 million | $6.9 million |
| Other Operating Income (Loss) | $0.6 million | $12.7 million | ($4.5 million) |
| Net (Loss)/Income | ($2.1 million) | $9.1 million | ($5.6 million) |
| Net (Loss)/Income Available to Common Shareholders | ($3.1 million) | $9.1 million | ($6.0 million) |
| Diluted EPS (Common) | ($0.51) | $1.49 | ($0.97) |
| Total Assets | $1.68 billion | $1.64 billion (Dec 31, 2008) | N/A |
| Total Deposits | $1.24 billion | $1.22 billion (Dec 31, 2008) | N/A |
| Shareholders' Equity | $105.8 million | $72.7 million (Dec 31, 2008) | N/A |
| Cash and Cash Equivalents | $99.7 million | $19.3 million (Dec 31, 2008) | N/A |
| Net Interest Margin | 3.68% | 3.67% | 3.53% |
Material Changes vs. Prior Period
- Net Loss vs. Profit: The Company reported a net loss of $3.1 million available to common shareholders for the nine months ended September 30, 2009, compared to net income of $9.1 million in the same period of 2008. This reversal was driven primarily by a $10.8 million other-than-temporary impairment (OTTI) charge on investment securities and a $4.3 million increase in the provision for loan losses.
- Investment Portfolio Impairment: Significant losses were recognized on pooled trust preferred securities (Collateralized Debt Obligations). Management determined six securities were other-than-temporarily impaired, resulting in an $8.7 million credit loss recognized in earnings for the quarter and $10.8 million year-to-date.
- Liquidity Position: Cash and cash equivalents increased dramatically from $19.3 million at year-end 2008 to $99.7 million at September 30, 2009. Management chose not to replace called investments to maintain higher liquidity levels.
- Capital Structure: Shareholders' equity increased by $33.1 million, primarily due to the issuance of $30.0 million in Fixed Rate Cumulative Perpetual Preferred Stock (Series A) and a warrant to the U.S. Treasury under the TARP Capital Purchase Program in January 2009.
- Loan Portfolio Quality: Non-accrual loans increased from $24.6 million (Dec 31, 2008) to $43.3 million (Sep 30, 2009). Total non-performing loans represented 4.03% of the total loan portfolio, up from 2.47%.
Guidance, Outlook, and Risks
- Management Commentary: Management stated that core operations remained strong with net interest income increasing $2.0 million year-over-year. However, the economic recession and distressed environment necessitated higher loan loss provisions and specific allocations for impaired loans, particularly in the acquisition and development sector.
- Capital Strategy: The Company is pursuing options to raise capital in the fourth quarter of 2009 to build reserves and position the bank for future opportunities. The TARP preferred stock issuance counts as Tier 1 capital.
- Dividend Restrictions: Due to TARP participation, the Company is prohibited from increasing quarterly cash dividends on common stock above $0.20 per share or repurchasing common stock without Treasury consent until the preferred stock is redeemed or January 30, 2012.
- Risks and Contingencies:
- Investment Risk: The market for pooled trust preferred securities is described as inactive and inefficient, with significant valuation uncertainty (Level 3 assets). Some underlying issuers have deferred payments.
- Credit Risk: Increased foreclosures and bankruptcies in operating geographic areas, alongside a decline in real estate sales, have heightened credit risk.
- Regulatory Risk: The Company is subject to restrictions on executive compensation and dividend payments under the Recovery Act and TARP terms.
Investor Verification Checklist
- OTTI Methodology: Verify the assumptions used in the cash flow testing for the $10.8 million impairment charge on trust preferred securities, specifically the default rates and recovery assumptions.
- Allowance Adequacy: Review the specific allocations for impaired loans, particularly the $60.6 million in real estate acquisition and development loans, to assess if the $16.9 million allowance is sufficient given rising non-accruals.
- Liquidity Management: Confirm the sustainability of the high cash position ($99.7 million) and the strategy for redeployment as the economic environment stabilizes.
- TARP Redemption: Monitor the timeline and conditions for redeeming the $30 million Series A Preferred Stock, noting the 5% dividend rate increasing to 9% in 2014.
- Non-Performing Assets: Track the trend of non-accrual loans (currently 4.03% of total loans) and the effectiveness of charge-off strategies.