First United Corporation — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. First United is a financial holding company whose primary subsidiary is First United Bank & Trust; it also provides insurance and other financial services.
Financial performance and condition
| Metric | Q2 2011 / June 30, 2011 | Comparable period / prior year-end |
|---|---|---|
| Net income (loss) | $1.13 million for Q2; $2.09 million for six months | Q2 2010: loss of $0.92 million; six months 2010: loss of $6.03 million |
| Common earnings per share | $0.12 Q2; $0.21 six months | Q2 2010: ($0.21); six months 2010: ($1.11) |
| Net interest income | $9.55 million Q2; $19.02 million six months | Q2 2010: $10.84 million; six months 2010: $22.83 million |
| Net interest margin | 2.95% Q2; 2.85% six months (FTE) | Q2 2010: 2.81%; six months 2010: 2.99% |
| Total assets / net loans | $1.46 billion / $915.4 million | December 31, 2010: $1.70 billion / $987.6 million |
| Deposits / borrowings | $1.105 billion / $243.4 million total | December 31, 2010: $1.302 billion / $282.2 million |
| Cash and cash equivalents | $133.4 million | December 31, 2010: $299.3 million |
| Shareholders’ equity | $98.1 million | December 31, 2010: $95.6 million |
For the six months, operating cash flow was $44.9 million, versus $138.2 million in 2010. Investing activities provided $25.1 million, while financing activities used $235.9 million, mainly reflecting deposit runoff and debt repayments. Cash declined by $165.9 million during the period. The filing does not provide a clear consolidated profit-margin figure.
Material changes versus comparable periods
- Common shareholders moved from a $6.8 million loss in first-half 2010 to $1.3 million of income in first-half 2011. Management attributed the improvement chiefly to lower loan-loss provisioning and substantially lower securities impairment and other losses, plus a $1.4 million gain on an indirect auto loan sale.
- These improvements were partly offset by lower net interest income: average earning assets and loan balances declined, and reinvestment yields were lower. First-half FTE net interest margin declined 14 basis points year over year, although Q2 margin improved year over year.
- Total deposits fell $197.1 million, including repayment of brokered deposits and maturities of CDARS deposits. Long-term borrowings fell $35.5 million, primarily from repayment of a maturing FHLB advance.
- Gross loans declined $73.4 million from year-end; the decline was $40.9 million excluding the $32.5 million indirect auto portfolio sale. Consumer loans fell notably following that sale.
Credit, liquidity, capital, and outlook
- Provision for loan losses was $4.6 million for the first half, down from $7.2 million; net charge-offs rose to $5.7 million from $3.5 million. The allowance was $21.0 million, or 2.24% of loans. Non-accrual loans increased from $34.9 million at year-end to $40.1 million; total non-accrual and 90-days-past-due loans were $43.3 million. Commercial and industrial non-accruals rose sharply, primarily due to one large participation loan.
- Other real estate owned was $19.1 million. The company reported $1.0 million of first-half OREO write-downs. Total troubled debt restructurings were $15.4 million.
- The available-for-sale securities portfolio had $239.3 million fair value against $262.2 million amortized cost. Eighteen pooled trust-preferred CDO securities were Level 3 assets valued at $10.7 million, with approximately $25.5 million in unrealized losses. The company recorded $19,000 of credit-related impairment for the first half and none in Q2.
- Management said liquidity was adequate and planned to continue using cash to repay brokered deposits, non-relationship certificates of deposit, and wholesale borrowings. It intended to repay a $15 million FHLB advance at its December 2011 maturity, subject to sufficient liquidity. Management expected net interest margin to improve as excess cash was deployed and higher-cost funding ran off; no specific earnings guidance was provided.
- At June 30, the company and bank were categorized as well capitalized. Consolidated total risk-based capital was 12.60%, Tier 1 risk-based capital 10.84%, and Tier 1 leverage 8.68%; the bank’s corresponding ratios were 12.73%, 11.46%, and 9.17%.
- The parent deferred interest on trust-preferred debentures; cumulative deferred interest was approximately $1.0 million. It also deferred two 2011 Series A preferred dividends of approximately $0.4 million each and suspended common cash dividends starting in 2011. Deferred amounts and future payments depend on earnings. Management identified interest-rate, credit-quality, economic, deposit-flow, and regulatory risks.
Key facts for investors to verify
- Whether non-accrual, criticized, and restructured loans stabilize, and whether charge-offs remain elevated.
- The assumptions and sensitivity behind the Level 3 CDO valuations, including issuer deferrals/defaults and potential further impairment.
- Whether deposit runoff, planned debt repayments, and loan demand leave liquidity adequate without pressuring earnings.
- Whether earnings support resumed trust-preferred interest and preferred dividends; common dividends remain suspended.
- Whether the anticipated margin improvement materializes amid low interest rates and a shrinking loan portfolio.