First United Corporation — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing, not a standalone quarterly report; fourth-quarter results are also summarized below. First United is a Maryland-based financial holding company whose principal business is community banking in western Maryland and northeastern West Virginia.
Financial performance and condition
| Metric | 2011 | 2010 |
|---|---|---|
| Total assets, year-end | $1.391 billion | $1.696 billion |
| Loans / net loans, year-end | $938.7 million / $919.2 million | $1.010 billion / $987.6 million |
| Deposits, year-end | $1.028 billion | $1.302 billion |
| Total borrowings, year-end | $243.9 million | $282.2 million |
| Shareholders’ equity, year-end | $96.7 million | $95.6 million |
| Net interest income | $38.3 million | $41.6 million |
| Net income (loss) | $3.6 million | $(10.2) million |
| Net income (loss) available to common shareholders | $2.0 million | $(11.8) million |
| Basic and diluted EPS | $0.33 | $(1.91) |
| Net interest margin, fully taxable-equivalent basis | 2.96% | 2.71% |
| Operating cash flow | $63.0 million | $141.9 million |
Fourth-quarter 2011 net income was $850,000, or $0.07 per share, compared with a net loss of $4.5 million, or $0.79 per share, in fourth-quarter 2010.
For 2011, the provision for loan losses was $9.2 million, down from $15.7 million. The allowance for loan losses was $19.5 million, or 2.08% of loans, versus $22.1 million, or 2.19%. Net charge-offs were $11.8 million, compared with $13.7 million. Non-accrual loans increased to $38.2 million from $34.9 million; other real estate owned was $16.7 million.
Regulatory capital ratios improved: consolidated total risk-based capital was 13.05%, Tier 1 risk-based capital 11.30%, and Tier 1 leverage 9.10%. The Bank was also reported as “well capitalized.”
Material changes versus 2010
- Common-shareholder results returned to profit, principally as loan-loss provision expense declined by $6.6 million and securities and other-real-estate losses fell. The 2011 results also included a $1.4 million gain on the sale of part of the indirect auto portfolio. These improvements were partly offset by lower net interest income and a smaller tax benefit.
- Net interest income fell $3.3 million despite a higher net interest margin: lower loan balances and yields reduced interest income, while lower funding balances and rates reduced interest expense.
- Assets declined 18.0%, deposits 21.0%, and loans 7.0% year over year. Management said it used excess cash to repay brokered deposits, other wholesale funding, and FHLB advances, and to reduce the balance sheet to better match capital levels.
- Cash and cash equivalents fell to $65.1 million from $299.3 million. Financing activities used $312.2 million of cash, largely reflecting the $273.9 million deposit decline and $36.1 million of long-term borrowing repayments.
- The consumer portfolio fell sharply, including a $32.5 million sale of indirect auto loans. Commercial and industrial loans rose $8.7 million; commercial real estate and acquisition-and-development balances declined.
Outlook, risks, and unusual items
- Outlook: No numerical earnings or margin guidance is provided. Management highlighted local economic conditions, loan and deposit yield pressure, interest-rate changes, and regulatory developments as continuing challenges. Management stated it believed liquidity was adequate and did not identify known trends or commitments expected to materially impair liquidity.
- Funding and liquidity: At year-end, reported additional capacity included $10 million of FHLB borrowing capacity, $26 million of unused lines at other financial institutions, a $9 million Federal Reserve line, and approximately $154 million through wholesale money-market funds. Funding availability and cost remain risks.
- Dividend and regulatory restrictions: At regulators’ request, the company deferred Series A preferred dividends beginning in November 2010 and interest payments on approximately $41.73 million of trust preferred debentures beginning in March 2011. Deferred preferred dividends were approximately $1.9 million and deferred debenture interest approximately $2.2 million at year-end. Common dividends were suspended; management gave no assurance when payments might resume. The company and Bank must obtain prior regulatory approval for distributions under informal agreements.
- Credit concentration: Approximately 15% of loans, or $143 million, were acquisition, construction, and development credits. Management noted potential heightened regulatory scrutiny of the Bank’s commercial real estate concentration. Weak regional property and credit markets could cause further losses.
- Investment valuation: Available-for-sale securities had a $22.1 million net unrealized loss at year-end, primarily associated with 18 pooled trust-preferred CDO securities carried at $9.4 million fair value against $36.4 million amortized cost. Fair value relies on significant unobservable inputs. The company recorded $19,000 of credit-related OTTI in 2011, versus $8.4 million in 2010.
- Litigation: A class action filed in Maryland during fourth-quarter 2011 challenges the Bank’s mortgage table-funding process and certain fees. The Bank intends to defend the case; potential legal fees and damages cannot be estimated clearly from the filing. Management separately stated it did not believe current legal actions overall would materially affect results.
- Subsidiary sale: Effective January 1, 2012, the Insurance Group sold substantially all assets, net of cash, for $3.6 million. 2011 insurance revenues were $2.4 million; related pre-tax operating expenses, net of specified items, were $2.2 million. Management did not expect a material future financial impact.
- Other items: Goodwill of $12.9 million was tested and management concluded it was not impaired, based on a valuation substantially dependent on discounted future benefits and assumptions. The independent auditor issued an unqualified opinion on the financial statements; management reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Whether non-accrual loans, criticized credits, TDRs ($18.0 million at year-end), and OREO continue to stabilize, and whether the $19.5 million allowance remains adequate.
- The recoverability and valuation assumptions for the Level 3 CDO portfolio, including issuer deferrals/defaults and the potential effect of further market or credit deterioration.
- Progress toward resuming preferred dividends and trust-preferred interest payments, the accumulated arrears, and any continuing restrictions on common dividends or capital distributions.
- The outcome, defense costs, and potential exposure from the mortgage-fee class action; the filing does not provide a clear estimate of damages.
- Whether deposit and asset reductions, lower loan balances, and the shift away from wholesale funding support sustainable margins and liquidity without constraining earnings or lending.
- The impact of the Insurance Group sale and related referral/non-compete arrangements, and any subsequent developments after December 31, 2011.