First United Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are with December 31, 2011. First United is a Maryland financial holding company whose primary business is community banking through First United Bank & Trust. Effective January 1, 2012, it sold substantially all of its insurance agency assets.
Financial results and position
Amounts below are in millions, except per-share data and ratios.
| Metric | Q1 2012 / March 31, 2012 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $9.9 ($10.2 fully taxable equivalent) | $9.5 ($9.9 fully taxable equivalent) in Q1 2011 |
| Net interest margin | 3.30% fully taxable equivalent | 2.73% in Q1 2011; 2.96% for 2011 |
| Net income (loss) | $(2.7); common shareholders’ loss $(3.1), or $(0.50) per share | Net income $1.0; common income $0.6, or $0.09 per share, in Q1 2011 |
| Provision for loan losses | $8.1 | $1.3 in Q1 2011 |
| Operating cash flow | $0.2 | $2.8 in Q1 2011 |
| Total assets | $1,385.5 | $1,390.9 at December 31, 2011 |
| Loans / net loans | $914.3 / $897.1 | $938.7 / $919.2 at December 31, 2011 |
| Deposits | $1,029.9 | $1,027.8 at December 31, 2011 |
| Cash and cash equivalents | $98.1 | $65.1 at December 31, 2011 |
| Borrowings | $35.2 short-term; $206.8 long-term | $36.9 short-term; $207.0 long-term at December 31, 2011 |
| Shareholders’ equity | $93.7 | $96.7 at December 31, 2011 |
Other operating income was $5.4 million, including $1.3 million in net gains. Operating expenses were $9.8 million, down from $10.9 million in Q1 2011. Annualized return on average assets was (0.77)% and return on average equity was (11.05)%; average equity to average assets was 7.01%. Book value was $10.32 per share.
Cash increased by $33.0 million during the quarter. Investing activities provided $32.6 million, including proceeds from securities, loan reductions, OREO sales, the insurance-asset sale, and a bank-owned life insurance death benefit. Financing activities provided $0.2 million.
Material changes and credit quality
- The common-shareholder loss principally reflected the $6.8 million year-over-year increase in loan-loss provision. Management attributed the higher provision primarily to a $9.0 million charge-off on an ethanol-plant shared national credit and a $1.1 million charge-off on a hotel participation loan.
- Net charge-offs were $10.4 million, versus $2.1 million in Q1 2011; the annualized net charge-off ratio rose to 4.47% from 0.83%. The allowance for loan losses declined to $17.2 million, or 1.88% of loans, from $19.5 million at year-end.
- Non-accrual loans fell to $28.6 million (3.1% of loans) from $38.2 million (4.1%) at year-end. Loans past due 30 days or more also declined, to 1.77% of the portfolio from 2.86%. Other real estate owned increased to $19.1 million from $16.7 million.
- Total loans declined $24.3 million, including the large C&I charge-off. Deposits increased $2.1 million; management cited core-deposit growth and a shift from money-market sweep accounts to demand deposits.
- Interest expense fell $2.3 million as average interest-bearing deposits and average debt declined and funding rates decreased. Net interest income increased modestly despite lower interest income.
Outlook, significant items, and risks
- Management anticipated a generally flat interest-rate environment during 2012 and expected the net interest margin to continue improving. It described the balance sheet as slightly asset-sensitive and said portfolio restructuring better positioned the company for rising rates. These are forward-looking expectations, not assurances.
- The first quarter included a one-time, tax-free bank-owned life insurance death benefit of approximately $0.7 million, approximately $0.6 million of realized securities gains, and approximately $0.6 million of gains on OREO sales. The insurance agency sale reduced insurance commissions.
- The available-for-sale CDO portfolio had $36.5 million amortized cost and $10.0 million fair value, with $26.5 million of unrealized losses. It comprises 18 pooled trust preferred securities and is valued using significant unobservable inputs (Level 3). Management reported no credit-related OTTI charge in Q1, but emphasized illiquidity and valuation uncertainty.
- At management’s request, the company continued deferring interest on trust preferred debentures; cumulative deferred interest was approximately $2.7 million. Series A preferred dividends remained suspended, with approximately $2.3 million cumulatively deferred. Common dividends were also suspended. Management could not predict when these payments would resume.
- Regulators’ most recent notification classified the company and bank as well capitalized. At March 31, consolidated total risk-based capital was 13.37%, Tier 1 risk-based capital 11.53%, and Tier 1 leverage 9.70%. Management stated liquidity and capital were adequate.
- Key risks include loan and collateral deterioration, concentration in commercial real estate and acquisition-and-development lending, CDO valuation and credit risk, interest-rate and funding changes, and regulatory or economic developments. The filing reported no legal proceedings and no material changes to previously disclosed risk factors. Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Investor verification points
- Review the ethanol-plant and hotel charge-offs, remaining criticized loans, non-accrual balances, OREO, and the adequacy of the $17.2 million allowance.
- Assess the assumptions and independent valuation work underlying the $10.0 million Level 3 CDO fair value, including the $26.5 million unrealized loss and exposure to issuer payment deferrals.
- Track whether margin improvement persists as loan yields, deposit costs, and interest rates change; compare management’s outlook with subsequent results.
- Confirm the company’s ability to resume deferred trust-preferred interest and preferred/common dividends, and monitor the related restrictions and accumulated obligations.
- Reconcile quarterly cash generation and liquidity sources with funding needs, deposit mix, borrowings, and the collateral pledged for repurchase agreements and FHLB advances.