First United Corporation Announces 3rd Quarter 2011 Earnings

OAKLAND, Md., Nov. 3, 2011 /PRNewswire/ -- First United Corporation (NASDAQ: FUNC), a financial holding company and the parent company of First United Bank & Trust, announces consolidated net income available to common shareholders of $1.6 million for the first nine months of 2011, compared to a net loss attributable to common shareholders of $6.9 million for the same period of 2010.  Basic and diluted net income per common share for the first nine months of 2011 was $.26, compared to basic and diluted net loss per common share of $1.12 for the same period of 2010. The change in earnings, from a net loss for the first nine months of 2010 to net income for the first nine months of 2011, resulted primarily from a $4.7 million reduction in provision for loan losses and a $1.7 million reduction in net losses from sales of securities and other real estate owned.  In addition, we have realized $19,000 in non-cash other-than-temporary impairment ("OTTI") charges for the first nine months of 2011, compared to $8.3 million for the same period of 2010.  During the first nine months of 2011, we also recognized a gain of $1.4 million from the sale of a portion of the indirect auto loan portfolio.  The decreases in expenses and losses and the gain were partially offset by a $5.9 million increase in income tax and a $4.3 million decline in net interest income.  The decrease in net interest income was driven by a $10.1 million reduction in interest income on a fully tax-equivalent ("FTE") basis attributable to lower levels of loans and the lower interest rate environment.  The net interest margin for the first nine months of 2011, on an FTE basis, increased to 2.89% from 2.78% for the first nine months of 2010 and increased slightly as compared to 2.85% at June 30, 2011 and 2.71% for the year ended December 31, 2010.  We anticipate that the margin will continue to improve throughout the remainder of 2011.

Consolidated net income available to common shareholders for the third quarter of 2011 totaled $.3 million or $.05 per common share, compared to a net loss attributable to common shareholders of $.1 million or $.01 per common share for the same period of 2010.  The net interest margin for the third quarter of 2011 was 2.97%, compared to 2.51% for the same period of 2010.  This increase was primarily attributable to the decrease in interest-bearing liabilities of $376.9 million and a lower rate environment when compared to the third quarter 2010.

For the nine-month period ended September 30, 2011, the Corporation's annualized returns on average assets and on average shareholders' equity were .25% and 3.80%, respectively, compared to (.43%) and (7.50%), respectively, for the same period of 2010.

According to William B. Grant, Chairman, Chief Executive Officer and President, "First United continued to make steady progress through the third quarter as we continued to focus on increasing our core earnings and profitability.  Loan production levels have increased as we are starting to see more activity in our market areas.  In addition, our retail offices have been successful in building out relationships with our customers and providing solutions for all of their financial needs."

Balance Sheet Overview

Total assets were $1.4 billion at September 30, 2011, a decrease of $262.3 million since December 31, 2010.  During this time period, cash and interest-bearing deposits in banks decreased $214.4 million, our investment portfolio increased $48.1 million, and gross loans decreased $58.2 million, net of the sale of $32.5 million of the indirect auto portfolio during the second quarter of 2011.  Total liabilities decreased by approximately $265.0 million during the first nine months of 2011, reflecting decreases in total deposits of $235.4 million and long-term borrowings of $35.8 million due to repayment of three maturing FHLB advances, offset by an increase of $5.3 million in short-term borrowings.  Total deposits decreased primarily as a result of the repayment of $161.0 million in brokered deposits and the maturity of $51.7 million in CDARs deposits.  Shareholders' equity increased $2.7 million from December 31, 2010 to September 30, 2011 as a result of net income earned during the period.

Comparing loans at September 30, 2011 to loans at December 31, 2010, outstanding loans decreased by $58.2 million (5.8%), net of the sale of $32.5 million of the indirect auto portfolio.  Commercial real estate ("CRE") loans decreased $27.2 million as a result of the payoff of several large loans, charge-offs of loan balances and ongoing scheduled principal payments.  Commercial and industrial ("C&I") loans increased $.5 million and residential mortgages declined $11.2 million.  The decrease in the residential mortgage portfolio was attributable to regularly scheduled principal payments on existing loans and management's decision to use secondary market outlets such as Fannie Mae for the majority of new, longer-term, fixed-rate residential loan originations.  The consumer portfolio declined $43.5 million due primarily to the sale of $32.5 million of retail installment contracts in our indirect auto loan portfolio and $11.0 million as repayment activity in the indirect auto portfolio exceeded new production due to special financing offered by the automotive manufacturers, credit unions and certain large regional banks.  At September 30, 2011, approximately 67% of the commercial loan portfolio was collateralized by real estate, compared to approximately 69% at June 30, 2011 and 71% at December 31, 2010.

Total deposits decreased $235.4 million during the first nine months of 2011 when compared to deposits at December 31, 2010.  Non-interest bearing deposits increased $29.6 million.  Traditional savings accounts increased $6.3 million due to continued growth in our Prime Saver product.  Total money market accounts decreased $52.2 million due to the repayment of $55.5 million in brokered accounts.  Time deposits less than $100,000 declined $41.3 million and time deposits greater than $100,000 decreased $173.8 million.  The decrease in time deposits greater than $100,000 was primarily due to the repayment of $105.5 million in brokered certificates of deposit and $49.7 million of maturities in our CDARs product.  Although brokered deposits are at very low rates in the current environment, management made the decision to right-size the balance sheet by using cash to repay brokered deposits and to allow certificates of deposit for non-relationship customers to run off. Our internal treasury team has developed a strategy to increase our net interest margin by changing the mix of our deposit base and focusing on customers with full banking relationships.

Comparing September 30, 2011 to December 31, 2010, shareholders' equity increased from $95.6 million to $98.3 million.  The $2.7 million increase was attributable to the net income recorded in the first nine months of 2011 along with a reduction in accumulated other comprehensive loss.  The book value of the Corporation's common stock increased from $10.68 per share at December 31, 2010 to $11.08 per share at September 30, 2011.  

At September 30, 2011, there were approximately 6,182,757 outstanding shares of First United Corporation common stock, an immediately exercisable warrant to purchase 326,323 shares of the Corporation's common stock was outstanding, and there were 30,000 outstanding shares of the Corporation's Fixed Rate Cumulative Perpetual Preferred Stock, Series A.

Asset Quality

The ratio of non-performing and 90 days past-due loans to total loans at September 30, 2011 was 4.17%, compared to 3.73% at December 31, 2010 and 3.84% at September 30, 2010.  The ratio of non-performing and 90 days past-due loans to total assets at September 30, 2011 was 2.67%, compared to 2.22% at December 31, 2010 and 2.23% at September 30, 2010.  Performing loans considered to be impaired (including performing troubled debt restructures, or TDRs), as defined and identified by management, amounted to $28.9 million at September 30, 2011 and $27.7 million at December 31, 2010.  Loans are identified as impaired when, based on current information and events, management determines that we will be unable to collect all amounts due according to contractual terms.  These loans consist primarily of acquisition and development (A&D") loans and CRE loans.  The fair values are generally determined based upon independent third party appraisals of the collateral or discounted cash flows based upon the expected proceeds.  Specific allocations have been made where management believes there is insufficient collateral to repay the loan balance if liquidated and there is no secondary source of repayment available.

Non-accrual loans totaled $37.5 million as of September 30, 2011, compared to $34.9 million as of December 31, 2010 and $39.0 million as of September 30, 2010.  Non-accrual loans that have been subject to a partial charge-off totaled $8.9 million as of September 30, 2011, compared to $2.9 million as of December 31, 2010.  Comparing the nine-month periods ending September 30, 2011 and September 30, 2010, total non-accrual loan balances have declined. Additionally, potential losses have been recognized in significantly more non-accrual loans as of September 30, 2011 than for the same time period of 2010.    

The allowance for loan losses ("ALL") decreased to $20.1 million at September 30, 2011, compared to $22.1 million at December 31, 2010 and $24.3 million at September 30, 2010.  The provision for loan losses for the first nine months of 2011 decreased to $5.9 million from $10.7 million for the same period in 2010.   Net charge-offs rose to $7.9 million from $6.5 million as of December 31, 2010.  Included in the net charge-offs for the nine months ended September 30, 2011 were partial charge-offs of $5.1 million for two large CRE loans. The decrease in the provision for loan losses from September 30, 2010 to September 30, 2011 resulted from management's analysis of the adequacy of the loan loss reserve, declining loan balances and improving economic conditions as noted by the Federal Reserve.  The sale of $32.5 million of the indirect auto portfolio, releasing $.6 million in provision expense, was a contributing factor to the lower provision expense through June 30, 2011. The ratio of the ALL to loans outstanding as of September 30, 2011 of 2.19% is lower than the 2.33% from the same period last year due to a focused effort by management to recognize potential problem loans and record specific allocations and adjust qualitative factors to reflect the current quality of the loan portfolio.

Net Interest Income (Tax-Equivalent Basis)

Net interest income on an FTE basis decreased $4.6 million during the first nine months of 2011 over the same period in 2010 due to a $10.1 million (17.8%) decrease in interest income, which was partially offset by a $5.5 million (24.8%) decrease in interest expense.  The decrease in net interest income was primarily due to the reduction in the average balances of earning assets.  The lower yield on both loans and investment securities, as funds were reinvested, also contributed to the decline in interest income comparing the two periods. Management has made the decision to invest in shorter duration investment securities during this time of historically low interest rates.  The reduction in the average rates on interest-bearing liabilities was the primary driver of the 11 basis point increase in the net interest margin, which increased to 2.89% at September 30, 2011 from 2.78% for the same period of 2010.  The net interest margin was 2.85% at June 30, 2011 and 2.71% for the year ended December 31, 2010.

The overall $271.6 million decrease in average interest-earning assets, driven by the reduction in loans, impacted the 7 basis point decline in the average yield on our average earning assets, which dropped from 4.59% for the first nine months of 2010 to 4.52% for the first nine months of 2011 (on an FTE basis).

Interest expense decreased during the first nine months of 2011 when compared to the same period of 2010 due to an overall reduction in interest rates on deposit products driven by our net-interest margin strategy, our decision to only increase special rates on time deposits for full relationship customers, the reduction in the average balance of total interest-bearing liabilities and the shorter duration of the portfolio. The average balance of interest-bearing liabilities decreased by $274.3 million as management continued its strategy to right-size the balance sheet by using cash to repay brokered deposits and wholesale long-term borrowings. The overall effect was a 17 basis point decrease in the average rate paid on our average interest-bearing liabilities from 1.92% for the nine months ended September 30, 2010 to 1.75% for the same period of 2011. 

Net interest income on an FTE basis decreased $.6 million during the third quarter of 2011 over the same period in 2010 due to a $2.9 million (16.4%) decrease in interest income, which was partially offset by a $2.3 million (31.2%) decrease in interest expense.  The decrease in net interest income was primarily due to the reduction in the average balances of earning assets.  The lower yield on both loans and investment securities, as funds were reinvested, also contributed to the decline in interest income comparing the two periods.  The average rate on interest-earning assets increased primarily due to the reduction in cash levels.  The average rate on interest-bearing liabilities decreased due to lower deposit rates across all product lines.

Non-Interest Income and Non-Interest Expense

Other operating income, exclusive of losses, decreased $.3 million during the first nine months of 2011 when compared to the same period of 2010.  Service charge income decreased $.7 million due primarily to a reduction in non-sufficient funds (NSF) fees resulting from newly enacted regulation of overdraft fees.  Debit card income increased $.4 million during the first nine months of 2011 when compared to the same period of 2010 due to increased consumer spending and higher customer awareness of our rewards program.  Trust department income increased $.3 million during the first nine months of 2011 when compared to the first nine months of 2010 due to an increase in assets under management and the fees received on those accounts.  Assets under management were approximately $582 million at September 30, 2011, a 2% increase over September 30, 2010.  

Net losses of $.1 million were reported through other income in the first nine months of 2011, compared to net losses of $11.7 million during the same period of 2010.  There were $19,000 in losses during the first nine months of 2011 that were attributable to non-cash OTTI charges on the investment portfolio, down from the $8.3 million during the same period of 2010.  The reduced OTTI charges are a result of improvement in the financial industry which makes up the primary collateral of the collateralized debt obligation portfolio.  Net gains of $.6 million from sales of investments and the $1.4 million gain from the sale of the $32.5 million of our indirect auto loan portfolio were offset by $1.9 million in write-downs of other real estate owned and $.2 million of losses on sales of other real estate owned.

Other operating income, exclusive of losses, remained fairly stable during the third quarter of 2011 when compared to the same period of 2010.  Service charge income decreased $.2 million due primarily to a reduction in non-sufficient funds (NSF) fees.  Debit card income increased $.1 million during the third quarter of 2011 when compared to the same period of 2010 due to increased consumer spending and higher customer awareness of our rewards program.  

Net losses of $.8 million were reported through other income in the third quarter of 2011, compared to net losses of $.9 million during the same period of 2010.  There were no losses during the third quarter of 2011 that were attributable to non-cash OTTI charges on the investment portfolio, down from the $.2 million during the same period of 2010.  Net gains of $.3 million from sales of investments were offset by $.9 million in write-downs of other real estate owned and $.2 million in losses from sales of other real estate owned.

Other operating expenses decreased $2.6 million (8%) for the first nine months of 2011 when compared to the first nine months of 2010.  The decrease was primarily due to a decline of $1.1 million in salaries and benefits resulting primarily from a reduction of full-time equivalent employees through attrition within the Corporation, reduced pension expense and a decline of $1.2 million in FDIC premiums attributable to the repayment of brokered deposits.

The decrease of $1.1 million (10%) in other operating expenses for the third quarter of 2011 was primarily due to a decline of $.4 million in salaries and benefits resulting primarily from a reduction of full-time equivalent employees through attrition within the Corporation and a decline of $.5 million in FDIC premiums attributable to the repayment of brokered deposits.  Other expenses decreased $.1 million for the third quarter of 2011 when compared to the same period of 2010.  This decrease is attributable to decreases in postage, contract labor and the completion of amortization of the Huntington branch goodwill in late 2010.  

ABOUT FIRST UNITED CORPORATION

First United Corporation is the parent company of First United Bank & Trust, a Maryland trust company (the "Bank"), First United Insurance Group, LLC, a full service insurance provider organized under Maryland law, and three statutory trusts that were used as financing vehicles.  The Bank has three wholly-owned subsidiaries:  OakFirst Loan Center, Inc., a West Virginia finance company; OakFirst Loan Center, LLC, a Maryland finance company (collectively, the "OakFirst Loan Centers"), and First OREO Trust, a Maryland statutory trust formed for the purposes of servicing and disposing of the real estate that the Bank acquires through foreclosure or by deed in lieu of foreclosure.  The Bank owns a majority interest in Cumberland Liquidation Trust, a Maryland statutory trust formed for the purposes of servicing and disposing of real estate that secured a loan made by another bank and in which the Bank held a participation interest.  The Bank also owns 99.9% of the limited partnership interests in Liberty Mews Limited Partnership, a Maryland limited partnership formed for the purpose of acquiring, developing and operating low-income housing units in Garrett County, Maryland.  The Corporation's website is www.mybank4.com.

FORWARD-LOOKING STATEMENTS

This press release contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.  Forward-looking statements do not represent historical facts, but are statements about management's beliefs, plans and objectives about the future, as well as its assumptions and judgments concerning such beliefs, plans and objectives.  These statements are evidenced by terms such as "anticipate," "estimate," "should," "expect," "believe," "intend," and similar expressions.  Although these statements reflect management's good faith beliefs and projections, they are not guarantees of future performance and they may not prove true.  These projections involve risk and uncertainties that could cause actual results to differ materially from those addressed in the forward-looking statements.  For a discussion of these risks and uncertainties, see the section of the periodic reports that First United Corporation files with the Securities and Exchange Commission entitled "Risk Factors".

SOURCE First United Corporation