Message to the Shareholders of First United Corporation
Dear Fellow Shareholder,
2009 was the most difficult year for First United in the last seventy-five years. We posted our first annual loss in memory, as the Company lost $12.8 million. The primary component of this loss was a large “Other-Than-Temporary Impairment” charge within the investment portfolio. How did this happen? A few years ago, as we internally assessed our income growth potential, we believed it would likely be less than we had historically produced. To remedy this, we undertook a course to increase our lending footprint to a degree, and to also increase the size of our investment portfolio. In addition, we would, of course, continue to meet the financial needs of our local markets.
As part of this strategy, in addition to traditional market area loans, we invested in loan participations. The loan participations were targeted towards industries that were not prevalent in our existing portfolio, such as the hospitality industry and the insurance industry. These participations were conservatively underwritten and fit nicely into our loan portfolio. However, as the recession progressed, these industries, and our loans, were negatively impacted by the economic downturn. In addition, due to the nature of our geographic footprint, a large portion of our loan portfolio is invested in acquisition and development loans in the Deep Creek Lake area and other forms of commercial real estate. Many of these loans are backed by long-term customers of the Bank who have felt the effects of declining real estate valuations, slow sales and reduced consumer spending. Many of our consumer borrowers have lost jobs, experienced reduced incomes or have struggled as their own businesses have been impacted by the slowed economy. As a result, our Bank has experienced higher than normal delinquencies and foreclosures.
The largest contributor to our 2009 net loss was a credit loss recorded through other-than-temporary impairment. As a part of the aforementioned growth strategy, in 2007 we grew our investment portfolio through the purchase of trust preferred securities, which are pools of debt issued primarily by banks and insurance companies. At the time of the purchases, all of these securities were deemed to be of investment grade by the rating agencies and were considered entirely appropriate for our portfolio. The subsequent recession impacted the financial services industry as hard as any, and several of the issuing banks within the trust preferred bonds were adversely impacted, causing many of them to default or defer on their obligations. Applicable accounting guidance required us to recognize an after-tax credit loss of $16 million through earnings. Significant details regarding both the investment and the loan portfolios are provided to you in our 10-K.
The issues related to our other-than-temporary impairment charge was compounded by the controversial accounting guidance of the Financial Accounting Standards Board, which essentially dictates that an analysis be conducted on certain assets, and if as a result of that analysis, a potential loss could occur at some point in the future, then such a loss must be immediately recognized. There was, at the direction of Congress, some mitigation of this standard earlier last year, but it remains a challenge faced by your Company, and many others. While the details of this application are provided for you in the 10-K, I would invite the reader to examine a book I recently previewed, “It’s Not as Bad as You Think”, written by noted author, economist and commentator Brian Wesbury. A frequent writer to the Wall Street Journal, Mr. Wesbury is an outspoken critic of the concept known as “mark to market” accounting. I must confess that I agree with a lot of his reasoning.