The Financial Statements - Report Example

Introduction Financial ments, in accounting parlance, are the “language of business”. It provides basic information about the company which investors need to know. This information answers the questions that should be answered in analyzing financial conditions of a company if one has to make investments. Financial Analyst must be aware of the corporation’s liquidity, debt versus equity, and market value versus book value. In choosing between investments, Financial Analyst should compare financial figures with other companies to determine its position in the market, or to compare it with its own performance over the years. Ratio analysis is the most commonly used method to gauge company’s position. These questions will be answered in analyzing the financial statement of the First United Corporation. A sick corporation could readily be seen in its financial statement, and it is for this reason that this study is focusing on the First United Corporation to find out how well is this corporation been doing. This corporation is being proposed for investment as this is one of the publicly traded companies.. (All information and figures of the company came from Corporate Window and Yahoo Finance. Definition of financial terms is from the on-line Free Dictionary. Corporate Profile First United Corporation is a company offering wide range of financial services. It was established in 1900 and has managed to grow steadily. It offers banking activities which include retail and commercial banking services to various government units, businesses and individuals. The bank is managed by its principal subsidiary, the First United Bank and Trust. Bank activities include normal banking transactions of checking and savings accounts, time deposits, NOW accounts and money market accents. Its loan portfolio consists of commercial loans, residential construction loans, mortgage and home equity loans, consumer and installment loans and lease financing. Aside from this, FUNC operates a full brokerage services managed by another subsidiary, the Prime-Vest Financial Services. FUC has 26 banking offices, one call center and 35 automated teller machine. (Yahoo) The headquarters of First United Corporation is located in Oakland, Maryland and has a network of offices in Washington, Allegany, Garret and Frederick Counties in Maryland. It has well connected offices in Monongalia Counties in West Virginia as well as Mineral, Hardy and Berkeley Like any other banks, deposits with First United Bank & Trusts are insured with Federal Deposit and Insurance Corp. (FDIC) up to $100,000 per depositor or $250,000 per owner for self-directed retirement accounts. Analysis of current financial position of FUNC. A comparison of the FUNC financial position for four years is presented in Table 1. The four years operation starting from year 2004 up to 2007 shows an upward trend of company growth. For instance, comparing net income of 2004 and 2007, an over $5M increase in net income would be noted. The net income is arrived at after all the expenses have been deducted. It is the basis in the computation of various profitability and stock performance ratios such as price-earning ratio, return on equity and earnings per share. These ratios are the most common indicators of profitability of the company and are frequently viewed by stockholders in the company’s financial statements. A profit margin of 4.25 is observed to be lower than the previous years. Profit margin is calculated by deducting operating expenses and cost of goods sold and dividing the result by net sales. Profit margin is an indicator of a firm’s operating efficiency, its pricing policies, and its ability to remain competitive. Stockholders’ equity over the years shows an steady increase. from $86M in 2004 to $104M in 2007. This represents the owners’ interest in the asset of the corporation after all its liabilities are considered. New capital coming from investors increases the total shareholders equity, while an asset decline decreases the stockholders equity. Equity per share and income per share follows the rising pattern, while the outstanding shares show a slight variance yearly. Net income per share also shows a steady increase per year of operation. As of 2007, there are 6,138 M outstanding shares that remain almost consistent in its 6M bracket. Table 1. Comparison of Financial Performance of FUNC FYE 12/31 2007 2006 2005 2004 (in thousands, except per share amounts) Total Interest Income 93,565 80,269 69,756 60,682 Net Income 12,793 12,577 12,151 7,627 Net Income Percent Change N/A 3.51 59.32 N/A Profit Margin 4.25 15.67 17.42 12.57 Stockholders Equity 104,665 96,856 92,039 86,356 Shareholders Equity Per Share 17.05 15.77 15.04 14.17 Return on Stockholders Equity 4.10 13.66 14.07 9.06 Net Income Per Share 2.08 2.05 1.99 1.25 Average Shares Outstanding Diluted 6,138 6,141 6,118 6,0 Source: Corporate Window Ratio analysis and competitive comparison. Ratio analysis is used in decision making. First it is used by management as internal guide to identify problems that need fixing. Management uses them to examine current performance as compared to the past period performance. Investors use this as guide for choice of capital investment. Table 2. Comparison of FUNC with competing banks DIRECT COMPETITOR COMPARISON   FUNC BBT FMBM.OB MTB Industry Market Cap: 105.93M 19.61B 68.98M 9.01B 59.50M Employ­ees: 423 29,400 137 12,422 231 Qtrly Rev Growth (yoy): 15.70% -2.10% 3.90% -27.00% 11.20% Revenue (ttm): 62.02M 6.17B 16.85M 2.42B 32.98M Gross Margin (ttm): N/A N/A N/A N/A 0.00% EBITDA (ttm): N/A N/A N/A N/A N/A Oper Margins (ttm): 34.85% 39.83% 37.44% 32.07% 19.01% Net Income (ttm): 14.78M 1.63B 4.38M 518.58M N/A EPS (ttm): 2.409 2.949 1.867 4.693 0.64 P/E (ttm): 7.21 12.04 15.89 17.47 13.57 PEG (5 yr expected): N/A 2.24 N/A 3.36 1.80 P/S (ttm): 1.71 3.21 4.09 3.68 2.02 BBT = BB & T Corp. FMBM.OB = F&M Bank Corp. MTB = M&T Bank Corp. Industry = Regional - Mid-Atlantic Banks Source: Yahoo Finance An operating margin shows how much a company is earning (before deduction of taxes and interest) for every dollar of sales. If the company’s margin is increasing, it means it is earning more per dollar of sales and the higher the margin, the better it is for the corporation. FUNC has an operating margin of 34.85% which means that the FUNC earns $0.3485 for every dollar of sales. EPS or earnings per share is the amount coming from the portion of company’s profit allocated to each outstanding share o common stock. It is the most important determinant for an investor to find out how his investment earns. EPS of FUNC is 2.409 which is just next to BBT, its biggest competitor with billion dollar capitalization. Price earning ratio or P/E ratio. This is defined as a valuation ratio of a company’s current share price compared price compared to its per-share earnings. This means that the investors are looking for higher earnings growth in the future. P/Es are often compared with other companies in the same industry and is used as basis for investments decision. The P/E of FUNC as shown in the table as 7.21 is the lowest in the industry. The P/S or the Price/Sales ratio, also called the "PSR", is a companys stock price divided by its annual sales per share FUNC has a P/ S of 1.71 Most Analysts look at sales revenue as a more reliable indicator of a a company’s size and growth. The PEG ratio is the ratio of price/earnings to growth. It is an indicator for a stock’s potential growth, and a low PEG means that the stock is undervalued. PEG is a widely used indicator of a stocks potential value. It is favored by many over the price/earnings ratio because it also accounts for growth. Similar to the P/E ratio, a lower PEG means that the stock is more undervalued. Figures of the PEG of FUNC is not available Trend analysis The time trend analysis is used here to show data that would interest investors. Past performances for the last six years of operation from 1997 to 2002 and compared with that of the 2007 performance of FUC are shown below. The behavior of the data shows a favorable trend growth rate for the average of six years of operation. The six year analysis is attached in Annex A. Table 3. 10 year performance of FUNC 5 yr component growth rate 1997-2002 2007 FS 1997 FS Net income 8% 12,793 6,645 Cash dividends 3% 4,796 3,609 Per share data: Net income basic 9% 2.08 1.06 Net income diluted 9% 2.08 1.06 Dividends declared 4% 4,796 3,609 Book value at year end 8% 17.06 9.06 Stockholder’s equity 7% 104,665 56,714 Efficiency ratio 63.02 62.89 (dollars in thousands) Source: Corporate Window Financial issues that may impact the investment decision. The company disclosed in its financial statement results of operation. For 2007, its President is proud of a record level income of $23,793M in its 107 years of operation. This was brought about by the growth of loan portfolio from 96.3M to 1.043B. Trust in the performance of the bank is indicated by the resurgence of deposits which grew from over 12%. The FUNC has expanded its services by opening new offices in Morgantown, West Virginia and Hagenstown, Maryland. A redirection of policy was done to secure the operations of the bank in view of the economic crunch and has assured that the bank’s operation is safe and secured. The bank has not however escaped the economic downturn, as its real estate income was affected. This necessitates redirection of corporation’s policies and invested its resources to the non-interest income. The combination of trust and brokerage began to pay off as its performance has increased the revenues of this division. In this aspect, the corporation’s immediate goal is to increase non-interest income as a percentage of total net income. The corporation has begun its prospects in competing large dynamic markets. It has invested in Market Presidents & Frederick Maryland to guide the company in their effort. The corporation President believes that in spite of the stiff competition of the banking industry, FUNC is positioned to be successful. The set-up of the bank affords it to know their customers better and to give to them the professional and technological services of the bank. The bank has invaded on personnel training in order to serve customers better. Testimonies of customers showed their satisfaction in the bank’s services. For instance, Dwain Griffin, President & CEO said: My Bank is small business friendly. They go out of their way to help me with cash management, money transfers -- even my deposits are credited all day during their business hours, Monday - Friday. (My Business) Many others have acknowledged the bank’s services. The President of the corporation takes pride of the steady return of income to stockholders considering the difficult market of the stocks in the financial services area. Conclusion A company that has stayed financially healthy for 107 years as in First United Corporation is worth considering for investment decisions. It has managed to climb to have an upward trend in its performance despite having big competitors in the industry. The ten year spread of financial statements shows relative increases and give steady income to investors. The stockholders equity remained strong and grew many times over from 1997 to 2007 which is an indication of trust in their banking and management system. As a publicly traded company, their operations are subject to scrutiny of stockholders and future investors. Their operations and financial statements are open for the evaluation of Financial Analysts who are looking for proper investments. As of November 3, 2008, common stock per share closed at $17.38 with earnings per share of $2.42 and a P/E ratio of 7.18 which is a 0.139 % return of investment. (FUNC stock quote) As a Financial Analyst assigned by my Boss to look for business opportunities for investment, I would highly recommend First United Corporation because of its sound financial statements. Annex 1 First United Corporation - 2007 Annual Report Top of Form Bottom of Form Works Cited Corporate Window. First United Corporation. 02 November 2008. FUNC: Stock Quote and Summary Data. 03 November 2008. 03 November 2008. Griffin, Darwin. My Business. My Bank–First United Bank & Trust. 02 Nov. 2008. The Free Dictionary. Operating margin. 03 Nov. 2008. ---. Earnings per share. 03 Nov. 2008. --- Price earning ratio. 03 Nov. 2008. --- Price/sales ratio. 03 Nov. 2008. Yahoo Finance. First United Corp. UFC. . 03 Nov. 2008. . Read More