First United Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. First United is a Maryland bank holding company whose principal subsidiary is First United Bank & Trust. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $12.7 | $11.5 | $24.5 | $22.9 |
| Provision for loan losses | $2.2 | $0.3 | $4.8 | $0.7 |
| Net income | $2.6 | $2.6 | $4.3 | $5.8 |
| Diluted EPS | $0.37 | $0.37 | $0.62 | $0.81 |
| FTE net interest margin | 3.53% | 3.68% | 3.61% | 3.70% |
For the six months, total interest income was $29.7 million and other operating income, including gains, was $8.3 million. Other operating expenses were $22.4 million, essentially unchanged year over year. The six-month effective tax rate was 22.2%.
Operating cash flow was $2.8 million for the six months, compared with $1.9 million a year earlier. Investing activities used $128.0 million, mainly reflecting $132.6 million of net loan growth; financing activities provided $192.3 million, principally from deposit growth. Cash and cash equivalents rose to $117.1 million from $50.0 million at year-end 2019.
Financial position, credit and liquidity
- Total assets were $1.640 billion, up $197.6 million from December 31, 2019. Net loans were $1.166 billion; deposits were $1.352 billion.
- The allowance for loan losses increased to $17.0 million from $12.5 million, or 1.43% of gross loans (1.62% excluding PPP loans). Six-month net charge-offs were $0.3 million. Management attributed most of the provision increase to COVID-related qualitative reserve adjustments.
- Nonaccrual loans were $11.1 million, compared with $10.8 million at year-end. Loans past due 30 days or more were 0.17% of loans including PPP loans. The filing reports $37.2 million of loans rated substandard, up $14.4 million from year-end; management cited two large relationships and said they were current and well collateralized.
- At June 30, $144.4 million of PPP loans were outstanding. Through July 31, active COVID-related modifications covered $214.5 million of loans, or 20.6% of the portfolio excluding PPP loans (18.1% including PPP loans). Some commercial borrowers received a second 90-day deferral.
- Total borrowings were $136.9 million: $36.0 million short-term and $100.9 million long-term, versus $149.7 million at year-end. Deposits increased $209.5 million. The Corporation reported $145.0 million in correspondent-bank lines, $1.1 million at the Federal Reserve Discount Window and approximately $158.1 million in available FHLB secured borrowing capacity.
- Shareholders’ equity was $124.5 million, down $1.5 million from year-end. The Corporation and Bank remained above regulatory well-capitalized thresholds; consolidated total capital to risk-weighted assets was 15.87%.
Material changes and management commentary
- Six-month net income fell 24.8%, primarily as the $4.8 million loan-loss provision substantially exceeded the prior-year $0.7 million. Q2 net income was nearly unchanged: higher net interest income offset the increased provision.
- Reported six-month FTE margin declined 9 basis points year over year; Q2 margin declined 15 basis points. Management said low-rate PPP balances and excess cash invested at low yields weighed on margin. It expects lower loan demand for the remainder of 2020, which may also pressure margin.
- Loans grew $136.6 million from year-end, including $144.4 million in PPP lending. Mortgage refinancing drove record first-half mortgage production of approximately $61.4 million; longer-term fixed-rate loans were generally sold to Fannie Mae. The mortgage pipeline was $27.6 million at quarter-end.
- Management anticipated approximately $3.5 million of deferred PPP loan fees. PPP loans carry a 1% interest rate, are SBA-guaranteed and may be forgiven subject to program requirements. The Bank was also approved for the Federal Reserve Main Street Lending Program and had not used the PPP Liquidity Facility as of the filing.
- Professional-services and investor-relations costs rose substantially due to the 2020 annual meeting and related proxy contest; management described most of these costs as nonrecurring. Higher mortgage-sale gains partly offset lower service-charge income. The filing reports no legal proceedings.
- Management performed a quantitative goodwill impairment analysis after COVID-19 and the decline in the company’s share price raised impairment concerns; the analysis found no impairment at June 30. Management said it would continue monitoring goodwill and the effects of the pandemic.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management emphasized uncertainty around the pandemic’s duration, borrower repayment capacity, local and national economic conditions, government support programs, and possible renewed restrictions. It was working with borrowers through short-term deferrals and other modifications, while monitoring credit quality and liquidity. Foreclosure and repossession activity had been temporarily suspended by the State, delaying progress on a significant nonaccrual development loan; foreclosure was tentatively expected in September 2020. Management stated that the institutions were well capitalized and that available liquidity was adequate.
Other notable exposures include $11.95 million of Level 3 collateralized debt obligations (CDOs), with $6.56 million of unrealized losses, and interest-rate swaps with a reported fair-value liability of $1.56 million. The company reported no material change in risk factors since its 2019 Form 10-K. Interest-rate sensitivity modeling showed estimated net interest income gains under rising-rate scenarios and declines under a 100-basis-point fall; these are estimates based on assumptions, not forecasts.
Important facts for investors to verify
- Track COVID-related deferrals as they expire, subsequent modifications, delinquencies, criticized loans, charge-offs and the adequacy of the allowance.
- Assess PPP fee recognition, loan forgiveness timing, and the effect of PPP balances and excess liquidity on future net interest margin.
- Monitor liquidity and deposit trends, including the use of borrowing facilities, alongside regulatory capital ratios.
- Review the valuation and credit performance of the Level 3 CDO portfolio, and any updated goodwill impairment analysis.
- The MD&A gives differing figures for Q2 margin excluding PPP balances (3.83% in one passage and 3.67% in another); the filing text does not provide a clear, consistent value. Verify the intended calculation.