First United Corporation — Q1 2017 Form 10-Q
Business context and reporting period. First United is a bank holding company whose primary subsidiary is First United Bank & Trust. This unaudited filing covers the three months ended March 31, 2017; balance-sheet comparisons are to December 31, 2016. Amounts below are in millions unless stated otherwise.
Financial performance and position
- Earnings and revenue: Net income was $1.98 million, up from $1.87 million. Net income available to common shareholders was $1.44 million versus $1.20 million; diluted EPS was $0.22 versus $0.19. Net interest income was $9.37 million, compared with $9.41 million. Other operating income was $3.46 million versus $3.60 million. The filing does not present a single total-revenue line.
- Margins and returns: Fully tax-equivalent net interest margin was 3.27%, up from 3.23%. Annualized return on average assets was 0.61% versus 0.57%; annualized return on average equity was 7.00% versus 6.52%.
- Expenses and credit costs: Operating expenses declined to $9.44 million from $9.90 million. Provision for loan losses was $0.61 million versus $0.57 million. The quarter included $1.77 million of loan recoveries and $0.71 million of charge-offs, for net recoveries of $1.06 million.
- Cash flow: Operating cash flow was $0.14 million, down from $4.14 million. Investing activities used $0.37 million and financing activities used $0.24 million; cash and cash equivalents decreased $0.47 million to $62.84 million.
- Balance sheet and liquidity: Total assets were $1,319.4 million; net loans $882.9 million; deposits $1,026.9 million; and shareholders’ equity $114.9 million. Cash and cash equivalents were $62.8 million. Management said liquidity was adequate; available borrowing capacity cited included $70.0 million of correspondent lines, $10.6 million at the Federal Reserve discount window, and approximately $162.4 million through the FHLB.
- Debt and capital: Short- and long-term borrowings totaled $156.2 million, down from $167.7 million at year-end. The consolidated total capital ratio was 16.09%, Tier 1 risk-based capital 14.88%, common equity Tier 1 12.12%, and Tier 1 leverage 10.99%.
Material changes versus comparable periods
- Common-shareholder earnings and EPS increased, while net interest income was broadly stable. Lower FDIC premiums and the absence of a $0.3 million litigation-claim reserve recorded in Q1 2016 helped reduce expenses; lower securities gains partly offset the improvement.
- Loans rose $2.6 million from year-end to $894.5 million. Deposits increased $12.6 million, including a $20.1 million rise in non-interest-bearing deposits.
- Non-accrual loans declined to $10.9 million from $13.9 million, primarily following a $2.5 million paydown on one large relationship. Accruing loans past due 30 days or more fell to 0.46% of loans from 0.67%.
- The allowance for loan losses increased to $11.6 million from $9.9 million; allowance-to-loans was 1.29% at quarter-end. A specific allocation for a large Pennsylvania mall participation loan was partly offset by a $1.3 million recovery on a previously charged-off ethanol-plant loan.
- The March rights offering issued 783,626 common shares for $9.4 million gross and approximately $9.2 million net. Proceeds partly offset the redemption of $10.0 million of Series A preferred stock and repayment of $10.8 million of junior subordinated debentures. Preferred stock outstanding fell to $10.0 million.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or financial guidance. Management cautions that interim results are not necessarily indicative of full-year performance.
- Key stated risks include economic and competitive conditions, interest-rate movements, deposit flows and funding costs, loan and investment portfolio quality, regulatory changes, and the company’s ability to manage growth. The company was asset-sensitive at March 31, 2017; interest-rate changes could affect earnings and economic value.
- The available-for-sale collateralized debt obligation portfolio had a $20.4 million fair value against $27.8 million amortized cost, including $7.4 million of unrealized losses. These securities are Level 3 valuations based on significant unobservable inputs and are exposed to credit, marketability, and liquidity risks. Management reported no credit-related OTTI charges in Q1 2017.
- The $19.0 million net deferred tax asset could be reduced if corporate tax rates fall, potentially causing a material earnings charge. The filing discusses a proposed 15% federal corporate tax rate announced after quarter-end; its likelihood and effect were not determinable.
- Loan commitments were $117.4 million and standby letters of credit $1.6 million at quarter-end. Management did not consider the letters-of-credit liability material. The filing reports no legal proceedings.
Important facts for investors to verify
- Progress and subsequent credit performance of the large mall participation loan, and whether the specific allowance remains adequate.
- Whether the $1.3 million ethanol-loan recovery is nonrecurring and how future charge-offs and recoveries affect provisioning.
- Valuation assumptions, credit performance, and liquidity exposure in the Level 3 trust-preferred CDO portfolio.
- Effects of any tax-rate changes on the $19.0 million deferred tax asset and reported earnings.
- Post-offering share count, capital ratios, and the ongoing effects of preferred-stock redemption and debt repayment on common earnings and funding costs.