First United Corporation — Q2 2017 Form 10-Q
Business context and period: First United is a bank holding company whose primary business is community banking through First United Bank & Trust. This unaudited filing covers the quarter and six months ended June 30, 2017; balance-sheet comparisons are to December 31, 2016. Financial statement amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income | $9.929 | $9.379 | $19.298 | $18.788 |
| Provision for loan losses | $0.299 | $1.346 | $0.908 | $1.914 |
| Net income | $2.309 | $1.704 | $4.289 | $3.575 |
| Net income available to common shareholders | $2.084 | $1.254 | $3.524 | $2.450 |
| Basic and diluted EPS | $0.30 | $0.20 | $0.52 | $0.39 |
| Net interest margin, FTE basis | 3.42% | 3.20% | 3.35% | 3.22% |
- Income and expenses: Six-month interest income was $23.018 million and interest expense $3.720 million. Other operating income was $6.948 million, versus $7.427 million in the prior-year period; operating expenses were $19.304 million, versus $19.436 million. Q2 other operating income was $3.491 million and expenses were $9.860 million.
- Management’s explanation: Higher net interest income and lower loan-loss provision, FDIC premiums, and certain other expenses supported earnings growth. Lower securities gains and BOLI income, plus increased salaries and data-processing costs, partly offset those improvements. Lower BOLI income reflected a one-time death benefit received in Q2 2016.
- Balance sheet at June 30: Total assets were $1.326 billion; net loans $886.0 million; deposits $1.038 billion; shareholders’ equity $118.6 million; cash and cash equivalents $73.0 million. Total assets were $1.318 billion at year-end 2016.
- Funding and debt: Deposits increased $23.5 million from year-end, including a $34.8 million rise in non-interest-bearing deposits. Short-term borrowings fell to $25.2 million from $36.0 million; long-term borrowings declined to $120.9 million from $131.7 million. Long-term debt includes $90.0 million of FHLB advances and $30.9 million of junior subordinated debt.
- Cash flow, six months: Operating activities provided $4.848 million, investing activities provided $4.479 million, and financing activities provided $0.325 million. Cash and cash equivalents increased $9.652 million to $72.962 million.
- Capital and liquidity: Consolidated total risk-based capital was 16.51%, common equity Tier 1 was 12.11%, and Tier 1 leverage was 11.55%. Management reported $70.0 million available on unsecured correspondent lines, $8.3 million at the Fed Discount Window, and approximately $177 million of FHLB availability. Management stated liquidity was adequate.
Material changes and credit quality
- Gross loans increased $4.0 million from year-end to $896.0 million. Residential mortgages rose $9.8 million and acquisition-and-development loans $7.4 million; commercial real estate loans declined $14.4 million, partly due to a large loan payoff and charge-offs.
- Non-accrual loans fell to $9.472 million from $13.946 million at year-end. Management attributed the reduction mainly to $2.9 million in charge-offs and $0.8 million transferred to other real estate owned (OREO). OREO increased to $11.556 million from $10.910 million.
- The allowance for loan losses was $9.922 million, or 1.11% of gross loans, compared with 1.11% at year-end and 1.38% at June 2016. Six-month net charge-offs were $0.904 million, compared with $1.158 million; annualized net charge-offs were 0.20% of average loans.
- Accruing loans past due 90 days or more increased to $1.216 million from $0.420 million at year-end, primarily in residential mortgage loans. Total accruing loans past due 30 days or more were 0.68% of the portfolio, versus 0.67% at year-end.
- Available-for-sale securities had a $129.2 million fair value versus $135.7 million amortized cost. The $14.3 million fair value of the Level 3 collateralized debt obligation portfolio was based on significant unobservable inputs; its amortized cost was $19.8 million, with $5.4 million in unrealized losses. Management reported no credit-related OTTI charges on these securities in the first six months of 2017.
Transactions, outlook, and risks
- In March 2017, the company completed a rights offering of 783,626 common shares, generating approximately $9.2 million net proceeds. It also redeemed $10.0 million of Series A preferred stock and repaid $10.8 million of junior subordinated debentures held by Trust III. Preferred stock outstanding was $10.0 million at quarter-end.
- Management gave no specific earnings or financial guidance. It noted that interim results are not necessarily indicative of full-year performance. The company was asset-sensitive at June 30; changes in interest rates, deposit costs and flows, loan demand, portfolio quality, regional economic conditions, competition, and regulation are identified risks.
- Loan commitments were $116.6 million and standby letters of credit $1.8 million. Management said the allowance was adequate but emphasized that future provision needs depend on loan growth, credit quality, loss experience, recoveries, and other qualitative factors.
- Other notable items: the company contributed $3.0 million to its pension plan in Q1. The filing reported no legal proceedings, no defaults on senior securities, and no material change in risk factors from the prior disclosures. Management concluded disclosure controls were effective at a reasonable-assurance level.
Most important facts for investors to verify
- Whether the lower loan-loss provision and improved earnings are sustainable, particularly given the large commercial real estate charge-offs and ongoing collateral-dependent credit exposures.
- Trends in past-due loans, non-accrual balances, OREO, and the allowance relative to loan growth and portfolio mix.
- The assumptions and sensitivity underlying the Level 3 CDO valuations, and whether the securities’ market illiquidity or credit performance changes.
- How deposit growth, deposit pricing, and reduced borrowings affect funding costs and net interest margin as rates change.
- Effects of the rights offering, preferred-stock redemption, and debt repayment on common-shareholder earnings, capital, and future financing costs.