First United Corporation — Q1 2015 Form 10-Q
Business context and period: First United Corporation is a bank holding company whose principal subsidiary is First United Bank & Trust. This unaudited report covers the three months ended March 31, 2015; balance-sheet comparisons are with December 31, 2014. Dollar amounts below are in millions unless noted.
Financial performance and condition
- Earnings: Net income was $1.368 million, compared with $1.358 million in Q1 2014. Net income available to common shareholders fell to $0.693 million from $0.911 million, and diluted EPS declined to $0.11 from $0.15. Preferred dividends and discount accretion were $0.675 million versus $0.447 million.
- Interest income and margin: Interest income was $11.423 million versus $11.754 million; interest expense declined to $2.529 million from $2.835 million. Net interest income was $8.894 million versus $8.919 million. Fully tax-equivalent net interest margin was 3.07% in both periods. Management attributed the margin lift versus full-year 2014’s 3.00% partly to $0.2 million of deferred CDO interest received in Q1.
- Other income and expenses: Other operating income was $3.043 million, up from $2.977 million. Operating expenses rose to $10.036 million from $9.760 million, mainly on higher salaries and benefits, FDIC premiums, OREO expenses, and data processing. Income before tax was $1.827 million versus $1.772 million.
- Credit and loans: Loans were $836.450 million, down $3.541 million from year-end. The allowance for loan losses was $11.751 million, or 1.40% of loans, versus $12.065 million and 1.44% at year-end. Q1 provision was $0.074 million versus $0.364 million; net charge-offs were $0.388 million versus $1.386 million. Non-accrual loans fell to $10.031 million from $11.551 million, while total troubled debt restructurings increased to $18.103 million from $13.684 million. OREO was $12.481 million; Q1 OREO expense, including $0.506 million of write-downs, was $0.632 million.
- Cash flow and liquidity: Operating cash flow was $2.202 million, compared with cash used of $4.440 million in Q1 2014. Investing activities provided $0.666 million; financing activities provided $6.906 million. Cash and cash equivalents increased $9.774 million to $45.225 million. Deposits rose $17.823 million to $999.146 million.
- Debt and equity: Short-term borrowings were $34.576 million and long-term borrowings $177.589 million, down from $39.801 million and $182.606 million at year-end. The $5.0 million decline in long-term debt included repayment of debentures that matured in March. Total assets were $1.341 billion and shareholders’ equity $112.001 million. Book value per common share was $13.16; return on average assets was 0.41% and return on average equity 5.01% (both annualized).
- Capital: At March 31, consolidated total risk-based capital was 15.30%, Tier 1 risk-based capital 13.15%, common equity Tier 1 8.69%, and Tier 1 leverage 10.35%. The Bank’s corresponding reported ratios were 15.17%, 14.04%, 14.04%, and 11.13%. Both entities exceeded the stated minimum capital-adequacy and well-capitalized thresholds.
Material changes versus comparable periods
- Common earnings and EPS declined despite slightly higher consolidated net income, primarily reflecting the increase in preferred-stock dividends and accretion; higher operating expenses also offset lower loan-loss provision.
- Net interest income was nearly flat as lower interest expense largely offset lower interest income. Average loans rose year over year, but lower loan yields and a smaller average securities balance weighed on interest income.
- Compared with December 31, deposits and cash increased, while loans and borrowings declined. Non-accrual loans improved, but TDR balances rose and accruing loans 30 or more days past due increased to 1.90% of loans from 1.62% at year-end.
- Available-for-sale CDOs had $28.391 million fair value against $37.399 million amortized cost, a $9.008 million unrealized loss. Management reported no credit-related OTTI during Q1; the valuation relies on Level 3 inputs and independent third-party cash-flow modeling.
Outlook, risks, contingencies, and unusual items
- The filing gives no earnings or revenue guidance. Management said its 2015 focus includes shifting deposits toward lower-cost core accounts and managing interest-rate risk; it considered the investment portfolio restructuring better positioned for a rising-rate environment.
- Management described liquidity as adequate and reported available funding capacity of $70 million in unsecured correspondent lines, $25.9 million at the Federal Reserve discount window, and approximately $54.1 million through the FHLB. These are stated capacities, not cash balances.
- Key exposures include interest-rate changes; loan and collateral quality; commercial real estate and acquisition-and-development credits; OREO valuations; and CDO credit, marketability, liquidity, and model assumptions. Management’s loss allowance and fair-value estimates are judgmental and actual outcomes may differ.
- Future interest payments on trust preferred debentures and dividends on Series A preferred stock require prior Federal Reserve approval; Bank dividends also require regulatory approval. Q1 preferred dividends were paid, and approval for June debt interest and the May preferred dividend was received in April. Common-stock dividends remained suspended.
- Loan commitments were $98.4 million and standby letters of credit $0.9 million. Management said the letters are generally collateralized and did not consider their associated liability material. No legal proceedings were reported. Disclosure controls were assessed as effective, and no material Q1 change in internal control was reported.
- The statements are interim and unaudited; management cautioned that Q1 results are not necessarily indicative of full-year results. Forward-looking statements are subject to economic, rate, funding, credit, regulatory, and competitive risks.
Important facts for investors to verify
- Whether growth in TDRs and past-due accruing loans affects subsequent credit losses, provision expense, or OREO write-downs.
- Whether the $28.4 million Level 3 CDO valuation and related cash-flow assumptions remain supportable, and whether issuers resume or defer payments.
- Whether the allowance remains adequate as loan mix, collateral values, and criticized credits change.
- Whether regulatory approvals continue for preferred dividends and trust-preferred interest, and the implications of the continuing common-dividend suspension.
- Whether core deposit growth, funding costs, interest-rate sensitivity, and stated available borrowing capacity develop as management expects.