First United Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. First United is a bank holding company whose principal subsidiary is First United Bank & Trust. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2021 / March 31, 2021 | Comparable period / prior year-end |
|---|---|---|
| Net income; diluted EPS | $3.43 million; $0.49 | Q1 2020: $1.76 million; $0.25 |
| Net interest income | $12.24 million GAAP; $12.48 million fully taxable equivalent (FTE) | Q1 2020: $11.89 million GAAP; $12.11 million FTE |
| FTE net interest margin | 3.11% | Q1 2020: 3.69% |
| Total assets | $1.782 billion | December 31, 2020: $1.733 billion |
| Net loans; deposits | $1.179 billion; $1.468 billion | December 31, 2020: $1.150 billion; $1.422 billion |
| Shareholders’ equity | $129.2 million | December 31, 2020: $131.0 million |
| Cash and cash equivalents | $193.0 million | December 31, 2020: $149.4 million |
| Borrowings | $51.5 million short-term; $100.9 million long-term | December 31, 2020: $49.2 million short-term; $100.9 million long-term |
- Operating cash flow was $7.9 million; investing activities used $11.6 million and financing activities provided $47.3 million. Cash and cash equivalents increased $43.6 million during the quarter.
- Reported return on average assets was 0.79% and return on average equity was 10.58%. The company also reported non-GAAP adjusted figures excluding settlement expense: net income of $6.00 million, EPS of $0.86, return on average assets of 1.38% and return on average equity of 18.36%.
- Consolidated capital ratios included total risk-based capital of 16.24%, Tier 1 risk-based capital of 14.99%, common equity Tier 1 of 12.76%, and Tier 1 leverage of 10.22%. The company said it and the Bank were well-capitalized.
- The company declared a $0.15 per-share dividend, versus $0.13 in Q1 2020.
Changes versus the prior comparable period
- Net income nearly doubled year over year despite a $3.3 million litigation settlement expense recorded in Q1 2021. Management attributed the improvement principally to a $2.5 million lower loan-loss provision, higher noninterest income and modestly higher net interest income.
- Net interest income increased, but the FTE margin fell 58 basis points to 3.11%. Lower loan and investment yields and very low returns on elevated cash balances outweighed benefits from reduced deposit and borrowing costs.
- Noninterest income rose to $5.33 million from $4.05 million, including higher trust, debit-card and mortgage-sale gains. Service-charge income declined, primarily with lower overdraft activity.
- Noninterest expense rose to $12.93 million from $11.01 million, including the settlement expense. Excluding that item, expenses were lower than the reported total suggests; management’s non-GAAP adjustment presents the settlement separately.
- Gross loans increased $31.5 million from year-end, driven mainly by PPP and commercial lending; deposits rose $45.9 million. Accumulated other comprehensive loss widened by $4.3 million, contributing to the decline in equity.
Outlook, commentary, risks and unusual items
- Guidance: The filing provides no specific earnings or financial guidance. Management cautions that first-quarter results are not necessarily indicative of full-year results.
- COVID-19 and credit: The pandemic’s duration and economic effects remain uncertain. Nonaccrual loans increased to $7.9 million from $3.3 million at year-end, largely after two hospitality loans totaling about $4.0 million were moved to nonaccrual. Management expected those loans to return to payment status in the near term, but that outcome is uncertain.
- At March 31, the allowance for loan losses was $16.6 million, or 1.38% of loans including PPP loans (1.57% excluding PPP loans). The quarter’s provision was $0.1 million, compared with $2.7 million in Q1 2020. Management considered the allowance adequate; actual losses may differ from estimates.
- The company originated $59.8 million of new-round PPP loans in Q1. PPP loans totaled $145.2 million at quarter-end, including $85.3 million remaining from the 2020 program. As of April 24, 12 COVID-related loan modifications totaled $5.7 million.
- Settlement and repurchase: On April 16, 2021, the company agreed to settle litigation with Driver Opportunity Partners for $3.3 million, recorded in Q1. An insurer’s $404,173 contribution toward settlement and legal costs was recorded as noninterest income; the company is pursuing additional insurance proceeds without assurance of recovery. Separately, it agreed to repurchase 360,737 shares from Driver at $18 per share under its repurchase program; the filing does not establish that the purchase had been completed by the report date.
- Market and valuation risks: Available-for-sale securities had a $10.4 million net unrealized loss at quarter-end, reflected in accumulated other comprehensive loss. The $13.6 million collateralized debt obligation portfolio is Level 3, valued using significant unobservable inputs; management reported no credit-related OTTI in Q1. Interest-rate sensitivity modeling showed estimated net interest income increases under rising-rate scenarios and decreases under a 100-basis-point decline, subject to model assumptions.
- Management reported available liquidity sources of approximately $130.0 million in correspondent-bank lines, $1.0 million at the Federal Reserve Discount Window and $120.2 million in FHLB borrowing capacity. It described liquidity as adequate. The company also disclosed $226.9 million in lending commitments and standby letters of credit.
Important facts for investors to verify
- Whether the hospitality borrowers’ cash flows recover and whether nonaccrual and criticized-loan balances increase or decline.
- PPP forgiveness pace, remaining PPP balances and their effects on loan yields, deferred fees and reported margin.
- Completion and funding of the agreed share repurchase, and the amount of any further insurance recovery related to the litigation settlement.
- Changes in net interest margin, unrealized securities losses and the assumptions supporting Level 3 CDO valuations.
- Future allowance requirements, deposit and liquidity trends, and the company’s capital position as loan commitments are funded.