First United Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. First United is a Maryland bank holding company whose primary subsidiary is First United Bank & Trust. Financial statements are unaudited.
Financial performance and condition
Amounts are in millions of dollars except per-share data and ratios.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Interest income | $14.6 | $13.3 | $43.1 | $38.4 |
| Net interest income | $11.6 | $11.3 | $34.5 | $32.7 |
| Provision for loan losses | $(0.013) | $0.5 | $0.7 | $1.2 |
| Other operating income, including gains | $5.1 | $3.8 | $12.7 | $11.4 |
| Other operating expenses | $11.2 | $11.1 | $33.7 | $32.4 |
| Net income | $4.5 | $2.8 | $10.2 | $8.3 |
| Diluted EPS | $0.63 | $0.39 | $1.44 | $1.17 |
| FTE net interest margin | 3.62% | 3.79% | 3.67% | 3.73% |
For the first nine months, annualized return on average assets was 0.97% (0.84% in 2018) and return on average equity was 10.96% (9.83%). Dividends declared were $0.13 per share in Q3 and $0.31 for the nine months, versus $0.09 and $0.27, respectively, in 2018.
| Balance-sheet metric | September 30, 2019 | December 31, 2018 |
|---|---|---|
| Total assets | $1,441.0 | $1,384.5 |
| Gross loans | $997.3 | $1,007.7 |
| Allowance for loan losses | $12.0 | $11.0 |
| Total deposits | $1,136.8 | $1,067.5 |
| Cash and cash equivalents | $84.2 | $23.5 |
| Short-term borrowings | $50.3 | $77.7 |
| Long-term borrowings | $100.9 | $100.9 |
| Shareholders’ equity | $129.3 | $117.1 |
- Cash flow, nine months: Operating activities provided $6.1 million, investing activities provided $14.7 million, and financing activities provided $39.8 million. Cash increased $60.6 million to $84.2 million.
- Capital: At September 30, consolidated total capital, Tier 1, common equity Tier 1, and Tier 1 leverage ratios were 16.95%, 15.82%, 13.32%, and 11.68%, respectively. The Bank’s corresponding ratios were 16.25%, 15.08%, 15.08%, and 10.91%.
- Credit quality: Non-accrual loans were $11.7 million, or 1.17% of loans, versus $4.9 million, or 0.49%, at year-end. The allowance was 1.20% of gross loans. Nine-month net recoveries were $0.3 million, compared with net charge-offs of $0.8 million in 2018.
Material changes versus comparable periods
- Net income rose to $10.2 million for the nine months and $4.5 million for Q3. Management attributed the improvement to higher net interest income, lower loan-loss provision, and increased other income.
- Reported earnings included a $1.1 million tax-exempt BOLI death benefit in Q3. Excluding its impact, management reported EPS of $1.29 for the nine months and $0.48 for Q3, compared with reported EPS of $1.44 and $0.63.
- Net interest income increased, but margin narrowed: FTE NIM declined 6 basis points for the nine-month comparison and 17 basis points for Q3. Management cited higher deposit rates and funding costs; loan yields and balances also contributed to interest income growth.
- Deposits increased $69.3 million from year-end, while short-term borrowings declined $27.4 million, including repayment of $40.0 million in overnight correspondent borrowings. Cash rose substantially, in part because of deposit growth and commercial loan payoffs.
- Gross loans declined $10.4 million from year-end. Non-accrual loans and substandard credits increased primarily because one large acquisition-and-development loan moved to non-accrual and entered forbearance; management established a $1.9 million specific allowance.
- Other operating expenses rose $1.3 million for the nine months. Higher equipment, occupancy, data-processing, and OREO costs were partly offset by lower miscellaneous expenses and FDIC premiums.
Outlook, risks, and unusual items
- No formal earnings or revenue guidance is provided. Management expects annual salary and benefit savings of approximately $1.4 million beginning in 2020 from a voluntary separation program, net of the expected impact of executive equity compensation plans. Approximately 30 associates signed separation agreements; 2019 Q4 severance expense was projected at $0.2 million, partly offset by $0.1 million of savings.
- Management described the company as asset-sensitive. Its September 30, 2019 simulation estimated NII increases of $0.97 million under a +100 basis-point scenario and $3.00 million under +400 basis points, and a $2.43 million decrease under −100 basis points. These are modeled estimates, not guidance, and depend on assumptions.
- The available-for-sale portfolio included $13.5 million fair value of pooled trust preferred CDO securities, classified as Level 3, against $18.4 million amortized cost. Management reported no credit-related OTTI charges in the first nine months and said it did not intend, nor expect to be required, to sell impaired securities at a loss. Valuation depends on significant unobservable assumptions.
- Other risks include interest-rate and deposit-cost changes, loan demand and credit quality, collateral values, and regional economic conditions. Standby letters of credit were $9.5 million, up from $3.4 million at year-end; total disclosed credit commitments, including letters of credit, were $139.3 million.
- Operating lease accounting adopted in 2019 added a $2.7 million right-of-use asset and $3.3 million lease liability; management reported no material effect on earnings or cash flows. The filing reports no legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether recurring earnings support reported growth after excluding the BOLI death benefit and considering the timing and sustainability of other income.
- Developments, collateral appraisals, forbearance terms, and allowance adequacy for the large non-accrual A&D loan; monitor further changes in non-accrual and substandard balances.
- Whether deposit growth persists at a cost that supports margins, given the reported decline in FTE NIM and higher deposit rates.
- Changes in the valuation and credit performance of the Level 3 CDO holdings, including assumptions behind their discounted-cash-flow valuations.
- Actual realization of projected VSP savings and the effect of related costs and compensation plans.