First United Corporation — FY2018 Form 10-K
Business and period. This annual report covers the fiscal year ended December 31, 2018; it is not a standalone fourth-quarter report. First United is a community bank holding company serving Western Maryland and northeastern West Virginia through First United Bank & Trust, with 25 banking offices. Its principal revenue sources are loan and securities interest, and fees from financial services.
Financial results and position
| Metric | 2018 | 2017 |
|---|---|---|
| Total assets at year-end | $1.385 billion | $1.336 billion |
| Gross loans / net loans at year-end | $1.008 billion / $996.7 million | $892.5 million / $882.5 million |
| Deposits at year-end | $1.068 billion | $1.039 billion |
| Shareholders’ equity at year-end | $117.1 million | $108.4 million |
| Net interest income (GAAP) | $44.2 million | $39.6 million |
| Net interest margin (FTE) | 3.74% | 3.37% |
| Net income | $10.7 million | $5.3 million |
| Net income available to common shareholders; diluted EPS | $10.7 million; $1.51 | $4.1 million; $0.58 |
| Provision for loan losses | $2.1 million | $2.5 million |
| Operating cash flow | $18.3 million | $12.9 million |
- Profitability and revenue: FTE net interest income rose 11.8% to $45.0 million. Interest income increased with loan growth and higher rates; interest expense also rose as deposit pricing and short-term borrowing costs increased. Other operating income was $15.0 million, up 5.1%.
- Expenses and credit: Operating expenses increased 11.8% to $43.8 million, including higher compensation, technology/equipment costs, and OREO write-downs. Net charge-offs fell to $1.0 million from $2.5 million; the allowance for loan losses rose to $11.0 million, or 1.10% of loans, from $10.0 million, or 1.12%.
- Cash flow: Investing activities used $113.7 million, principally reflecting $116.1 million of net loan growth and $9.5 million of premises and equipment purchases. Financing activities provided $35.2 million. Cash and cash equivalents declined $60.2 million to $23.5 million.
- Debt and liquidity: Total borrowings were $178.6 million at year-end, including $77.7 million short-term and $100.9 million long-term. Available capacity was reported as $104.3 million at the FHLB, $85.0 million on correspondent lines, and $4.4 million at the Fed Discount Window. Management said liquidity was adequate.
- Capital: The Corporation and Bank were classified as well capitalized. Consolidated total risk-based capital was 15.91%; the Bank’s was 15.43%. Shareholders’ equity increased during the year.
Material changes versus 2017
- Loans grew $115.2 million, or 13.1%, led by residential mortgages, commercial and industrial loans, and commercial real estate. Growth included purchases of a $15.0 million mortgage pool and a $10.0 million student-loan pool.
- Deposits increased $28.1 million. The Bank also obtained $25.0 million in short-term brokered certificates of deposit late in the year and relied more on overnight borrowings amid loan growth and deposit mix changes.
- Net income available to common shareholders rose to $10.7 million from $4.1 million. Drivers included higher net interest income, lower loan-loss provision, and lower income taxes; higher operating expenses partly offset those gains.
- The 2017 effective tax rate was 56.8%, including a $3.2 million one-time expense from revaluing deferred taxes after the Tax Act. The 2018 effective rate was 20.6%.
- The Corporation resumed common dividends in 2018 after suspending them in 2010; it declared $0.09 per share each quarter. No common shares were repurchased.
- Non-accrual loans decreased to $4.9 million from $7.1 million, while accruing loans 30 days or more past due rose to 1.10% of loans from 0.63%.
Outlook, risks, contingencies, and unusual items
- Outlook: The filing provides no specific earnings or revenue guidance. Management described ongoing loan growth and active liquidity and interest-rate risk management; future results remain exposed to rates, funding costs, competition, and local economic conditions.
- Interest-rate exposure: Although management characterized the balance sheet as asset sensitive, its model estimated net interest income declines under all shown rate scenarios: $163,000 for +100 basis points, $1.939 million for +400 basis points, and $4.007 million for -100 basis points. These are modeled estimates subject to assumptions, not forecasts.
- Credit and concentration risk: Lending is concentrated geographically and substantially secured by real estate. A&D loans were $118.4 million, approximately 12% of total loans. Management cited improving local economies and asset quality, but losses could exceed the allowance; CECL adoption, planned for January 1, 2020, may increase the allowance.
- Investment valuation: Available-for-sale securities had $137.6 million fair value versus $144.1 million amortized cost. The $15.3 million pooled trust-preferred CDO portfolio is Level 3, valued using significant unobservable inputs in an illiquid market. Management reported no additional credit-related impairment charge in 2018.
- Accounting correction: In February 2019, the Company identified a prior-period OREO appraisal error. It said 2017 OREO had been overstated by $0.4 million and expense understated by $0.3 million net of tax; management judged the error immaterial to both 2017 and 2018 statements and corrected it in 2018.
- Other matters: Loan commitments and standby letters of credit were $123.6 million and $3.4 million, respectively, in the MD&A; a separate note reports total commitments of $127.0 million, including $3.4 million of standby letters. Management did not consider these arrangements materially adverse. Management and the auditor reported effective internal control over financial reporting. Legal proceedings in the ordinary course were not expected to have a material adverse effect.
- Key risks also include cybersecurity and third-party service-provider exposure, regulatory and compliance costs, deposit competition and funding availability, and potential impairment of securities, goodwill, or deferred tax assets.
Important facts for investors to verify
- Whether strong loan growth can be funded without further increases in deposit pricing, brokered funding, or short-term borrowings—and how this affects margins and liquidity.
- Credit trends behind the increase in loans past due, particularly in commercial real estate, A&D, and consumer lending, and the adequacy of the $11.0 million allowance.
- The assumptions and sensitivity of the Level 3 CDO valuation, and any further market-value or credit deterioration in the investment portfolio.
- The effect of CECL implementation on the allowance, regulatory capital, and earnings when adopted.
- The correction of the OREO appraisal error and the effect of 2018 OREO write-downs; also reconcile cash dividends paid with dividends declared and the reported quarterly amounts.
- The sustainability of earnings growth after the one-time 2017 tax revaluation and amid higher operating expenses and changing interest rates.