First United Corporation — Q3 2018 Form 10-Q
Business context and reporting period
First United Corporation is a bank holding company whose principal subsidiary is First United Bank & Trust. This unaudited quarterly report covers the three and nine months ended September 30, 2018; balance-sheet comparisons are against December 31, 2017. Dollar amounts below are in millions unless stated otherwise.
Key financial metrics
| Metric | Q3 2018 / September 30, 2018 | Comparable period / prior year-end |
|---|---|---|
| Net income available to common shareholders | $2.76; $0.39 per diluted share | Q3 2017: $1.79; $0.25 per share |
| Nine-month net income available to common shareholders | $8.29; $1.17 per diluted share | Nine months 2017: $5.31; $0.77 per share |
| Net interest income | Q3: $11.26; nine months: $32.71 | Q3 2017: $10.10; nine months 2017: $29.40 |
| Net interest margin, fully taxable equivalent | Q3: 3.79%; nine months: 3.73% | Q3 2017: 3.37%; nine months 2017: 3.36% |
| Other operating income / expenses | Nine months: $11.40 / $32.41 | Nine months 2017: $10.63 / $29.37 |
| Provision for loan losses | Q3: $0.47; nine months: $1.19 | Q3 2017: $0.90; nine months 2017: $1.81 |
| Total assets / net loans | $1,347.9 / $953.7 | December 31, 2017: $1,336.5 / $882.5 |
| Deposits / shareholders’ equity | $1,024.6 / $115.6 | December 31, 2017: $1,039.4 / $108.4 |
| Cash and cash equivalents | $23.6 | December 31, 2017: $83.8 |
| Borrowings | Short-term $86.8; long-term $100.9 | December 31, 2017: $48.8; $120.9 |
| Credit quality | Non-accrual loans $4.8 (0.50% of loans); allowance $10.3 (1.07% of gross loans) | December 31, 2017: $7.1 (0.80%); allowance $10.0 |
| Capital ratios | Consolidated total capital 16.35%; CET1 12.82%; Tier 1 leverage 11.72% | Well-capitalized thresholds: 10.00%; 6.50%; 5.00%, respectively |
Nine-month cash flow: operating activities provided $7.6; investing activities used $69.1; financing activities provided $1.3. Cash and cash equivalents declined $60.2, primarily reflecting loan growth and loan-pool purchases.
Material changes versus comparable periods
- Nine-month common earnings increased to $8.3 from $5.3; Q3 earnings rose to $2.8 from $1.8. Management attributed improvement chiefly to higher net interest income, stronger wealth-management revenue, lower loan-loss provision, and reduced preferred dividends following Series A preferred-stock redemptions.
- Nine-month FTE net interest income increased 11.6%, with margin rising to 3.73% from 3.36%. Loan yields benefited from repricing, new higher-rate lending and purchased loan pools. Deposit pricing pressure increased interest expense.
- Operating expenses rose $3.0 year over year for the nine-month period, largely from staff costs, equipment and data-processing costs, and OREO valuation write-downs. OREO expense was $0.68 versus $0.31.
- Gross loans grew $71.5, or 8.0%, since year-end, including increases in commercial and industrial, residential mortgage and consumer loans. Deposits declined $14.8. Short-term borrowings increased $38.0, partly reflecting a $15.0 FHLB advance reclassified at maturity and funding needs associated with loan growth.
- Non-accrual loans decreased $2.3 and OREO fell $2.7 since year-end. Management cited loan payoffs and charge-offs, partly offset by a new $1.9 million commercial real estate non-accrual credit. Accruing loans at least 30 days past due declined to 0.36% of loans from 0.63%.
Outlook, commentary, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management said liquidity was adequate for current and anticipated demands and reported no known trends or uncertainties likely to materially impair liquidity or capital needs.
- The company was asset-sensitive at September 30. Its simulation estimated annual net interest income changes of +$0.44 million for a +100-basis-point rate shock and $(1.71) million for a −100-basis-point shock. These are model estimates subject to assumptions, not forecasts.
- Management considered the $10.3 million allowance adequate, but noted that future provision needs depend on loan composition and growth, credit quality, loss experience, recoveries and qualitative factors. The allowance is based on estimates; actual losses may differ.
- Available-for-sale securities had a $7.3 million net unrealized loss relative to amortized cost. The $16.6 million pooled trust-preferred CDO portfolio is Level 3, valued using significant unobservable inputs. Management reported no credit-related OTTI charges during the first nine months of 2018, but acknowledged inactive markets, issuer payment deferrals/defaults and valuation uncertainty.
- Other stated risks include interest-rate and deposit-cost changes, competition, regional economic conditions, loan and investment quality, growth management, and regulatory changes. The filing reports no legal proceedings and no material change in risk factors since the 2017 Form 10-K.
- Standby letters of credit totaled $2.7 million; total unused lending commitments and letters of credit were $131.1 million. Management did not consider the guarantee liability material. The 2018 adoption of revenue-recognition guidance had no material financial-statement impact; expected effects of CECL and lease-accounting standards were still under assessment.
Most important facts for investors to verify
- Whether loan growth can be sustained without further deposit attrition or increased wholesale funding costs, given the $60.2 million cash decline and higher short-term borrowings.
- How much earnings improvement is repeatable: separate loan-driven margin growth from the lower provision, tax-rate reduction and prior preferred-dividend burden.
- Developments in the new $1.9 million non-accrual CRE credit, criticized loans, charge-offs and the adequacy of the allowance as the portfolio expands.
- The assumptions and sensitivity of Level 3 CDO valuations, including the remaining unrealized losses and collateral performance.
- Whether deposit repricing, interest-rate movements and the modeled asset-sensitive position produce results consistent with management’s assumptions.
- Capital and available liquidity facilities, including the reported $61.0 million of correspondent-bank lines, $5.5 million Fed Discount Window line and approximately $98.0 million of FHLB availability.