First United Corporation — Q2 2015 Form 10-Q
Business context and period. First United Corporation is a bank holding company whose primary subsidiary is First United Bank & Trust. This unaudited filing covers the three and six months ended June 30, 2015; balance-sheet comparisons are with December 31, 2014. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Interest income | $11.27 | $11.67 | $22.69 | $23.42 |
| Net interest income | $8.78 | $8.94 | $17.67 | $17.86 |
| Provision for loan losses | $0.05 | $0.58 | $0.13 | $0.94 |
| Other operating income | $3.37 | $4.16 | $6.41 | $7.10 |
| Operating expenses | $10.62 | $10.94 | $20.65 | $20.67 |
| Net income | $1.18 | $1.24 | $2.54 | $2.60 |
| Net income available to common shareholders | $0.50 | $0.44 | $1.19 | $1.35 |
| Basic and diluted EPS | $0.08 | $0.07 | $0.19 | $0.22 |
- Margins and returns: Fully tax-equivalent net interest margin was 3.00% in Q2, down from 3.04%; first-half margin was 3.04%, versus 3.06%. First-half annualized return on average assets was 0.38% (0.39% in 2014) and return on average equity was 4.60% (4.82%).
- Balance sheet at June 30: Assets were $1,343.1; gross loans $845.1; net loans $833.3; deposits $1,003.1; and shareholders’ equity $113.2. Compared with year-end, assets rose $10.8, loans $5.1, deposits $21.8, and equity $4.2.
- Cash flow for the first half: Operating activities provided $5.8, investing activities provided $12.8, and financing activities provided $3.8. Cash and cash equivalents increased $22.5 to $57.9. The company also purchased $5.5 of bank-owned life insurance.
- Debt and funding: Short-term borrowings were $28.3 and long-term borrowings $177.6, down from $39.8 and $182.6, respectively, at year-end. The $5.0 junior subordinated debenture that matured in March was repaid. Deposits increased as core demand and savings balances grew while time deposits declined.
- Liquidity and capital: Management said liquidity was adequate. At June 30, stated available funding included $70.0 in unsecured correspondent lines, $22.4 at the Fed Discount Window, and approximately $62.7 through the FHLB. Consolidated total capital, Tier 1 risk-based capital, common equity Tier 1, and Tier 1 leverage ratios were 15.70%, 13.53%, 8.89%, and 10.32%, respectively; the Bank’s ratios also exceeded the applicable well-capitalized thresholds.
Material changes and management commentary
- First-half common earnings declined to $1.19 from $1.35, primarily as lower net interest income and fewer securities gains outweighed lower loan-loss provision expense. Q2 common earnings rose to $0.50 from $0.44, reflecting lower provision and OREO expenses and lower preferred dividends, partly offset by fewer securities gains and higher personnel costs.
- Net interest income remained under pressure as loan yields fell with repricing and new lending at lower rates. Lower interest expense, including reduced deposit and borrowing costs, only partly offset the decline. Management said it would continue shifting the deposit mix toward lower-cost core accounts.
- First-half other operating income fell mainly because prior-year gains on sales of previously impaired CDO securities did not recur. In Q2 2015, the company recorded $0.1 of net gains versus $1.0 in Q2 2014. Management attributed the earlier sale opportunity to market activity following Volcker Rule clarification.
- Credit metrics were mixed. Non-accrual loans were $11.9, or 1.41% of loans, versus $11.6, or 1.38%, at year-end; loans 90 days or more past due and still accruing were $0.4. Total TDRs increased to $18.4 from $13.7. OREO declined to $11.6 from $12.9. The allowance was $11.8, or 1.40% of loans, versus $12.1, or 1.44%, at year-end; first-half net charge-offs were $0.4, compared with $2.1 a year earlier.
- In Q2, management established a $0.5 unallocated portion of the loan-loss allowance. First-half provision expense was lower due to lower historical loss factors and charge-offs; management said it considered the allowance adequate, while noting that future provision needs depend on portfolio quality, losses, and economic conditions.
- The available-for-sale CDO portfolio comprised 16 pooled trust preferred securities with $35.6 amortized cost and $30.0 fair value, including $5.5 in net unrealized losses. Valuation is Level 3 and relies on third-party discounted cash-flow estimates. Management reported no credit-related OTTI on these securities in the first half, but cited illiquidity, marketability, and economic conditions as sources of valuation pressure.
Outlook, risks, and contingencies
- The filing provides no quantified earnings or revenue guidance. Management described the company’s investment portfolio restructuring as better positioning it for rising rates and reported that it was asset-sensitive at June 30; actual results remain exposed to rate movements and repricing assumptions.
- Cash dividends on common stock remained suspended. Payments on Series A preferred stock and interest on trust preferred debentures require prior Federal Reserve approval; Bank dividends are also subject to regulatory approval. The company cautioned that future approvals and payments are not assured. A renewed deferral of trust preferred interest would restrict common-stock dividends and other capital distributions.
- The company repurchased and canceled the Treasury’s warrant on May 26, 2015 for approximately $0.12, recorded in other expense; the Treasury then had no remaining equity investment in the Corporation.
- Loan commitments totaled $110.5 and standby letters of credit $0.8 at June 30. Management expects most commitments to expire undrawn and believes collateral and guarantees support the letters of credit. The filing reports no material change in risk factors, no legal proceedings, and effective disclosure controls.
- Management identified interest-rate changes, deposit flows and funding costs, loan and investment portfolio quality, local economic conditions, regulatory actions, and fair-value and loan-loss estimates as risks. Interim results are not necessarily indicative of full-year performance.
Important facts for investors to verify
- Track margin and loan-yield trends, deposit pricing and mix, and whether core deposit growth can offset lower asset yields.
- Review non-accrual loans, TDR growth, OREO write-downs, charge-offs, and the adequacy and composition of the allowance, including the new unallocated reserve.
- Assess the CDO portfolio’s Level 3 valuation assumptions, underlying issuer performance, and the effect of any further market or credit deterioration.
- Confirm ongoing regulatory approvals for preferred dividends and trust preferred interest, and the implications of continued common-dividend suspension.
- Monitor liquidity sources, borrowing maturities, capital ratios under Basel III, and sensitivity of earnings and economic value to interest-rate changes.