First United Corporation — 2015 Form 10-K Summary
Business context and reporting period
Full fiscal year ended December 31, 2015; this is an annual report, not a quarterly filing. First United is a community-bank holding company serving western Maryland and northeastern West Virginia through First United Bank & Trust. The Bank operated 25 branches. Financial statements were audited by Baker Tilly, which issued an unqualified opinion.
Key financial results and position
| Metric | 2015 | 2014 |
|---|---|---|
| Total assets, year-end | $1.323 billion | $1.332 billion |
| Net loans, year-end | $867.1 million | $827.9 million |
| Deposits, year-end | $998.8 million | $981.3 million |
| Shareholders’ equity, year-end | $120.8 million | $109.0 million |
| Net interest income | $35.6 million | $35.5 million |
| Net interest margin, FTE | 3.04% | 3.00% |
| Net income | $10.9 million | $5.6 million |
| Net income available to common shareholders | $8.2 million | $3.0 million |
| Diluted earnings per common share | $1.31 | $0.48 |
| Net cash provided by operating activities | $22.2 million | $3.9 million |
Interest income was $45.0 million and interest expense was $9.4 million. Total other operating income was $25.0 million, including an $11.6 million arbitration recovery and net losses of $2.5 million. Operating expenses were $41.1 million; income tax expense was $5.1 million.
Year-end total borrowings were $183.4 million, down from $222.4 million. Cash and cash equivalents were $52.1 million, up from $35.5 million. Available additional funding included $104.2 million from the FHLB, $70.0 million in correspondent-bank lines, and $17.2 million at the Federal Reserve discount window. Management said liquidity was adequate.
Changes versus the prior year
- Net income available to common shareholders rose to $8.2 million from $3.0 million, primarily because of the one-time $11.6 million arbitration settlement recovery.
- Net interest margin edged up to 3.04% from 3.00%; net interest income was essentially flat as lower interest expense offset lower interest income.
- Loans grew 4.6% to $879.0 million gross, led by commercial real estate, acquisition and development, and residential mortgage loans. Deposits rose $17.5 million, with management shifting funding toward core transaction and savings accounts and away from certificates of deposit.
- Borrowings declined by $39.0 million, mainly following repayment of a $30.0 million FHLB advance and maturity of $5.0 million in subordinated debentures.
- The allowance for loan losses fell to $11.9 million from $12.1 million; provision expense declined to $1.1 million from $2.5 million, and net charge-offs decreased to $1.2 million from $4.0 million.
Outlook, risks, contingencies, and unusual items
- Management identified local economic conditions, real-estate credit concentrations, competition, interest-rate movements, and regulatory changes as ongoing risks. Approximately 13% of loans were acquisition, construction, and development loans, concentrated in the company’s regional markets.
- Non-accrual loans increased to $15.5 million from $11.6 million; accruing loans past due 30 days or more were 1.70% of loans versus 1.62%. Other real estate owned declined to $6.9 million from $12.9 million.
- The CDO portfolio was valued using significant unobservable inputs (Level 3). Its year-end fair value was $22.2 million against $25.8 million amortized cost. The company recorded $3.5 million of realized losses related to transfers of CDO investments; management said it found no credit-related OTTI during 2015. A Volcker Rule determination concerning certain CDOs remained a risk.
- The Corporation’s total risk-based capital ratio was 17.37%, and the Bank’s was 16.24%; both were classified as well capitalized. The Corporation remained subject to an informal Federal Reserve agreement requiring prior approval for specified distributions and payments.
- No common dividends were declared in 2015 or 2014; the common-dividend suspension remained in effect. Preferred-stock dividends and interest payments on trust preferred debentures depended on regulatory approvals. The Corporation redeemed $10.0 million of Series A preferred stock on February 15, 2016.
- Management reported effective disclosure controls and internal control over financial reporting. It said current legal proceedings were not expected to have a material adverse effect; the filing does not provide a clear quantified exposure.
Important facts for investors to verify
- How much of 2015 earnings is sustainable without the $11.6 million arbitration recovery, and what drove the CDO-related realized losses?
- Whether the rise in non-accrual loans, especially commercial real estate, leads to higher charge-offs or allowance needs.
- The assumptions and sensitivity behind Level 3 CDO valuations, and the regulatory outcome of the Volcker Rule analysis.
- Current Federal Reserve approvals and restrictions affecting preferred dividends, trust-debenture interest, common dividends, and capital distributions.
- Whether deposit growth, available borrowing capacity, and capital remain adequate as loans grow and market rates change.