First United Corporation — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual filing; the supplied text does not provide a clear standalone fourth-quarter income statement. First United is a community bank holding company operating mainly in western Maryland and northeastern West Virginia. At year-end it reported $1.332 billion in assets, $827.9 million in net loans, $981.3 million in deposits and $109.0 million in shareholders’ equity.
Financial performance and condition
- Earnings: Net income was $5.6 million, down from $6.5 million in 2013. Net income available to common shareholders fell to $3.0 million from $4.7 million; diluted EPS was $0.48 versus $0.76. Return on average assets was 0.42% and return on average equity was 5.07%.
- Revenue and margin: Interest income was $46.4 million, down 7.1%; net interest income was $35.5 million, down 7.0%. Fully tax-equivalent net interest margin contracted to 3.00% from 3.25%. Total other operating income was $14.1 million, including $1.1 million in net gains, primarily from securities sales.
- Expenses and credit costs: Operating expenses declined 5.2% to $40.3 million. Provision for loan losses rose to $2.5 million from $0.4 million; net charge-offs increased to $4.0 million from $2.8 million.
- Loans and asset quality: Gross loans increased 3.7% to $840.0 million. Non-accrual loans declined to $11.6 million from $17.4 million, and total non-accrual and 90-days-past-due loans fell to $12.1 million from $18.6 million. The allowance was $12.1 million, or 1.44% of loans, versus 1.68% a year earlier. Other real estate owned declined to $12.9 million from $17.0 million.
- Cash flow and liquidity: Operating cash flow was $3.9 million, down from $18.7 million. Investing activities used $2.4 million and financing activities used $9.1 million. Cash and cash equivalents decreased $7.6 million to $35.5 million. Management reported $32.7 million of additional FHLB borrowing capacity, $70 million in unused correspondent lines, a $26.9 million unused Federal Reserve line and approximately $49 million available through wholesale money-market funds.
- Deposits and debt: Deposits increased slightly to $981.3 million, with non-interest-bearing deposits up $25.3 million as the company shifted away from higher-cost certificates of deposit. Total borrowings were $222.4 million, including $135.9 million of FHLB advances and $46.7 million of junior subordinated debt.
- Capital: Corporation and Bank total risk-based capital ratios were 15.40% and 15.60%, respectively; both were classified as well capitalized. Shareholders’ equity increased $7.1 million, partly reflecting a $4.0 million improvement in accumulated other comprehensive loss.
Material changes versus 2013
- Common earnings and EPS declined, primarily because interest income fell $3.5 million and loan-loss provision expense increased $2.1 million. Lower interest expense and operating costs partly offset the declines.
- Average loan balances fell and loan yields declined 43 basis points, while average investment securities increased. The net interest margin compressed by 25 basis points.
- Commercial and industrial loans grew $33.5 million and residential mortgages grew $16.7 million; commercial real estate and acquisition-and-development balances declined.
- Available-for-sale securities declined in balance. The company reclassified $107.6 million amortized cost of securities to held-to-maturity in June 2014.
- Preferred-stock and trust-preferred interest deferrals were terminated in 2014 after regulatory approvals; accumulated preferred dividends and deferred interest were paid. The preferred dividend rate rose from 5% to 9% in February 2014.
Outlook, risks and unusual items
- Management identified local economic conditions, competition and potential yield compression, interest-rate changes, and banking regulation as continuing challenges. No numerical earnings or growth guidance is provided.
- Management described the Bank as asset-sensitive at year-end. Its simulation estimated that a 100-basis-point rate increase would raise annual net interest income by $0.9 million, while a 100-basis-point decrease would reduce it by $2.3 million; these are model estimates subject to assumptions.
- Geographic and real-estate lending concentration remains material: approximately 12% of loans, or $99 million, were acquisition, construction and development loans. Management also cited possible losses beyond the allowance and collateral-value uncertainty as risks.
- The $25.3 million fair value of the pooled trust-preferred CDO portfolio was based on Level 3 inputs; its $37.1 million amortized cost exceeded fair value by $11.8 million. Management reported no credit-related OTTI during 2014, but valuation depends on significant unobservable assumptions and illiquid markets.
- The Bank held $37.1 million principal amount of notes collateralized primarily by trust-preferred securities or subordinated debt. Management concluded the notes were not prohibited by the Volcker Rule; if regulators disagreed, disposal could cause a considerable loss. The filing gives both a July 21, 2015 general conformance deadline and a specific January 21, 2015 disposal date in the event of regulatory disagreement.
- Common dividends remained suspended, and the company stated it had no present intention to resume them in the foreseeable future. Preferred dividends and trust-preferred interest payments remain subject to prior regulatory approval; failure to obtain approvals could again require deferral.
- Unusual items included a $0.4 million one-time BOLI death benefit. A fourth-quarter correction of a prior-period life-insurance accounting error adjusted opening 2013 retained earnings and the 2013 BOLI asset by $0.5 million; management deemed the prior-period effect immaterial.
- Management concluded goodwill of $11.0 million was not impaired despite the stock trading below book value. It reported effective disclosure controls and internal control over financial reporting. The independent auditor issued an unqualified opinion.
Important facts for investors to verify
- Whether net interest margin and loan yields stabilized after their 2014 declines, and whether loan growth can offset continued repricing pressure.
- Subsequent credit performance, net charge-offs, criticized loans, real-estate collateral values and the adequacy of the $12.1 million allowance.
- Valuation, cash flows and regulatory treatment of the Level 3 CDO portfolio and other trust-preferred-related notes, including the filing’s differing Volcker Rule dates.
- Availability and cost of liquidity sources, deposit mix and refinancing or maturity needs for borrowings.
- Regulatory approval status for preferred dividends and trust-preferred interest, and the resulting constraints on common dividends.
- Realization assumptions for $25.9 million of net deferred tax assets, pension obligations and goodwill impairment assumptions.