First United Corporation — 2019 Form 10-K
Business context and reporting period. First United Corporation is a community bank holding company operating primarily through First United Bank & Trust in western Maryland and northeastern West Virginia. This annual filing covers the fiscal year ended December 31, 2019; it is not a standalone fourth-quarter report. Amounts below are in U.S. dollars.
Financial performance and condition
- Profitability: Net income was $13.1 million, up 23% from $10.7 million in 2018. Diluted earnings per share were $1.85 versus $1.51. Return on average assets was 0.93% (0.81% in 2018); return on average equity was 10.44% (9.39%).
- Revenue and margins: Net interest income was $46.4 million, up from $44.2 million. Fully tax-equivalent net interest income rose 5.1% to $47.3 million, while fully tax-equivalent net interest margin narrowed to 3.68% from 3.74%. Interest income increased $5.7 million, partly offset by a $3.4 million rise in interest expense. Other operating income, including gains, increased to $16.8 million from $15.2 million.
- Expenses and taxes: Operating expenses increased 3.6% to $45.4 million. Income tax expense was $3.3 million; the effective tax rate was 20.3%, compared with 20.6% in 2018.
- Assets, loans and deposits: Total assets were $1.44 billion, up $58.3 million. Gross loans rose $44.4 million to $1.05 billion; deposits increased $74.5 million to $1.14 billion. Trust Department assets under supervision were approximately $902.2 million, versus $810.0 million.
- Credit quality: The allowance for loan losses was $12.5 million, or 1.19% of loans, versus $11.0 million and 1.10% in 2018. Provision expense declined to $1.3 million from $2.1 million, and the company recorded $0.2 million in net recoveries versus $1.0 million in net charge-offs. Non-accrual loans rose to $10.8 million from $4.9 million, primarily because an $8.0 million acquisition-and-development loan entered non-accrual status under a forbearance agreement.
- Cash flow: Operating activities provided $16.4 million; investing activities used $32.5 million; financing activities provided $42.6 million. Cash and cash equivalents increased $26.4 million to $50.0 million.
- Debt, capital and liquidity: Total borrowings were $149.7 million, down $29.0 million, including repayment of $40.0 million in overnight borrowings. The Corporation’s total risk-based capital ratio was 16.29% and the Bank’s was 15.60%; both were categorized as well capitalized. At year-end, available capacity included $143.7 million from the FHLB, $115.0 million in unsecured correspondent lines and $2.1 million at the Federal Reserve Discount Window. Management said liquidity was adequate.
- Shareholder returns: The Corporation paid $0.40 per share in dividends during 2019; no common stock was repurchased.
Material changes versus 2018
- Net income and EPS increased, supported by higher net interest income, lower loan-loss provision and higher other income. A $1.1 million BOLI death benefit contributed to the increase in other income.
- Net interest margin declined six basis points on a fully tax-equivalent basis despite Federal Reserve rate cuts. Deposit growth and higher deposit pricing earlier in the year raised interest expense.
- Loans and deposits grew, while total borrowings declined. Commercial loan production reached approximately $177 million; year-end commercial loan pipeline was $61 million.
- Non-accrual loans increased substantially, primarily due to the single $8.0 million A&D credit; past-due accruing loans of 30 days or more fell to 0.33% of loans from 1.10%.
- Other comprehensive loss was $1.6 million, versus income of $0.2 million in 2018, including pension and swap-related losses.
Outlook, commentary, risks and unusual items
- Management commentary: A voluntary employee separation program generated $0.2 million of net severance expense in 2019 and was projected to yield approximately $1.4 million of salary and benefit savings in 2020. Management described the commercial loan pipeline as strong. No formal earnings or financial guidance is provided in the filing.
- COVID-19: The filing identifies the coronavirus outbreak, which began disrupting markets in early 2020, as a potential material risk to customers, operations, personnel and results. This is a post-balance-sheet-period risk; the filing does not quantify its effect.
- Concentration and credit risks: Lending is geographically concentrated in Maryland and West Virginia, with significant real estate exposure. A&D loans were approximately 12% of total loans. Management stated CRE concentrations were below heightened regulatory guidance thresholds.
- Investment valuation: Available-for-sale collateralized debt obligations had a $14.4 million fair value and $4.1 million unrealized loss at year-end; these securities are Level 3 valuations relying on significant unobservable inputs. Management reported no additional credit-related impairment in 2019.
- Other risks and events: Interest-rate changes, competition, regulation, funding access, cybersecurity, and potential loan losses are identified risks. An activist investor group had notified the company of its intent to nominate three directors for the 2020 annual meeting. The company reported no material adverse effect expected from current legal proceedings.
- Accounting and audit: The company adopted lease accounting in 2019, recognizing a $2.7 million right-of-use asset and $3.3 million lease liability at adoption, with no material income-statement or cash-flow impact. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting, which was reported effective.
Important facts for investors to verify
- Progress in collecting, restructuring or resolving the $8.0 million A&D non-accrual loan, and any resulting provision or charge-off.
- Whether loan growth and the $61.0 million pipeline convert to funded loans without weakening underwriting or credit quality.
- Deposit pricing, funding mix and net interest margin trends following 2019 rate cuts.
- Assumptions and valuation sensitivity for the Level 3 CDO portfolio and the adequacy of the loan-loss allowance.
- Actual realization of the projected $1.4 million 2020 expense savings and the impact of COVID-19 on borrowers, earnings and liquidity.
- Developments in the 2020 director-election contest, dividend capacity and any effect on strategic priorities.