First United Corporation — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The company is a community-bank holding company serving western Maryland and northeastern West Virginia. It reported 23 banking offices and approximately $1.3 billion in assets. This is an annual filing; it does not provide a separate Q4 results summary.
Financial performance and condition
| Metric | 2016 | 2015 |
|---|---|---|
| Total assets at year-end | $1.318 billion | $1.323 billion |
| Net loans at year-end | $882.0 million | $867.1 million |
| Deposits at year-end | $1.014 billion | $998.8 million |
| Net interest income | $37.6 million | $35.6 million |
| Net interest margin, fully tax-equivalent | 3.19% | 3.04% |
| Provision for loan losses | $3.1 million | $1.1 million |
| Net income | $7.3 million | $13.0 million |
| Net income available to common shareholders | $5.3 million; $0.84 per share | $10.3 million; $1.65 per share |
| Net cash provided by operating activities | $11.7 million | $22.2 million |
- Net interest income increased 5% as loan growth and lower funding costs more than offset lower investment income. Management shifted funding toward lower-cost core deposits and used investment-portfolio cash flows to support loan growth.
- Loans increased 1.5%; deposits increased $15.4 million. Net loans were 67% of year-end assets, and deposits were 84% of liabilities.
- Year-end total borrowings were $167.7 million, down from $183.4 million. This included $131.7 million of long-term borrowings. Available capacity included $172.4 million at the FHLB, $70.0 million in correspondent-bank lines, and $10.6 million at the Federal Reserve Discount Window.
- Year-end shareholders’ equity was $113.7 million, down from $120.8 million, reflecting the $10.0 million preferred-stock redemption and a $2.5 million increase in accumulated other comprehensive loss, partly offset by earnings.
- The Corporation’s total risk-based capital ratio was 16.71%, common equity Tier 1 ratio 10.74%, and Tier 1 leverage ratio 10.95%. The Bank was also classified as well capitalized.
Material changes and notable items
- Common-shareholder earnings fell about 49%, primarily because 2015 included an $11.6 million arbitration award recorded in other income. Other operating income declined to $14.1 million from $25.0 million.
- The 2016 loan-loss provision rose to $3.1 million as net charge-offs increased to $5.1 million from $1.2 million. A $2.5 million charge-off on a Pennsylvania mall participation loan was a significant contributor. The allowance ended the year at $9.9 million, or 1.11% of loans, versus $11.9 million, or 1.36%, a year earlier.
- Non-accrual loans declined to $13.9 million from $15.5 million; OREO increased to $10.9 million from $6.9 million. Total troubled debt restructurings fell to $9.3 million from $14.0 million.
- Investment securities declined in fair value to $237.2 million from $275.8 million. Available-for-sale securities had a $9.6 million net unrealized loss; $20.3 million of the portfolio consisted of Level 3 collateralized debt obligations (CDOs), with $7.7 million in unrealized losses. Management reported no additional credit-related impairment charge in 2016.
- A one-time BOLI death benefit contributed to 2016 BOLI income. Operating expenses fell 4.9%, including lower FDIC premiums and OREO expenses, partly offset by higher miscellaneous expenses.
Outlook, risks, and contingencies
- Management provided no quantified earnings or revenue guidance. It cited local economic conditions, competitive pressure on loan and deposit yields, interest-rate fluctuations, and banking regulation as continuing challenges.
- The Corporation’s interest-rate modeling showed it was asset-sensitive at year-end. A modeled +100 basis-point rate change increased annual net interest income by an estimated $1.5 million; a −100 basis-point change reduced it by an estimated $3.2 million. These are scenario estimates, not forecasts.
- The company had an informal agreement with the Federal Reserve Bank of Richmond requiring prior consent for dividends and certain other distributions. Common dividends had been suspended since 2010. The company said approvals had been received for specified preferred dividends and TPS interest payments; future distributions remain subject to regulatory approval and other restrictions.
- After year-end, the company launched a rights offering for up to 783,626 common shares at $11.93 per share, with standby purchasers potentially covering up to 570,304 shares. Proceeds were intended to offset a planned $10 million Series A preferred redemption and repayment of $10.8 million of junior subordinated debentures. The planned transactions were conditional on sufficient offering proceeds.
- Credit risk is geographically concentrated and tied to real estate; commercial real estate and acquisition/development lending, local economic conditions, collateral values, and potentially higher charge-offs are key exposures. Other risks include rate and liquidity changes, CDO valuation and Volcker Rule interpretation, deferred-tax-asset realization, cybersecurity, competition, and regulatory costs.
- The filing says 2015 financial statements should no longer be relied upon because of an error involving the transfer of eight pooled trust preferred securities between the Bank and Corporation. Management reported adding review controls for consolidating entries and concluded that controls were effective at year-end 2016. The independent auditor issued an unqualified opinion on the 2016 and 2015 financial statements.
- Management stated that current legal proceedings were not expected to have a material adverse effect. Loan commitments and commercial letters of credit totaled $122.3 million at year-end; management described expected funding needs as substantially lower than commitments and did not consider the related guarantee liability material.
Key facts investors should verify
- Review the 2015 restatement and the specific correction for the pooled trust preferred securities transfer, including any effects on comparative financial statements.
- Assess the durability of earnings excluding the 2015 arbitration award and the 2016 one-time BOLI death benefit, alongside the higher loan-loss provision and charge-offs.
- Examine CDO cash-flow assumptions, Level 3 valuation sensitivity, unrealized losses, and the potential consequences if regulators disagree with management’s Volcker Rule analysis.
- Confirm the outcome and proceeds of the rights offering and whether the planned preferred-stock redemption and debenture repayment were completed.
- Monitor dividend and debt-service permissions, capital levels after the planned transactions, credit quality and OREO, and the realization assumptions for the $19.3 million net deferred tax asset.