First United Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. First United is a bank holding company whose primary subsidiary is First United Bank & Trust. Financial amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net interest income | $9.409 | $8.894 |
| Net interest margin, fully tax-equivalent | 3.23% | 3.07% |
| Provision for loan losses | $0.568 | $0.074 |
| Other operating income, including net gains | $3.604 | $3.056 |
| Operating expenses | $9.897 | $10.049 |
| Income before taxes | $2.548 | $1.827 |
| Net income | $1.871 | $1.368 |
| Net income available to common shareholders | $1.196 | $0.693 |
| Basic and diluted EPS | $0.19 | $0.11 |
Net interest income on a fully tax-equivalent basis was $9.558 million, up 4.9%. Management attributed the improvement primarily to lower funding costs, including a 19-basis-point decline in the average rate on interest-bearing liabilities. The effective tax rate was 26.6%, versus 25.1%.
Financial position, cash flow and capital
- At March 31, total assets were $1.325 billion, net loans $888.3 million, deposits $1.016 billion and shareholders’ equity $111.1 million. Gross loans rose $21.6 million (2.5%) from year-end; deposits rose $17.0 million. Available-for-sale and held-to-maturity securities declined to $155.2 million and $101.5 million, respectively.
- Cash and cash equivalents were $53.3 million, up $1.1 million from year-end. Q1 operating cash flow was $4.1 million, investing cash flow was negative $3.1 million and financing cash flow was positive $0.1 million.
- Short-term borrowings were $29.6 million and long-term borrowings $147.5 million. Total deposits were the principal funding source. Management reported available capacity of $70.0 million on correspondent lines, $14.5 million at the Fed Discount Window and approximately $134.7 million through the FHLB.
- Regulatory capital ratios remained above stated “well-capitalized” thresholds. At March 31, consolidated total capital was 16.51%, Tier 1 capital 14.18%, common equity Tier 1 10.16% and Tier 1 leverage 10.63%. The Bank’s respective ratios were 16.37%, 15.12%, 15.12% and 10.84%.
Material changes and credit quality
- Common earnings increased to $1.196 million from $0.693 million. Higher other income—helped by securities-sale gains—and lower operating expenses more than offset the higher loan-loss provision and income taxes. Operating expenses included a $0.3 million increase in miscellaneous expense for a pending loan claim; the filing does not provide further detail about the claim.
- The loan-loss provision rose to $0.568 million from $0.074 million, which management attributed primarily to loan growth. The allowance was $12.256 million, or 1.36% of gross loans, versus $11.922 million at year-end. Net charge-offs were $0.234 million, compared with $0.388 million a year earlier.
- Non-accrual loans increased to $16.2 million (1.80% of loans) from $15.5 million (1.76%) at year-end. Criticized loans rated Substandard increased to $54.4 million from $45.3 million. Conversely, accruing loans past due 30 days or more declined to 0.46% of loans from 0.76%.
- Other real estate owned fell to $6.1 million from $6.9 million; related net expense declined to $0.084 million from $0.632 million, mainly because of lower valuation write-downs.
- Shareholders’ equity decreased $9.6 million from year-end, primarily reflecting the February redemption of $10.0 million of Series A preferred stock and a $0.9 million increase in accumulated other comprehensive loss, partly offset by earnings. Remaining Series A preferred stock was $20.0 million.
Outlook, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management said its focus on shifting deposits toward lower-cost core accounts would continue through 2016 and described liquidity as adequate. It also reported that the Corporation was asset-sensitive and believed portfolio restructuring better positioned it for rising rates.
- Management cautioned that results are subject to economic and market conditions, interest-rate changes, deposit flows and funding costs, loan demand and credit quality, competition, regulation, and other factors; interim results are not necessarily indicative of full-year results.
- The $19.5 million available-for-sale collateralized debt obligation portfolio is valued using Level 3 inputs because markets are inactive. Its $25.4 million amortized cost exceeded fair value by $5.9 million. Management reported no credit-related OTTI charges in Q1 2016, but valuations depend on third-party cash-flow models and significant assumptions.
- Future interest payments on trust preferred debt and dividends on Series A preferred stock require prior Federal Reserve approval; the company also depends on Bank dividends to fund parent-company payments. Common-stock dividends remained suspended, with no assurance as to when they might resume.
- Two new troubled debt restructurings were reported, with no payment defaults during the quarter. The filing reports no legal proceedings and no material change in previously disclosed risk factors. Management concluded disclosure controls were effective and reported no material first-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether the rise in non-accrual and Substandard loans leads to higher future provisions or charge-offs, and whether the allowance remains adequate.
- Key assumptions and sensitivity of the Level 3 CDO valuation, including collateral performance, discount rates and liquidity; also monitor any further OTTI.
- Federal Reserve approval status and the company’s capacity to continue trust-debt interest and preferred-dividend payments, as well as conditions for any common-dividend resumption.
- Loan and deposit growth, deposit mix and funding costs, and the effect of interest-rate changes on net interest income and liquidity.