First United Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are to December 31, 2017. First United is a bank holding company whose primary subsidiary is First United Bank & Trust. Financial amounts below are in millions unless otherwise stated.
Financial performance and position
| Metric | Q1 2018 / March 31, 2018 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $10.58 | $9.37 in Q1 2017 |
| Provision for loan losses | $0.45 | $0.61 in Q1 2017 |
| Noninterest income | $3.68 | $3.46 in Q1 2017 |
| Noninterest expense | $10.69 | $9.46 in Q1 2017 |
| Net income | $2.51 | $1.98 in Q1 2017 |
| Net income available to common shareholders | $2.51; EPS $0.35 | $1.44; EPS $0.22 in Q1 2017 |
| Fully tax-equivalent net interest margin | 3.68% | 3.27% in Q1 2017; 3.37% for full-year 2017 |
| Total assets | $1,319.4 | $1,336.5 at December 31, 2017 |
| Gross loans / net loans | $937.5 / $927.0 | $892.5 / $882.5 at December 31, 2017 |
| Total deposits | $1,017.9 | $1,039.4 at December 31, 2017 |
| Cash and cash equivalents | $21.2 | $83.8 at December 31, 2017 |
| Short-term / long-term borrowings | $55.2 / $115.9 | $48.8 / $120.9 at December 31, 2017 |
| Shareholders’ equity | $111.1 | $108.4 at December 31, 2017 |
- Operating cash flow was $3.2 million, investing cash use was $45.0 million, and financing cash use was $20.8 million. Cash and cash equivalents fell $62.5 million during the quarter.
- Annualized return on average assets was 0.76% and return on average equity was 9.13%, compared with 0.61% and 7.00%, respectively, in Q1 2017. Average equity to average assets was 8.34%, versus 8.71%.
- The allowance for loan losses was $10.47 million, or 1.12% of gross loans. The quarter recorded $0.05 million in net recoveries; the allowance ratio was 1.29% in Q1 2017.
- Regulatory capital ratios at March 31 included consolidated total capital of 16.06%, Tier 1 capital of 15.01%, common equity Tier 1 of 12.59%, and Tier 1 leverage of 11.45%. The Bank was also above the disclosed “well capitalized” thresholds.
Material changes versus comparable periods
- Common earnings rose from $1.44 million to $2.51 million, and EPS increased from $0.22 to $0.35. The prior-year comparison included $0.54 million of preferred dividends; all Series A preferred stock had been redeemed by November 2017.
- Net interest income increased $1.21 million year over year. Management attributed the improvement to higher loan balances and yields, including repricing and new lending, and lower interest expense as long-term borrowings declined. The FTE margin improved 41 basis points.
- Loan balances grew $45.0 million, or 5.0%, from year-end. Growth included purchases of a $15 million residential mortgage pool and a $10 million student loan pool, as well as CRE growth.
- Deposits declined $21.5 million from year-end. Cash fell by $62.5 million, while net loans increased and the company purchased loans and invested in premises and equipment.
- Operating expenses rose $1.24 million year over year, including higher salaries and benefits, insurance claims, technology and occupancy costs, and OREO expenses. OREO expense increased to $0.39 million, including $0.30 million of fair-value write-downs.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no quantitative earnings or revenue guidance. Management said operating results for the quarter are not necessarily indicative of full-year or future results.
- Credit quality: Nonaccrual loans declined to $4.3 million from $7.1 million at year-end, primarily after payoffs totaling $2.5 million. However, accruing loans past due 30 days or more increased to 1.14% of loans from 0.63%, primarily due to one large commercial A&D relationship. Management considered the allowance adequate; actual losses may differ from estimates.
- Investment valuation: The $16.0 million CDO portfolio is Level 3 and consists of 10 pooled trust-preferred securities in an inactive market. It carried $3.7 million of unrealized losses. Management reported no credit-related OTTI charges in Q1, but valuation depends on third-party discounted-cash-flow estimates and unobservable assumptions.
- Interest-rate risk: The company described itself as asset sensitive, but its modeled one-year net interest income response varied by scenario: +100 basis points was estimated to add $0.2 million, while +400 basis points was estimated to reduce NII by $1.3 million. Management cautioned that assumptions and market conditions could change outcomes.
- Funding and liquidity: Management stated it believed liquidity was adequate and identified available correspondent, Federal Reserve discount-window, and FHLB facilities. Deposits declined while short-term borrowings increased by $6.4 million; liquidity and funding costs remain relevant to monitor.
- Tax and accounting: The effective tax rate fell to 20.5% from 28.6%, mainly reflecting the federal corporate tax rate reduction from 35% to 21%. Adoption of the new revenue-recognition standard did not materially change revenue measurement or timing. The company expects the new lease standard to increase reported assets and liabilities; it was assessing the impact of the expected-credit-loss standard.
- Other disclosures: There were no legal proceedings reported, no material change in internal control over financial reporting, and no material changes to risk factors identified by management. Standby letters of credit totaled $2.7 million; total disclosed credit commitments, including these letters, were $133.1 million.
Important facts for investors to verify
- Whether the quarter’s margin and earnings improvement is sustainable as deposit pricing and borrowing costs respond to interest rates.
- Whether loan growth from purchased portfolios and new commercial relationships maintains credit quality, especially the past-due A&D relationship.
- The assumptions, independent valuation inputs, and potential downside associated with the Level 3 CDO portfolio and its $3.7 million unrealized loss.
- How the $62.5 million cash decline and $21.5 million deposit reduction affect liquidity, reliance on borrowings, and funding expense in subsequent quarters.
- Whether elevated operating costs and OREO valuation losses moderate, and how the lower tax rate affects future effective tax rates.
- The eventual balance-sheet and credit-loss effects of the forthcoming lease and expected-credit-loss accounting standards.