First United Corporation — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparison is primarily with FY2020. First United is a community bank holding company operating through First United Bank & Trust in western Maryland and northeastern West Virginia. The filing is an annual report, not a standalone fourth-quarter report.
Financial results and condition
| Metric | FY2021 / Dec. 31, 2021 | FY2020 / Dec. 31, 2020 |
|---|---|---|
| Net income | $19.8 million | $13.8 million |
| Diluted EPS | $2.95 | $1.97 |
| Net interest income (GAAP) | $52.5 million | $48.5 million |
| Net interest margin (FTE) | 3.28% | 3.34% |
| Total assets | $1.730 billion | $1.733 billion |
| Net loans | $1.137 billion | $1.150 billion |
| Total deposits | $1.469 billion | $1.422 billion |
| Total borrowings | $88.6 million | $150.1 million |
| Shareholders’ equity | $141.9 million | $131.0 million |
- Net interest income on a fully taxable equivalent basis rose $4.0 million, or 8.1%, mainly as interest expense fell $3.9 million; interest income was nearly unchanged. The FTE margin narrowed by 6 basis points.
- Other operating income, including gains, increased to $20.7 million from $18.6 million. Trust income was $8.7 million, up $1.2 million, and debit-card income rose $0.7 million.
- The provision for loan losses was a credit of $0.8 million, versus a $5.4 million expense in 2020. The allowance was $16.0 million, or 1.38% of loans; net recoveries were $0.3 million compared with $1.5 million of net charge-offs.
- Net cash provided by operating activities was $20.0 million; investing activities used $28.4 million and financing activities used $25.3 million. Cash and cash equivalents declined $33.7 million to $115.7 million.
- Liquidity resources included $188.2 million of available FHLB borrowing capacity, $130.0 million of unused correspondent-bank lines and a $1.0 million unused Federal Reserve line. Management reported adequate liquidity.
- The Corporation and Bank were classified as well-capitalized. The Corporation’s total risk-based capital ratio was 15.89% and the Bank’s was 14.97%; the Bank’s ratio was 15.50% in 2020.
Material changes versus FY2020
- Earnings rose 42.8%, with reported EPS increasing 49.0%; the comparison benefited substantially from the lower loan-loss provision following COVID-related reserve increases in 2020.
- Reported 2021 results included $3.3 million of litigation settlement expense, a $2.4 million penalty for prepaying $70.0 million of FHLB advances, a $1.0 million charitable contribution, and $1.4 million of insurance reimbursement income. Management’s non-GAAP adjusted net income was $23.8 million, versus reported net income of $19.8 million.
- Deposits grew $47.0 million, including $81.2 million growth in non-interest-bearing deposits, while time deposits declined $65.0 million. Management attributed deposit growth partly to stimulus-related and core relationship balances.
- Total loans declined $14.1 million as PPP loans were forgiven. C&I balances fell $85.8 million, while residential mortgage and consumer balances rose, partly through purchases of loan pools.
- Total borrowings fell $61.5 million, primarily following the FHLB advance prepayment. The associated penalty reduced reported earnings.
- Nonperforming assets declined to $7.2 million, or 0.42% of assets, from $13.4 million, or 0.78%. Nonaccrual loans were $2.5 million versus $3.3 million.
- The Company repurchased 400,000 shares for approximately $7.2 million and declared $0.60 per share in dividends, up from $0.52 in 2020. Dividend payments remain subject to regulatory, capital and debt restrictions.
Outlook, risks and unusual items
- No specific earnings, revenue or margin guidance is provided. Management said it expected additional OREO reductions in the first quarter of 2022 and reported that $9.4 million of COVID-related loan modifications, involving 13 commercial loans, were scheduled to return to contractual terms during that quarter.
- After year-end, the Company transferred available-for-sale securities with approximately $149 million cost and $139 million fair value to held-to-maturity classification. It said this was intended to reduce potential future capital effects from accumulated other comprehensive loss amid rising rates; the reclassification had no income-statement impact.
- Management identified interest-rate exposure, local economic and real-estate concentration, credit losses, funding access, securities valuation, competition, regulation, cybersecurity and third-party service-provider disruption as important risks. The Bank is concentrated in Maryland and West Virginia; real-estate acquisition, construction and development loans were approximately 11% of total loans.
- The Company was asset-sensitive at year-end. Its modeled one-year net interest income increased by $1.2 million under a +100-basis-point scenario and decreased by $3.1 million under a -100-basis-point scenario; results depend on modeling assumptions.
- CECL implementation was scheduled for January 1, 2023; management was still evaluating its impact. LIBOR transition was also identified as a risk for certain loans, securities, swaps and subordinated debt.
- The auditor identified qualitative factors in the allowance for loan losses as a critical audit matter because their application involves significant judgment. Management concluded disclosure controls and internal control over financial reporting were effective; the 2021 financial statements received an unqualified audit opinion.
Investor verification checklist
- Assess how much earnings growth depended on lower credit provisions and the specified unusual items; compare reported and adjusted results.
- Review the post-year-end securities reclassification, its effects on reported capital and accumulated other comprehensive loss, and the portfolio’s sensitivity to further rate changes.
- Verify subsequent performance of the $9.4 million of modified loans and monitor local commercial real-estate credit quality, criticized loans and collateral values.
- Evaluate deposit stability and the availability and cost of borrowing capacity, including the concentration of funding sources and pledged collateral.
- Track CECL readiness and any resulting change in the allowance, capital or earnings when adopted.
- Review dividend capacity and the terms of the junior subordinated debentures, which can restrict dividends if interest payments are deferred.