First United Corporation — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited consolidated results; dollar amounts below are in millions unless otherwise noted.
Business context and reporting period
First United is a bank holding company whose principal subsidiary is First United Bank & Trust. At June 30, 2021, it reported $1.764 billion in assets, $1.456 billion in deposits, $1.126 billion in net loans and $130.6 million in shareholders’ equity.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income (GAAP) | $12.763 | $12.656 | $24.999 | $24.543 |
| Noninterest income | $4.321 | $3.425 | $9.063 | $7.433 |
| Provision for loan losses | $0.555 | $2.167 | $0.665 | $4.821 |
| Net income | $4.403 | $2.570 | $7.833 | $4.325 |
| Diluted earnings per share | $0.66 | $0.37 | $1.15 | $0.62 |
| Net interest margin (FTE) | 3.15% | 3.53% | 3.13% | 3.61% |
- For the first half, net interest income on a fully taxable equivalent (FTE) basis was $25.5 million, up 1.9% year over year. Lower interest expense more than offset lower interest income. FTE margin declined 48 basis points.
- Six-month operating cash flow was $6.6 million; investing activities provided $13.4 million and financing activities provided $25.0 million. Cash and cash equivalents rose $45.0 million to $194.4 million.
- Deposits increased $33.7 million from year-end 2020. Total borrowings were $150.3 million: $49.4 million short-term and $100.9 million long-term. Shareholders’ equity was $130.6 million versus $131.0 million at year-end.
- Capital remained above regulatory “well-capitalized” thresholds: consolidated total capital ratio was 15.80%, common equity Tier 1 was 12.37%, and Tier 1 leverage was 9.94%. Ratios declined from year-end, partly reflecting the share repurchase and settlement-related funding.
Material changes versus comparable periods
- Six-month net income increased 81% and diluted EPS rose from $0.62 to $1.15. Management attributed the improvement chiefly to a $4.2 million lower loan-loss provision, higher noninterest income and slightly higher net interest income.
- Results included a $3.3 million litigation settlement expense in Q1 2021. Excluding the expense and its tax effect, management reported non-GAAP six-month net income of $10.4 million and EPS of $1.52. These are management-adjusted measures, not GAAP results.
- Noninterest income rose $1.6 million for the first half, notably from trust, debit-card and brokerage income. Other income included insurance proceeds related to litigation claims. Operating expenses rose $1.5 million, including the settlement charge.
- Gross loans decreased $22.5 million from December 2020 to $1.145 billion, including reduced PPP balances and residential mortgage runoff; consumer loans grew after a loan-pool purchase. Deposits rose, with noninterest-bearing deposits up $77.3 million.
- Nonaccrual loans increased to $7.3 million from $3.3 million at year-end, primarily after two hospitality loans totaling about $4.5 million were placed on nonaccrual. OREO declined to $6.8 million from $9.4 million.
Outlook, commentary, risks and unusual items
- Management expects continued net interest margin compression during the remainder of 2021 as deposit costs approach floors and loan yields reprice lower. No quantified full-year earnings guidance is provided.
- COVID-19 remains an uncertain risk to borrowers and the economy. As of July 16, six commercial loans totaling $7.3 million had COVID-related modifications and were scheduled to return to contractual terms within the next quarter. PPP lending has ended; $74.1 million remained outstanding at June 30, with about $140.5 million forgiven.
- Credit indicators warrant monitoring: allowance for loan losses was $17.1 million, or 1.49% of loans including PPP; nonaccrual loans were 0.64% of loans. Management said its allowance was adequate but noted estimates may differ from actual losses. Pandemic-related modifications were not classified as TDRs or past due under applicable relief provisions.
- The investment portfolio included $16.2 million of Level 3 collateralized debt obligations (CDOs), valued using significant unobservable inputs. Management reported no credit-related OTTI charges in the first half and did not intend or expect to be required to sell impaired securities at a loss.
- Interest-rate exposure is material: management’s simulation estimated net interest income would rise $1.7 million under a +100-basis-point shock and fall $2.9 million under a -100-basis-point shock. These are model estimates subject to assumptions.
- Liquidity sources included approximately $130.0 million of unsecured correspondent lines, $122.2 million of available FHLB borrowing capacity and $1.0 million at the Federal Reserve Discount Window. The PPP Liquidity Facility expired July 31, 2021.
- The Corporation repurchased 400,000 shares in April for approximately $7.2 million; reported average purchase price was $17.95 per share. Management said the repurchase and settlement-related funding contributed to lower capital ratios. The filing reports no legal proceedings as of filing, while describing the settlement expense and related agreement.
Most important facts for investors to verify
- Whether the lower loan-loss provision reflects durable credit improvement or changing pandemic-era assumptions; track hospitality exposure, nonaccruals, modifications and subsequent payment performance.
- How PPP forgiveness and fee accretion affect future loan balances, earnings and margin after the program ended.
- Whether the expected margin compression materializes, given low reinvestment yields, elevated cash and loan repricing.
- The valuation assumptions and credit performance of Level 3 CDOs, and the effect of any further market or credit deterioration.
- The settlement’s full financial and governance implications, including the related insurance proceeds, repurchase terms and capital impact.
- Reconcile the filing’s non-GAAP allowance coverage excluding PPP: the narrative cites both 1.59% and 1.60% at June 30, 2021.