First United (FUNC) - 2019 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements The unaudited consolidated financial statements for the quarter ended March 31, 2019, show an increase in total assets to $1.417 billion from $1.385 billion at year-end 2018, with net income rising to $3.15 million from $2.51 million, and reflecting the adoption of the new lease accounting standard Consolidated Statement of Financial Condition As of March 31, 2019, total assets increased to $1.417 billion, driven by a significant rise in cash and cash equivalents to $54.0 million and growth in total deposits to $1.131 billion, while shareholders' equity grew to $122.4 million Consolidated Statement of Financial Condition Highlights (in thousands) | Account | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $54,004 | $23,541 | | Net loans | $993,070 | $996,667 | | Total Assets | $1,416,901 | $1,384,516 | | Liabilities & Equity | | | | Total deposits | $1,130,612 | $1,067,527 | | Short-term borrowings | $39,695 | $77,707 | | Total Liabilities | $1,294,502 | $1,267,450 | | Total Shareholders' Equity | $122,399 | $117,066 | | Total Liabilities and Shareholders' Equity | $1,416,901 | $1,384,516 | Consolidated Statement of Operations For the three months ended March 31, 2019, net income increased by 25.7% to $3.15 million from $2.51 million in the prior-year period, primarily driven by a 7.2% rise in net interest income to $11.35 million, with basic and diluted earnings per share increasing to $0.44 Consolidated Statement of Operations Highlights (in thousands, except per share data) | Metric | Three months ended March 31, 2019 | Three months ended March 31, 2018 | | :--- | :--- | :--- | | Net interest income | $11,346 | $10,582 | | Provision for loan losses | $349 | $447 | | Total other operating income | $3,721 | $3,710 | | Total other operating expenses | $10,690 | $10,691 | | Net Income | $3,151 | $2,506 | | Basic and diluted EPS | $0.44 | $0.35 | Consolidated Statement of Comprehensive Income Comprehensive income for Q1 2019 significantly increased to $5.87 million from $3.33 million in the prior-year period, fueled by higher net income and a substantial rise in other comprehensive income due to net unrealized gains on pension plans Comprehensive Income (in thousands) | Component | Three months ended March 31, 2019 | Three months ended March 31, 2018 | | :--- | :--- | :--- | | Net Income | $3,151 | $2,506 | | Other comprehensive income, net of tax | $2,715 | $820 | | Comprehensive income | $5,866 | $3,326 | Consolidated Statement of Changes in Shareholders' Equity Shareholders' equity increased from $117.1 million at the beginning of 2019 to $122.4 million at March 31, 2019, primarily driven by net income and other comprehensive income, partially offset by common stock dividends - Key drivers for the increase in shareholders' equity in Q1 2019 were net income of $3.15 million and other comprehensive income of $2.72 million[13] Consolidated Statement of Cash Flows For the first three months of 2019, cash and cash equivalents increased by $30.5 million, primarily due to net cash provided by financing activities of $24.5 million, driven by deposit growth and reduced short-term borrowings Cash Flow Summary (in thousands) | Activity | Three months ended March 31, 2019 | Three months ended March 31, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $997 | $3,225 | | Net cash provided by/(used in) investing activities | $4,993 | $(44,954) | | Net cash provided by/(used in) financing activities | $24,473 | $(20,797) | | Increase/(decrease) in cash and cash equivalents | $30,463 | $(62,526) | Notes to Consolidated Financial Statements The notes detail the basis of presentation and significant accounting policies, including the adoption of the new lease accounting standard, composition of investment and loan portfolios, allowance for loan losses, fair value measurements, and employee benefit plans - The Corporation adopted ASU 2016-02, "Leases" (Topic 842) on January 1, 2019, resulting in the recognition of a right-of-use asset of approximately $2.7 million and a lease liability of approximately $3.3 million on the Consolidated Statement of Financial Condition[94][131] - The company is preparing for the adoption of the Current Expected Credit Losses (CECL) model (ASU 2016-13) on January 1, 2020, with plans to run its existing allowance model in parallel for two to three quarters prior to implementation[133] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 25.7% increase in Q1 2019 net income to higher net interest income and a lower provision for loan losses, with total assets growing by $32.4 million due to strong deposit growth, despite an increase in non-accrual loans Results of Operations Net income for Q1 2019 was $3.2 million ($.44 per share), up from $2.5 million ($.35 per share) in Q1 2018, driven by a $0.8 million rise in net interest income as higher loan yields outpaced increased deposit costs Key Performance Ratios | Ratio | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Return on Average Assets | 0.91% | 0.76% | | Return on Average Equity | 10.49% | 9.13% | - Net interest income (FTE basis) increased by $0.8 million (7.4%) year-over-year, driven by a $1.7 million increase in interest income, partially offset by a $0.9 million increase in interest expense, with the net interest margin stable at 3.72% for Q1 2019[157][169] - The provision for loan losses was $0.3 million for Q1 2019, a slight decline from $0.4 million in Q1 2018, attributed to reduced historical loss factors and slower loan growth, offset by a specific reserve on one large A&D loan[158][176] Financial Condition Total assets grew to $1.4 billion at March 31, 2019, an increase of $32.4 million from year-end 2018, funded by a $63.1 million increase in deposits, allowing for a $38.0 million reduction in short-term borrowings, though non-accrual loans increased to $11.6 million - Total deposits increased by $63.1 million during Q1 2019, with non-interest bearing deposits growing by $26.0 million and money market accounts increasing by $29.8 million[207] - Non-accrual loans increased to $11.6 million at March 31, 2019, from $4.9 million at December 31, 2018, primarily due to a forbearance agreement on one large A&D loan totaling $7.0 million[41][188] Loan Portfolio Composition (in thousands) | Loan Type | March 31, 2019 | % of Total | December 31, 2018 | % of Total | | :--- | :--- | :--- | :--- | :--- | | Commercial real estate | $299,466 | 30% | $306,921 | 31% | | Acquisition and development | $123,326 | 12% | $118,360 | 12% | | Commercial and industrial | $109,419 | 11% | $111,466 | 11% | | Residential mortgage | $438,607 | 44% | $436,907 | 43% | | Consumer | $33,800 | 3% | $34,060 | 3% | | Total Loans | $1,004,618 | 100% | $1,007,714 | 100% | - The allowance for loan losses (ALL) increased to $11.5 million at March 31, 2019, representing 1.15% of gross loans outstanding, up from 1.10% at year-end 2018[193] Liquidity and Capital Resources The Corporation maintains adequate liquidity through core deposits and access to various funding sources, remaining well-capitalized under all regulatory measures with a consolidated Total Capital ratio of 16.40% and a Tier 1 Leverage ratio of 11.56% at March 31, 2019 - At March 31, 2019, available liquidity sources included $100.0 million in unsecured lines with correspondent banks, $4.2 million from the Fed Discount Window, and approximately $144.4 million from the FHLB[224] Regulatory Capital Ratios (Consolidated) | Ratio | March 31, 2019 | Required for Adequacy | Required to be Well Capitalized | | :--- | :--- | :--- | :--- | | Total Capital (to risk-weighted assets) | 16.40% | 8.00% | 10.00% | | Tier 1 Capital (to risk-weighted assets) | 15.30% | 6.00% | 8.00% | | Common Equity Tier 1 Capital | 12.83% | 4.50% | 6.50% | | Tier 1 Capital (to average assets) | 11.56% | 4.00% | 5.00% | Item 3. Quantitative and Qualitative Disclosures about Market Risk The primary market risk is interest rate fluctuation, managed using interest sensitivity gap analysis and simulation models, with the company being asset sensitive as of March 31, 2019, where a 100 basis point rate increase would increase NII by an estimated $0.82 million Net Interest Income Sensitivity Analysis (in thousands) | Rate Change | Estimated Change in NII (March 31, 2019) | | :--- | :--- | | +400 basis points | $2,230 | | +200 basis points | $1,452 | | +100 basis points | $820 | | -100 basis points | $(2,079) | Item 4. Controls and Procedures Management, including the Principal Executive Officer and Principal Financial Officer, concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2019, with no material changes to internal control over financial reporting during the quarter - Based on an evaluation as of March 31, 2019, the PEO and PFO concluded that the company's disclosure controls and procedures are effective at the reasonable assurance level[238] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company reported no legal proceedings during the period - There are no legal proceedings to report[242] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2018 - Management does not believe that any material changes in risk factors have occurred since the last disclosure in the 2018 Form 10-K[243] Item 6. Exhibits This section lists the exhibits filed with the quarterly report, including certifications by the Principal Executive Officer and Principal Financial Officer pursuant to the Sarbanes-Oxley Act, and XBRL data files