First United (FUNC) - 2019 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents First United Corporation's unaudited consolidated financial statements for Q3 and nine months ended September 30, 2019, including key financial statements and accompanying notes Consolidated Statement of Financial Condition As of September 30, 2019, total assets increased, driven by higher cash and deposits, while net loans slightly decreased and shareholders' equity grew Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2019 (Unaudited) | Dec 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $84,169 | $23,541 | | Net loans | $985,313 | $996,667 | | Total Assets | $1,440,964 | $1,384,516 | | Liabilities & Equity | | | | Total deposits | $1,136,787 | $1,067,527 | | Total Liabilities | $1,311,625 | $1,267,450 | | Total Shareholders' Equity | $129,339 | $117,066 | | Total Liabilities and Shareholders' Equity | $1,440,964 | $1,384,516 | Consolidated Statement of Operations Net income for the nine months ended September 30, 2019, increased significantly, driven by higher net interest income and other operating income, with strong year-over-year growth in the third quarter Nine Months Ended September 30 (in thousands, except per share data) | Metric | 2019 (Unaudited) | 2018 | | :--- | :--- | :--- | | Net interest income | $34,469 | $32,706 | | Provision for loan losses | $669 | $1,187 | | Net Income | $10,246 | $8,285 | | Basic and diluted EPS | $1.44 | $1.17 | Three Months Ended September 30 (in thousands, except per share data) | Metric | 2019 (Unaudited) | 2018 | | :--- | :--- | :--- | | Net interest income | $11,596 | $11,256 | | Provision for loan losses | $(13) | $471 | | Net Income | $4,493 | $2,763 | | Basic and diluted EPS | $0.63 | $0.39 | Consolidated Statement of Cash Flows For the nine months ended September 30, 2019, cash and cash equivalents significantly increased, primarily driven by net cash provided by financing and investing activities, reversing the prior year's decrease Cash Flow Summary for Nine Months Ended September 30 (in thousands) | Activity | 2019 (Unaudited) | 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $6,092 | $7,605 | | Net cash provided by/(used in) investing activities | $14,721 | $(69,113) | | Net cash provided by financing activities | $39,815 | $1,313 | | Increase/(decrease) in cash and cash equivalents | $60,628 | $(60,195) | Notes to Consolidated Financial Statements The notes provide detailed information on accounting policies and financial statement line items, including loan portfolios, allowance for loan losses, fair value, leases, and employee benefits - The loan portfolio is segmented into Commercial Real Estate (CRE), Acquisition and Development (A&D), Commercial and Industrial (C&I), Residential Mortgage, and Consumer loans. As of September 30, 2019, total loans were $997.3 million[37] - The Allowance for Loan Losses (ALL) increased to $12.0 million at September 30, 2019, from $11.0 million at year-end 2018. The provision for the first nine months of 2019 was $0.7 million[209] - The company adopted ASU 2016-02 (Leases) on January 1, 2019, recognizing a Right-of-Use (ROU) asset of $2.7 million and a lease liability of $3.3 million on the balance sheet[97][132] - The company is preparing for the adoption of the Current Expected Credit Losses (CECL) model (ASU 2016-13), with an effective date for SEC filers after December 15, 2019, though a deferral for smaller reporting companies is expected[134] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 and nine-month 2019 financial results, attributing increased net income to higher net interest income, lower loan loss provision, and a BOLI death benefit, covering detailed analysis of financial condition and operations Results of Operations Net income for the first nine months of 2019 increased, driven by higher net interest income and other operating income, including a BOLI death benefit, despite rising operating expenses and a decreased loan loss provision - Consolidated net income for the first nine months of 2019 was $10.2 million ($1.44 per share), up from $8.3 million ($1.17 per share) in the same period of 2018[158] - A key driver of increased other operating income was the receipt of $2.1 million in BOLI cash proceeds, which included a $1.1 million death benefit in the third quarter[158][190] - In September 2019, the Corporation introduced a Voluntary Separation Program (VSP), expected to result in annual salary and benefit cost savings of approximately $1.4 million beginning in 2020[114][164][194] Net Interest Margin (FTE Basis) | Period | 2019 | 2018 | | :--- | :--- | :--- | | Nine Months Ended Sep 30 | 3.67% | 3.73% | | Three Months Ended Sep 30 | 3.62% | 3.79% | Financial Condition Total assets increased since year-end 2018, driven by strong deposit growth and higher cash, while gross loans slightly decreased and shareholders' equity grew - Total assets remained stable at $1.4 billion, increasing $56.4 million from December 31, 2018[200] - Gross loans decreased by $10.4 million, with declines in Commercial Real Estate and A&D loans, while Residential Mortgage and Consumer loans saw modest increases[201] - Non-accrual loans increased to $11.7 million (1.17% of total loans) from $4.9 million at year-end, primarily due to one large A&D loan of $7.7 million moving to non-accrual status[43][204] - Total deposits increased by $69.3 million during the first nine months of 2019, driven by growth in non-interest bearing accounts, money market accounts, and time deposits over $100,000[224] Capital Resources The Corporation and Bank remained well-capitalized under Basel III as of September 30, 2019, with all capital ratios significantly above minimums, and elected to exclude certain comprehensive items from regulatory capital Capital Ratios as of September 30, 2019 | Ratio | Consolidated | Bank | Required (Well-Capitalized) | | :--- | :--- | :--- | :--- | | Common Equity Tier 1 Capital | 13.32% | 15.08% | 6.50% | | Tier 1 Capital | 15.82% | 15.08% | 8.00% | | Total Capital | 16.95% | 16.25% | 10.00% | | Tier 1 Leverage | 11.68% | 10.91% | 5.00% | - The Corporation and Bank made a one-time permanent election to exclude the effects of certain accumulated other comprehensive items from regulatory capital, mitigating volatility from interest rate fluctuations on the AFS securities portfolio[247] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section incorporates by reference market risk disclosures from Item 2, specifically regarding market risk and interest sensitivity - The primary market risk is interest rate fluctuation. The company was asset sensitive as of September 30, 2019, meaning net interest income is expected to increase in a rising rate environment[232][233] Estimated Change in Net Interest Income (NII) from Rate Changes (in thousands) | Rate Change (basis points) | Estimated NII Change | | :--- | :--- | | +400 | $3,002 | | +200 | $1,782 | | +100 | $970 | | -100 | $(2,425) | Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2019, with no material changes to internal control over financial reporting during the quarter - Management concluded that the company's disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2019[257] - No changes in internal control over financial reporting occurred during the quarter ended September 30, 2019, that have materially affected, or are reasonably likely to materially affect, internal controls[258] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company reported no legal proceedings during the period - None[261] Item 1A. Risk Factors Management reported no material changes in the company's risk factors since their last disclosure in the 2018 Annual Report on Form 10-K - Management does not believe that any material changes in risk factors have occurred since they were last disclosed[262] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds during the period - None[263]