First United (FUNC) - 2019 Q4 - Annual Report

PART I Business First United Corporation, a bank holding company with $1.4 billion in assets, offers comprehensive banking and wealth management services across 25 offices in Maryland and West Virginia, operating under extensive regulation and Basel III compliance Key Financial Metrics as of December 31, 2019 | Metric | Amount (USD) | | :--- | :--- | | Total Assets | $1.4 billion | | Net Loans | $1.0 billion | | Deposits | $1.1 billion | | Shareholders' Equity | $125.9 million | - The company operates 25 banking offices and 32 ATMs across several counties in Maryland and West Virginia, providing a complete range of retail and commercial banking services[17] - The Bank's Trust Department supervised approximately $902.2 million in assets as of December 31, 2019, an increase from $810.0 million in 2018[31] - The company faces intense competition from various financial institutions, competing by focusing on personalized services, local relationships, and tailored product offerings[32][34][35] - The Corporation and the Bank are subject to Basel III capital rules, including minimum capital ratios and a capital conservation buffer, with which the company was in compliance as of December 31, 2019[61][68] - As of December 31, 2019, the Bank and the Corporation were categorized as "well capitalized" under the Prompt Corrective Action framework[78] Risk Factors The company faces significant risks from regional economic dependence, real estate lending concentration, interest rate fluctuations, the upcoming CECL standard, cybersecurity threats, intense competition, regulatory changes, and an ongoing activist shareholder proxy contest - The company's business is geographically concentrated in Maryland and West Virginia, with a significant portion of its loan portfolio in real estate, making it vulnerable to local economic downturns[113] - The upcoming implementation of the Current Expected Credit Loss (CECL) accounting standard is expected to require an increase in the allowance for loan losses, potentially having a material adverse effect on financial condition[118] - The company faces significant competition from larger financial institutions with greater resources and access to capital markets, as well as non-bank financial service providers[126] - Cybersecurity threats are a major risk, as a breach in information systems could lead to legal claims, regulatory penalties, operational disruptions, and reputational damage[143] - The company is subject to risks from a proxy contest initiated by Driver Management Company LLC on December 3, 2019, which could be costly, disrupt operations, and divert management's attention[147] - The company's ability to pay dividends is restricted by the terms of its outstanding TPS Debentures, which prohibit dividend payments if the company elects to defer interest payments on the debentures[155] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - There are no unresolved staff comments[162] Properties The company owns its headquarters and 19 banking offices, leasing six others, with total rent expense for leased properties at $0.4 million in 2019 - The Corporation owns its headquarters and an operations center in Oakland, Maryland, while the Bank owns 19 of its banking offices and leases six[163] - Total rent expense on leased offices and properties was $0.4 million in 2019[163] Legal Proceedings The company is involved in ordinary course legal actions, but management anticipates no material adverse effect on its financial condition or operations - Management believes that losses from current legal actions, if any, will not materially and adversely affect the company's financial condition or results of operations[164] Mine Safety Disclosures This section is not applicable to the company's operations - Not applicable[165] PART II Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under "FUNC", with dividends resumed in 2018 after a 2010 suspension, and no share repurchases in 2019 - The Corporation's common stock is listed on the NASDAQ Global Select Market under the symbol "FUNC"[168] - The board of directors suspended cash dividends in November 2010 and lifted this suspension in 2018, with dividend payments remaining at the discretion of the board and subject to legal and regulatory limitations[169] - Neither the Corporation nor its affiliates repurchased any shares of its common stock during 2019[171] Selected Financial Data This section presents a five-year financial summary, highlighting $1.44 billion in total assets, $13.1 million net income, and $1.85 diluted EPS for 2019, with strong returns on assets and equity Selected Financial Data (2015-2019) | (Dollars in thousands, except per share data) | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Balance Sheet Data | | | | | | | Total Assets | $1,442,027 | $1,383,760 | $1,335,867 | $1,317,675 | $1,322,988 | | Net Loans | 1,038,894 | 996,103 | 882,117 | 881,670 | 866,801 | | Deposits | 1,142,031 | 1,067,527 | 1,039,390 | 1,014,229 | 998,794 | | Shareholders' Equity | 125,940 | 117,066 | 108,390 | 113,698 | 120,771 | | Operating Data | | | | | | | Net Interest Income | 46,391 | 44,182 | 39,578 | 37,640 | 35,625 | | Provision for Loan Losses | 1,320 | 2,111 | 2,534 | 3,122 | 1,054 | | Net Income | $13,129 | $10,667 | $5,269 | $7,281 | $12,991 | | Per Share Data | | | | | | | Basic and diluted net income per common share | $1.85 | $1.51 | $0.58 | $0.84 | $1.65 | | Dividends Paid | 0.40 | 0.27 | — | — | — | | Significant Ratios | | | | | | | Return on Average Assets | 0.93% | 0.81% | 0.40% | 0.55% | 0.98% | | Return on Average Equity | 10.44% | 9.39% | 4.52% | 6.38% | 11.40% | | Total Risk-based Capital Ratio | 16.29% | 15.91% | 15.98% | 16.71% | 17.21% | Management's Discussion and Analysis of Financial Condition & Results of Operations Consolidated net income rose to $13.1 million in 2019, a 23% EPS increase, driven by higher net interest income and lower loan loss provisions, alongside growth in loans and deposits, while maintaining strong capital ratios Overview Consolidated net income for 2019 reached $13.1 million, a 23% increase in diluted EPS, driven by higher net interest income, reduced loan loss provisions, and increased other operating income, alongside significant loan and deposit growth 2019 vs 2018 Performance Summary | Metric | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | Net Income | $13.1M | $10.7M | +$2.4M | | Diluted EPS | $1.85 | $1.51 | +23% | | Net Interest Income | $46.4M | $44.2M | +$2.2M | | Provision for Loan Losses | $1.3M | $2.1M | -$0.8M | | Other Operating Income | $16.6M | $15.0M | +$1.6M | | Other Operating Expenses | $45.4M | $43.8M | +$1.6M | - Total loans increased by $44.4 million to $1.1 billion, driven by growth in commercial real estate, commercial & industrial, and consumer loans[183] - Total deposits grew by $74.5 million, led by a $32.4 million increase in non-interest bearing deposits and a $41.0 million increase in money market accounts[187] Consolidated Statement of Income Review Fully tax equivalent net interest income increased by $2.3 million (5.1%), driven by loan growth, while the provision for loan losses decreased, and other operating income rose due to BOLI death benefits, partially offset by increased operating expenses Net Interest Income (FTE Basis) | (Dollars in thousands) | 2019 | 2018 | | :--- | :--- | :--- | | Interest Income (FTE) | $58,788 | $53,090 | | Interest Expense | $11,529 | $8,112 | | Net Interest Income (FTE) | $47,259 | $44,978 | | Net Interest Margin % (FTE) | 3.68% | 3.74% | - The provision for loan losses decreased to $1.3 million in 2019 from $2.1 million in 2018, despite a specific allocation of $2.1 million for one large non-accrual A&D loan[227] - Other operating income increased by $1.6 million, primarily due to a $1.1 million gain from bank owned life insurance (BOLI) death benefit proceeds received in Q3 2019[229] - Other operating expenses increased by $1.6 million, driven by higher salaries and benefits ($0.5 million) and equipment, occupancy, and technology expenses ($1.1 million), partially offset by a $0.2 million decrease in FDIC premiums due to assessment credits[230] Consolidated Balance Sheet Review Total assets reached $1.4 billion at year-end 2019, an increase of $58.3 million, driven by $44.4 million in gross loan growth and $74.5 million in deposit growth, while the allowance for loan losses increased to $12.5 million - Total assets increased by $58.3 million to $1.4 billion at December 31, 2019, primarily due to strong deposit growth of $74.5 million[234] Loan Portfolio Composition (in millions) | Loan Type | 2019 | 2018 | | :--- | :--- | :--- | | Commercial real estate | $335.5 | $306.9 | | Acquisition and development | $117.9 | $118.4 | | Commercial and industrial | $122.3 | $111.4 | | Residential mortgage | $440.2 | $436.9 | | Consumer | $36.2 | $34.1 | | Total Loans | $1,052.1 | $1,007.7 | - Non-accrual loans increased to $10.8 million at year-end 2019 from $4.9 million in 2018, primarily due to one large A&D loan totaling $8.0 million being moved to non-accrual status[260] - The allowance for loan losses (ALL) increased to $12.5 million (1.19% of total loans) at December 31, 2019, up from $11.0 million (1.10% of total loans) at year-end 2018[258] - The investment securities portfolio decreased by $6.4 million, including collateralized debt obligations (CDOs) valued using Level 3 inputs, which had unrealized losses of $4.1 million[271][273] Quantitative and Qualitative Disclosures About Market Risk This section incorporates market risk disclosures by reference from the "Market Risk and Interest Sensitivity" heading within Item 7 - Information regarding market risk is incorporated by reference from the 'Market Risk and Interest Sensitivity' section in Item 7[319] Financial Statements and Supplementary Data This section presents audited consolidated financial statements for 2019 and 2018, with an unqualified opinion from Baker Tilly Virchow Krause, LLP on both the financial statements and internal control effectiveness - The independent auditor, Baker Tilly Virchow Krause, LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2019[322] Consolidated Statement of Financial Condition Highlights (in thousands) | | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Net Loans | $1,038,894 | $996,103 | | Total Assets | $1,442,027 | $1,383,760 | | Liabilities & Equity | | | | Total Deposits | $1,142,031 | $1,067,527 | | Total Liabilities | $1,316,087 | $1,266,694 | | Total Shareholders' Equity | $125,940 | $117,066 | Consolidated Statement of Income Highlights (in thousands) | | Year Ended Dec 31, 2019 | Year Ended Dec 31, 2018 | | :--- | :--- | :--- | | Net Interest Income | $46,391 | $44,182 | | Provision for Loan Losses | $1,320 | $2,111 | | Net Income | $13,129 | $10,667 | - The company adopted the new lease accounting standard (ASU 2016-02) on January 1, 2019, recognizing a right-of-use asset of approximately $2.7 million and a lease liability of approximately $3.3 million[386][391] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting and financial disclosure - None reported[579] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2019, a conclusion attested by the independent registered public accounting firm - Management concluded that the Corporation's disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2019[581] - Based on the COSO 2013 framework, management concluded that the Corporation's internal control over financial reporting was effective as of December 31, 2019[586] Other Information The company reports no other information for this item - None[589] PART III Directors, Executive Officers and Corporate Governance This section details the 11 directors and executive officers, highlights the Audit Committee's financial expertise, confirms a Code of Ethics, and notes late Form 4 filings related to director dividend reinvestments - The Board of Directors consists of 11 members, all of whom also serve on the board of the Bank[590] - The Board has a standing Audit Committee, and has determined that members M. Kathryn Burkey, Brian R. Boal, Robert W. Kurtz, and John W. McCullough each qualify as an "audit committee financial expert"[605] - The company has adopted a Code of Ethics applicable to its directors, officers, and employees, which is available on its website[613][615] - Several directors filed late Form 4s during 2019, all related to purchases of shares under a dividend reinvestment feature of a brokerage account[616] Executive Compensation Director compensation for 2019 included cash and stock awards, while executive compensation, primarily base salary with no incentive awards, is detailed for the three named executive officers and includes various benefit and severance plans 2019 Director Compensation Summary | Name | Fees earned or paid in cash ($) | Stock awards ($) | Total ($) | | :--- | :--- | :--- | :--- | | John F. Barr | 23,908 | 28,292 | 52,200 | | Brian R. Boal | 26,608 | 28,292 | 54,900 | | M. Kathryn Burkey | 26,408 | 28,292 | 54,700 | | Robert W. Kurtz | 34,350 | 18,300 | 52,650 | | John W. McCullough | 23,308 | 28,292 | 51,600 | 2019 Summary Compensation Table | Name and principal position | Year | Salary ($) | Bonus ($) | All other compensation ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | :--- | | Carissa L. Rodeheaver, Chairman, President & CEO | 2019 | 388,907 | - | 11,077 | 399,984 | | Robert L. Fisher, II, Senior Vice President, Chief Revenue Officer | 2019 | 268,876 | - | 10,453 | 279,329 | | Jason B. Rush, Senior Vice President, Chief Operating Officer | 2019 | 203,138 | - | 8,113 | 211,251 | - No incentive awards were granted to executive officers in 2019, though each named executive officer received a $5,000 discretionary cash bonus in 2018[633][637] - The company has change-in-control severance agreements with its named executive officers, providing a lump sum cash payment of two times final pay and other benefits upon a qualifying termination[641][665] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section outlines the 2018 Equity Compensation Plan with 297,423 available securities and details beneficial stock ownership, noting directors and executive officers collectively own 4.4%, while Driver Opportunity Partners I LP holds 5.1% - As of December 31, 2019, 297,423 securities remained available for future issuance under the company's 2018 Equity Compensation Plan[673] - As of February 29, 2020, all directors and executive officers as a group beneficially owned 314,589 shares, representing 4.4% of the outstanding common stock[675] - Driver Opportunity Partners I LP reported beneficial ownership of 365,212 shares, or 5.1% of the outstanding common stock, as of January 10, 2020[675][676] Certain Relationships and Related Transactions, and Director Independence The company conducts ordinary course banking transactions with directors and officers, discloses specific related party services, and confirms a majority of its Board members are independent under NASDAQ rules - The Bank engages in ordinary course banking transactions with directors, officers, and their affiliates on terms comparable to those for unrelated persons[677] - A company owned by director H. Andrew Walls provided printing and other services to the Corporation, with fees totaling $186,334 in 2019[678] - The Board of Directors has determined that 10 of its 11 members are "independent directors" under NASDAQ rules[681] Principal Accountant Fees and Services This section details $324,350 in fees paid to Baker Tilly Virchow Krause, LLP for fiscal year 2019, primarily for audit services, all pre-approved by the Audit Committee Accountant Fees (2018-2019) | Fee Type | FY 2019 | FY 2018 | | :--- | :--- | :--- | | Audit Fees | $321,050 | $302,000 | | Audit Related Fees | $3,300 | $3,875 | | Tax Fees | $0 | $0 | | All Other Fees | $0 | $0 | | Total | $324,350 | $305,875 | - All audit and permitted non-audit services provided by the independent registered public accounting firm were pre-approved by the Audit Committee[685] PART IV Exhibits and Financial Statement Schedules This section lists financial statements and provides an index of all exhibits, including corporate governance documents, material contracts, certifications, and XBRL data files, filed with the Annual Report on Form 10-K - This section lists the financial statements and schedules filed with the report[687][688] - An Exhibit Index is provided, listing all documents filed or furnished with the annual report, such as articles of incorporation, bylaws, material contracts, and certifications required by the Sarbanes-Oxley Act[689][690]