First United (FUNC) - 2020 Q1 - Quarterly Report

FORM 10-Q Cover Page This cover page identifies First United Corporation's Form 10-Q filing details, registrant information, and filer status - Filing Type: Quarterly Report on Form 10-Q for the period ended March 31, 2020[2] - Registrant: First United Corporation[2] - Exchange Listing: Common Stock (FUNC) registered on Nasdaq Stock Market[3] - Filer Status: Accelerated filer and Smaller reporting company[3] Shares Outstanding (as of April 30, 2020) | Metric | Value | | :--- | :--- | | Common Stock, par value $.01 per share | 6,966,898 shares | INDEX TO QUARTERLY REPORT This section outlines the Quarterly Report's structure, dividing it into Part I (Financial Information) and Part II (Other Information) - Report Structure: Divided into Part I (Financial Information) and Part II (Other Information)[5] - Part I Items: Includes Financial Statements, Management's Discussion and Analysis, Market Risk Disclosures, and Controls and Procedures[5] - Part II Items: Covers Legal Proceedings, Risk Factors, Unregistered Sales of Equity Securities, Defaults upon Senior Securities, Mine Safety Disclosures, Other Information, and Exhibits[5] PART I. FINANCIAL INFORMATION This part presents the unaudited consolidated financial statements and management's discussion for the quarter ended March 31, 2020 Item 1. Financial Statements This item presents First United Corporation's unaudited consolidated financial statements and accompanying detailed notes Consolidated Statement of Financial Condition This statement provides a snapshot of the company's assets, liabilities, and shareholders' equity at specific dates Total Assets | Date | Amount (in thousands) | Change (vs. Dec 31, 2019) | | :--- | :--- | :--- | | March 31, 2020 | $1,461,513 | +$19,486 | | December 31, 2019 | $1,442,027 | | Cash and Cash Equivalents | Date | Amount (in thousands) | Change (vs. Dec 31, 2019) | | :--- | :--- | :--- | | March 31, 2020 | $72,008 | +$22,029 | | December 31, 2019 | $49,979 | | Net Loans | Date | Amount (in thousands) | Change (vs. Dec 31, 2019) | | :--- | :--- | :--- | | March 31, 2020 | $1,038,058 | -$836 | | December 31, 2019 | $1,038,894 | | Total Deposits | Date | Amount (in thousands) | Change (vs. Dec 31, 2019) | | :--- | :--- | :--- | | March 31, 2020 | $1,172,394 | +$30,363 | | December 31, 2019 | $1,142,031 | | Total Shareholders' Equity | Date | Amount (in thousands) | Change (vs. Dec 31, 2019) | | :--- | :--- | :--- | | March 31, 2020 | $118,549 | -$7,391 | | December 31, 2019 | $125,940 | | Consolidated Statement of Operations This statement reports the company's revenues, expenses, and net income over specific periods Net Income | Period | Amount (in thousands) | Change (YoY) | | :--- | :--- | :--- | | 3 months ended Mar 31, 2020 | $1,755 | -$1,396 | | 3 months ended Mar 31, 2019 | $3,151 | | Basic Net Income Per Share | Period | Amount | Change (YoY) | | :--- | :--- | :--- | | 3 months ended Mar 31, 2020 | $0.25 | -$0.19 | | 3 months ended Mar 31, 2019 | $0.44 | | Net Interest Income | Period | Amount (in thousands) | Change (YoY) | | :--- | :--- | :--- | | 3 months ended Mar 31, 2020 | $11,887 | +$541 | | 3 months ended Mar 31, 2019 | $11,346 | | Provision for Loan Losses | Period | Amount (in thousands) | Change (YoY) | | :--- | :--- | :--- | | 3 months ended Mar 31, 2020 | $2,654 | +$2,305 | | 3 months ended Mar 31, 2019 | $349 | | Total Other Operating Income | Period | Amount (in thousands) | Change (YoY) | | :--- | :--- | :--- | | 3 months ended Mar 31, 2020 | $4,049 | +$328 | | 3 months ended Mar 31, 2019 | $3,721 | | Total Other Operating Expenses | Period | Amount (in thousands) | Change (YoY) | | :--- | :--- | :--- | | 3 months ended Mar 31, 2020 | $11,005 | +$315 | | 3 months ended Mar 31, 2019 | $10,690 | | Consolidated Statement of Comprehensive (Loss)/Income This statement presents net income and other comprehensive income items, reflecting changes in equity not from owners Comprehensive (Loss)/Income | Period | Amount (in thousands) | Change (YoY) | | :--- | :--- | :--- | | 3 months ended Mar 31, 2020 | $(3,877) | -$9,743 | | 3 months ended Mar 31, 2019 | $5,866 | | Net Unrealized Losses on Pension | Period | Amount (in thousands) | Change (YoY) | | :--- | :--- | :--- | | 3 months ended Mar 31, 2020 | $(4,915) | -$7,044 | | 3 months ended Mar 31, 2019 | $2,129 | | Net Unrealized Losses on Investments with OTTI | Period | Amount (in thousands) | Change (YoY) | | :--- | :--- | :--- | | 3 months ended Mar 31, 2020 | $(1,225) | -$1,145 | | 3 months ended Mar 31, 2019 | $(80) | | Consolidated Statement of Changes in Shareholders' Equity This statement details changes in shareholders' equity components, including net income, other comprehensive loss, and stock transactions Total Shareholders' Equity | Date | Amount (in thousands) | Change (QoQ) | | :--- | :--- | :--- | | March 31, 2020 | $118,549 | -$7,391 | | January 1, 2020 | $125,940 | | Other Comprehensive Loss (Q1 2020) | Metric | Amount (in thousands) | | :--- | :--- | | Other comprehensive loss | $(5,632) | Stock Repurchase (Q1 2020) | Metric | Amount (in thousands) | | :--- | :--- | | Stock repurchase | $(2,754) | Common Stock Dividend Declared (Q1 2020) | Metric | Amount (per share) | Total (in thousands) | | :--- | :--- | :--- | | Common stock dividend | $0.13 | $(910) | Consolidated Statement of Cash Flows This statement reports cash inflows and outflows from operating, investing, and financing activities over specific periods Cash and Cash Equivalents at End of Period | Period | Amount (in thousands) | Change (YoY) | | :--- | :--- | :--- | | 3 months ended Mar 31, 2020 | $72,008 | +$18,004 | | 3 months ended Mar 31, 2019 | $54,004 | | Net Cash Provided by Operating Activities | Period | Amount (in thousands) | Change (YoY) | | :--- | :--- | :--- | | 3 months ended Mar 31, 2020 | $3,669 | +$2,672 | | 3 months ended Mar 31, 2019 | $997 | | Net Cash Provided by Financing Activities | Period | Amount (in thousands) | Change (YoY) | | :--- | :--- | :--- | | 3 months ended Mar 31, 2020 | $17,426 | -$7,047 | | 3 months ended Mar 31, 2019 | $24,473 | | Net Increase in Deposits (Q1 2020) | Metric | Amount (in thousands) | | :--- | :--- | | Net increase in deposits | $30,363 | Stock Repurchase (Q1 2020) | Metric | Amount (in thousands) | | :--- | :--- | | Stock repurchase | $(2,754) | Notes to Consolidated Financial Statements This section provides detailed explanations and additional information supporting the consolidated financial statements Note 1 – Basis of Presentation This note clarifies that unaudited interim financial statements adhere to U.S. GAAP but lack full annual disclosures and are not indicative of full-year results - GAAP Compliance: Unaudited consolidated financial statements prepared in accordance with U.S. GAAP for interim financial information[18] - Interim Nature: Do not include all information and footnotes required for annual financial statements; interim results are not necessarily indicative of full-year results[18] Note 2 – Significant Event This note details the COVID-19 pandemic's impact, including the company's business continuity plan, PPP participation, and increased allowance for loan losses - COVID-19 Impact: Declared a pandemic on March 11, 2020, leading to a health and financial crisis[20] - Business Continuity Plan: Successfully implemented to protect associates and customers[21] - Paycheck Protection Program (PPP) Participation: Funded 428 loan applications for ~$111.0 million from the first tranche and an additional 492 loan applications for ~$29.0 million through May 1, 2020, totaling over $140 million for 920 small businesses, protecting over 16,000 jobs; anticipated fees are approximately $3.5 million[22][135] Allowance for Loan Losses (ALL) Increase | Date | Amount (in thousands) | ALL to Total Loans | | :--- | :--- | :--- | | March 31, 2020 | $15,012 | 1.42% | | December 31, 2019 | $12,537 | 1.19% | - Loan Modifications: 15.3% of total loans ($161.2 million) modified through May 6, 2020, including deferrals of principal and interest or interest-only periods[25][26] - Federal Funds Rate Reduction: Federal Reserve Board reduced the federal funds rate by 150 basis points to 0%-0.25% in March 2020, potentially reducing future net interest margin[26] Note 3 – Earnings Per Common Share This note details the calculation of basic and diluted earnings per common share, which decreased to $0.25 for Q1 2020 Basic and Diluted EPS | Period | Basic EPS | Diluted EPS | | :--- | :--- | :--- | | 3 months ended Mar 31, 2020 | $0.25 | $0.25 | | 3 months ended Mar 31, 2019 | $0.44 | $0.44 | Weighted Average Basic Shares Outstanding (Q1 2020) | Metric | Value (in thousands) | | :--- | :--- | | Weighted average basic shares outstanding | 7,063 | Note 4 – Net Gains This note summarizes net gains, which increased to $41 thousand for Q1 2020, primarily from consumer loan sales Net Gains | Period | Amount (in thousands) | | :--- | :--- | | 3 months ended Mar 31, 2020 | $41 | | 3 months ended Mar 31, 2019 | $14 | Gains on Sale of Consumer Loans (Q1 2020) | Metric | Amount (in thousands) | | :--- | :--- | | Gains on sale of consumer loans | $59 | Note 5 – Investments This note details investment securities, including AFS and HTM portfolios, highlighting net unrealized losses and OTTI evaluation for CDOs Total Available-for-Sale (AFS) Securities | Date | Amortized Cost (in thousands) | Fair Value (in thousands) | Net Unrealized (Loss)/Gain (in thousands) | | :--- | :--- | :--- | :--- | | March 31, 2020 | $134,336 | $130,792 | $(3,544) | | December 31, 2019 | $135,008 | $131,305 | $(3,703) | Total Held-to-Maturity (HTM) Securities | Date | Amortized Cost (in thousands) | Fair Value (in thousands) | | :--- | :--- | :--- | | March 31, 2020 | $91,399 | $98,311 | | December 31, 2019 | $93,979 | $100,656 | Collateralized Debt Obligations (CDO) in AFS | Date | Amortized Cost (in thousands) | Fair Value (in thousands) | Gross Unrealized Losses (in thousands) | OTTI in AOCL (in thousands) | | :--- | :--- | :--- | :--- | :--- | | March 31, 2020 | $18,470 | $12,380 | $6,090 | $(4,507) | | December 31, 2019 | $18,443 | $14,354 | $4,089 | $(2,835) | Credit-Related OTTI Balance | Period | Amount (in thousands) | | :--- | :--- | | March 31, 2020 | $2,396 | | January 1, 2020 | $2,446 | - No Credit-Related OTTI Charges: Management determined no securities had credit-related non-cash OTTI charges during the first three months of 2020 or 2019[33] Note 6 – Loans and Related Allowance for Loan Losses This note details the loan portfolio and Allowance for Loan Losses (ALL), which significantly increased due to COVID-19 related qualitative factor adjustments Total Loans | Date | Amount (in thousands) | Change (QoQ) | | :--- | :--- | :--- | | March 31, 2020 | $1,053,732 | +$1,614 | | December 31, 2019 | $1,052,118 | | Loan Portfolio Composition (March 31, 2020) | Category | Balance (in thousands) | % of Total | | :--- | :--- | :--- | | Commercial real estate | $337,688 | 32% | | Residential mortgage | $434,969 | 41% | | Acquisition and development | $121,333 | 12% | | Commercial and industrial | $123,509 | 12% | | Consumer | $36,233 | 3% | Allowance for Loan Losses (ALL) | Date | Amount (in thousands) | Change (QoQ) | | :--- | :--- | :--- | | March 31, 2020 | $15,012 | +$2,475 | | December 31, 2019 | $12,537 | | ALL to Total Loans Ratio | Date | Ratio | | :--- | :--- | | March 31, 2020 | 1.42% | | December 31, 2019 | 1.19% | Non-accrual Loans | Date | Amount (in thousands) | Change (QoQ) | | :--- | :--- | :--- | | March 31, 2020 | $11,012 | +$163 | | December 31, 2019 | $10,849 | | - Troubled Debt Restructurings (TDRs): 15 loans totaling $4.1 million at March 31, 2020, stable from December 31, 2019; no new TDRs or modifications in Q1 2020[48][49] Note 7 – Other Real Estate Owned, net This note details the Other Real Estate Owned (OREO) portfolio, which slightly decreased, with valuation allowance activity including write-downs and sales Total OREO | Date | Amount (in thousands) | Change (QoQ) | | :--- | :--- | :--- | | March 31, 2020 | $4,040 | -$87 | | December 31, 2019 | $4,127 | | - OREO Valuation Allowance Activity (Q1 2020): Fair value write-down of $26 thousand and sales of OREO of $(36) thousand[51] Total OREO Expense, Net (Q1 2020) | Period | Amount (in thousands) | | :--- | :--- | | 3 months ended Mar 31, 2020 | $0 | | 3 months ended Mar 31, 2019 | $143 | Note 8 – Fair Value of Financial Instruments This note explains fair value determination using the ASC 820 hierarchy, classifying CDOs and impaired loans as Level 3 due to unobservable inputs - Fair Value Hierarchy: Utilizes Level 1 (quoted prices in active markets), Level 2 (observable inputs other than quoted prices), and Level 3 (significant unobservable inputs)[54][55][56] Level 3 Assets (March 31, 2020) | Asset Category | Fair Value (in thousands) | | :--- | :--- | | Investment Securities – available for sale | $12,380 | | Impaired Loans | $6,683 | | Other Real Estate Owned | $534 | - CDO Valuation: Classified as Level 3 due to inactive markets and reliance on income valuation approach (discounted cash flow modeling) with significant adjustments[60][61] - Impaired Loans & OREO Valuation: Classified as Level 3, fair value generally determined by independent third-party appraisals or discounted cash flows[65][66] Note 9 – Accumulated Other Comprehensive Loss This note details the significant increase in accumulated other comprehensive loss, driven by unrealized losses on the pension plan and investments with OTTI Accumulated OCL Balance | Date | Amount (in thousands) | Change (QoQ) | | :--- | :--- | :--- | | March 31, 2020 | $(31,603) | $(5,632) | | December 31, 2019 | $(25,971) | | Other Comprehensive Loss (Q1 2020) | Metric | Amount (in thousands) | | :--- | :--- | | Other comprehensive loss, net of tax | $(5,632) | - Key Drivers of OCL (Q1 2020): Net unrealized losses on pension plan ($(4.9 million)), net unrealized losses on investments with OTTI ($(1.2 million)), and net unrealized losses on cash flow hedges ($(963 thousand))[78] Note 10 – Borrowed Funds This note summarizes short-term and long-term borrowings, with short-term decreasing due to municipalities utilizing cash Short-term Borrowings (Securities sold under agreements to repurchase) | Date | Amount (in thousands) | Change (QoQ) | | :--- | :--- | :--- | | March 31, 2020 | $39,418 | -$9,310 | | December 31, 2019 | $48,728 | | Long-term Borrowings (FHLB advances & Junior subordinated debt) | Date | Amount (in thousands) | Change (QoQ) | | :--- | :--- | :--- | | March 31, 2020 | $100,929 | $0 | | December 31, 2019 | $100,929 | | - Securities Pledged: Repurchase agreements secured by $50.7 million in investment securities; FHLB advances secured by $228.2 million in loans[81][82] Note 11 – Employee Benefit Plans This note details employee benefit plans, highlighting a $7.0 million decline in pension plan market value due to COVID-19, resulting in a net pension credit - Pension Plan Market Value Decline: Approximately $7.0 million decline at March 31, 2020, due to the COVID-19 pandemic's impact on the rate environment[84] Net Pension (Credit)/Expense | Period | Amount (in thousands) | | :--- | :--- | | 3 months ended Mar 31, 2020 | $(66) | | 3 months ended Mar 31, 2019 | $9 | Defined Benefit SERP Expense | Period | Amount (in thousands) | | :--- | :--- | | 3 months ended Mar 31, 2020 | $144 | | 3 months ended Mar 31, 2019 | $134 | - Pension Plan Contribution (Q1 2020): $1.0 million[88] Note 12 - Equity Compensation Plan Information This note describes equity compensation plans, detailing RSU grants to executive officers in Q1 2020, resulting in $31,242 in stock compensation expense - 2018 Equity Compensation Plan: Authorizes issuance of up to 325,000 shares of common stock[92] Director Stock Compensation Expense | Period | Amount | | :--- | :--- | | 3 months ended Mar 31, 2020 | $66,983 | | 3 months ended Mar 31, 2019 | $66,717 | - Restricted Stock Units (RSUs) Granted (Q1 2020): 25,004 shares (target level) granted to executive officers with a grant date fair market value of $12.54 per share; stock compensation expense for Q1 2020 was $31,242, with $282,282 related to unvested units[99] - RSU Vesting: Includes performance-vesting (based on EPS and tangible book value growth) and time-vesting components over three years[96][97] Note 13 – Derivative Financial Instruments This note discusses interest rate swap agreements used as cash flow hedges, with their fair value decreasing by $1.3 million in Q1 2020 - Purpose: Interest rate swap agreements used as cash flow hedges to modify re-pricing characteristics of interest-bearing liabilities[100] Fair Value of Interest Rate Swap Contracts | Date | Amount (in thousands) | Change (QoQ) | | :--- | :--- | :--- | | March 31, 2020 | $(1,448) | $(1,315) | | December 31, 2019 | $(133) | | - Impact on OCI (Q1 2020): $1.3 million decrease in derivative value and related deferred tax of $352 thousand recorded in net accumulated other comprehensive loss[103] - No Hedge Ineffectiveness: No hedge ineffectiveness recorded for Q1 2020[103] Note 14 – Assets and Liabilities Subject to Enforceable Master Netting Arrangements This note clarifies that master netting arrangements exist for swaps and repurchase agreements, but assets and liabilities are not offset for presentation - Netting Arrangements: Master netting arrangements exist for interest rate swap agreements and repurchase agreements[107] - Financial Statement Presentation: Assets and liabilities are not offset for financial statement presentation purposes[107] - Collateral: Collateral (cash and investment securities) is pledged for net liability positions; repurchase agreements are secured by $50.7 million in investment securities[107][81] Note 15 - Goodwill This note states goodwill is tested annually for impairment; an interim test due to COVID-19 found no impairment as fair value exceeded carrying value - Goodwill Balance: $11.0 million at March 31, 2020[8] - Impairment Testing: Goodwill is not amortized but tested annually or more frequently if triggering events occur[111] - COVID-19 Triggering Event: Economic deterioration due to COVID-19 triggered an interim impairment test in Q1 2020[112] - No Impairment Recognized: Based on the analysis, fair value continues to exceed carrying value, so no impairment was recognized[112] Note 16 – Adoption of New Accounting Standards and Effects of New Accounting Pronouncements This note discusses the adoption of ASU 2018-13, delayed CECL model implementation for smaller reporting companies, and evaluation of ASU 2020-04 - ASU 2016-13 (CECL Model): Required implementation delayed for smaller reporting companies (including First United Corporation) until January 1, 2023[113] - ASU 2018-13 (Fair Value Measurement): Effective January 1, 2020; did not have a significant impact[114] - ASU 2020-04 (Reference Rate Reform): Effective March 12, 2020, through December 31, 2022; impact is being evaluated but not expected to be material[115] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of financial condition and results, covering key drivers, critical accounting policies, COVID-19 impact, and outlook INTRODUCTION This section introduces the review of material changes and significant factors affecting the company's financial condition and operations - Purpose: Review material changes and significant factors affecting financial condition and results of operations[117] - Context: To be read with unaudited consolidated financial statements and the Annual Report on Form 10-K for December 31, 2019[117] FORWARD-LOOKING STATEMENTS This section highlights that the report contains forward-looking statements subject to risks and uncertainties, including the COVID-19 pandemic - Nature: Contains forward-looking statements, not historical facts, based on management's beliefs and objectives[119] - Risks: Involve risks and uncertainties that could cause actual results to differ materially[119] - COVID-19 Risk: Specifically identifies the COVID-19 pandemic as a significant risk factor that could adversely affect the Corporation's business, financial condition, and results of operations[119] FIRST UNITED CORPORATION This section describes First United Corporation as a Maryland-based bank holding company with total assets of $1.5 billion - Company Structure: Maryland corporation, bank holding company for First United Bank & Trust and other subsidiaries (Trusts, consumer finance companies, real estate holding companies)[120] Key Financials (March 31, 2020) | Metric | Amount | | :--- | :--- | | Total assets | $1.5 billion | | Net loans | $1.0 billion | | Deposits | $1.2 billion | | Shareholders' equity | $118.5 million | ESTIMATES AND CRITICAL ACCOUNTING POLICIES This section discusses critical accounting policies requiring significant management estimates and judgments, with no material changes since December 31, 2019 Allowance for Loan Losses The Allowance for Loan Losses (ALL) is a critical accounting policy based on management's estimates of probable losses, subject to inherent uncertainties - Purpose: ALL is established to cover losses from borrowers' inability to make payments[124] - Estimation Factors: Loan-specific risks, portfolio trends, economic climate, lending rates, political conditions, and legislation[124] - Uncertainty: Calculation relies on estimates and judgments related to inherently uncertain events, so actual results may vary[124] Goodwill Goodwill is tested annually for impairment; an interim test due to COVID-19 found no impairment as fair value exceeded carrying value Goodwill Balance (March 31, 2020) | Metric | Amount (in millions) | | :--- | :--- | | Goodwill | $11.0 | - Impairment Testing: Not amortized; tested annually or more frequently if triggering events occur[126] - COVID-19 Impact: Economic deterioration due to COVID-19 triggered an interim test in Q1 2020[128] - No Impairment: Fair value continues to exceed carrying value, so no impairment was recognized[128] Accounting for Income Taxes This policy involves deferred tax recognition and valuation allowance assessment, requiring significant judgment and potentially leading to effective tax rate volatility - Deferred Taxes: Recognized for future tax consequences of temporary differences between financial statement and tax bases[129] - Valuation Allowance: Regularly reviewed; established if it's more likely than not that deferred tax assets will not be realized[130] - Volatility: Adherence to guidance may result in increased volatility in quarterly and annual effective income tax rates[131] Other-Than-Temporary Impairment of Investment Securities Management quarterly evaluates investment securities for OTTI, recognizing credit losses in earnings and other losses in other comprehensive loss - Evaluation Frequency: Quarterly[132] - Impairment Components: Credit losses recognized in earnings; other losses recognized in other comprehensive loss[132] - Considerations: Length and extent of fair value decline, adverse conditions, volatility, rating changes, payment failures, and cash flow projections[132] Fair Value of Investments Fair value of investments is determined using the ASC 820 hierarchy, with valuation techniques subject to different estimates based on methodologies - Standard: Fair value determined in accordance with ASC Topic 820[133] - Hierarchy: Uses Level 1, Level 2, and Level 3 inputs[133] - Subjectivity: Valuation techniques are appropriate, but different methodologies and assumptions could result in different estimates[58] Pension Plan Assumptions Pension plan costs and liabilities are calculated using actuarial concepts, with critical assumptions including discount rate and expected return on assets - Calculation Basis: Actuarial concepts under ASC Topic 715[134] - Critical Assumptions: Discount rate and expected return on plan assets, evaluated annually[134] - Other Factors: Employee demographics (retirement, turnover, mortality) and compensation increases[134] Response to COVID-19 The company implemented its Business Continuity Plan in response to COVID-19, focusing on associate and customer well-being, and actively participated in the PPP Paycheck Protection Program The company actively participated in the PPP, funding over $140 million in loans to 920 small businesses, protecting over 16,000 jobs - PPP Participation: Funded 428 loans for $111.0 million (first tranche) and an additional 492 loans for $29.0 million (second tranche) by May 1, 2020[135] - Total PPP Loans: Over $140 million to 920 small businesses, protecting over 16,000 jobs[135] - Loan Characteristics: 100% SBA guaranteed, up to two-year maturity, six-month deferral, 1% interest rate, potential for forgiveness[135] Anticipated PPP Fees | Metric | Amount | | :--- | :--- | | Anticipated fees | ~$3.5 million | Liquidity Sources The company maintains strong liquidity through unsecured lines of credit, FHLB borrowings, and access to the Federal Reserve Discount Window and PPPLF Liquidity Sources (March 31, 2020) | Source | Amount (in millions) | | :--- | :--- | | Unsecured lines of credit | $115.0 | | Federal Reserve Discount Window | $2.1 | | Secured borrowings with FHLB | $158.2 | - Additional Sources: Access to brokered certificates of deposit market and eligibility for the Paycheck Protection Program Liquidity Facility (PPPLF)[138][139] Capital Both the Corporation and its Bank subsidiary maintain strong capital ratios, exceeding regulatory requirements and are well-capitalized - Capital Ratios: Both the Corporation and the Bank are considered well-capitalized by applicable regulatory measures[140] SELECTED FINANCIAL DATA This section presents key selected financial data and ratios for the three-month periods ended March 31, 2020 and 2019 Per Share Data | Metric | Mar 31, 2020 | Mar 31, 2019 | | :--- | :--- | :--- | | Basic net income per common share | $0.25 | $0.44 | | Diluted net income per common share | $0.25 | $0.44 | | Basic book value per common share | $17.01 | $17.27 | | Diluted Book Value per common share | $16.95 | $17.27 | Significant Ratios (Annualized) | Metric | Mar 31, 2020 | Mar 31, 2019 | | :--- | :--- | :--- | | Return on Average Assets | 0.49% | 0.91% | | Return on Average Equity | 5.62% | 10.49% | | Average Equity to Average Assets | 8.69% | 8.68% | RESULTS OF OPERATIONS This section analyzes operating results, highlighting decreased net income due to increased provision for loan losses from COVID-19 economic uncertainty Overview Consolidated net income decreased by 43% to $1.8 million for Q1 2020, primarily due to a $2.3 million increase in provision for loan losses from COVID-19 uncertainty Consolidated Net Income | Period | Amount (in thousands) | Change (YoY) | | :--- | :--- | :--- | | 3 months ended Mar 31, 2020 | $1,755 | -$1,396 | | 3 months ended Mar 31, 2019 | $3,151 | | - Basic and Diluted EPS: $0.25 for Q1 2020 (down 43% from $0.44 in Q1 2019)[143] - Provision for Loan Losses: Increased by $2.3 million, with $2.4 million related to COVID-19 qualitative factor adjustments and $0.3 million to loan growth[143][144] - Net Interest Income: Increased by $0.5 million[143] - Net Interest Margin (FTE): Stable at 3.69% for Q1 2020 (vs. 3.72% for Q1 2019)[143] - Other Operating Income: Increased by $0.3 million[143] - Other Operating Expenses: Increased by $0.3 million[143] Net Interest Income Net interest income (FTE) increased by $0.5 million (4.6%) for Q1 2020 due to higher average loan balances, with stable net interest margin Net Interest Income (FTE) | Period | Amount (in thousands) | Change (YoY) | | :--- | :--- | :--- | | 3 months ended Mar 31, 2020 | $12,110 | +$531 | | 3 months ended Mar 31, 2019 | $11,579 | | Net Interest Margin (FTE) | Period | Rate | Change (YoY) | | :--- | :--- | :--- | | 3 months ended Mar 31, 2020 | 3.69% | -0.03% | | 3 months ended Mar 31, 2019 | 3.72% | | - Interest and Fees on Loans: Increased by $0.7 million, driven by a $39.2 million increase in average loan balances[145][156] - Interest Expense: Remained flat due to deposit rate reductions and $24.1 million average growth in non-interest bearing accounts[146][157] Provision for Loan Losses The provision for loan losses significantly increased to $2.7 million for Q1 2020, primarily due to a $2.4 million adjustment for qualitative factors related to COVID-19 economic uncertainty Provision for Loan Losses | Period | Amount (in thousands) | Change (YoY) | | :--- | :--- | :--- | | 3 months ended Mar 31, 2020 | $2,654 | +$2,305 | | 3 months ended Mar 31, 2019 | $349 | | - COVID-19 Impact: $2.4 million of the provision expense was due to qualitative factor adjustments related to economic uncertainty from the COVID-19 health crisis[160] - Loan Growth Impact: $0.3 million of the provision expense was related to loan growth[160] Other Operating Income Total other operating income, excluding net gains, increased by $0.3 million to $4.0 million for Q1 2020, driven by service charges and trust department income Total Other Operating Income (excluding net gains) | Period | Amount (in thousands) | Change (YoY) | | :--- | :--- | :--- | | 3 months ended Mar 31, 2020 | $4,008 | +$301 | | 3 months ended Mar 31, 2019 | $3,707 | | Service Charges on Deposit Accounts | Period | Amount (in thousands) | | :--- | :--- | | 3 months ended Mar 31, 2020 | $615 | Trust Department Income | Period | Amount (in thousands) | | :--- | :--- | | 3 months ended Mar 31, 2020 | $1,753 | Debit Card Income | Period | Amount (in thousands) | | :--- | :--- | | 3 months ended Mar 31, 2020 | $634 | Other Operating Expenses Total other operating expenses increased slightly by $0.3 million to $11.0 million for Q1 2020, driven by professional services and occupancy costs, partially offset by reduced salaries Total Other Operating Expenses | Period | Amount (in thousands) | Change (YoY) | | :--- | :--- | :--- | | 3 months ended Mar 31, 2020 | $11,005 | +$315 | | 3 months ended Mar 31, 2019 | $10,690 | | Salaries and Employee Benefits | Period | Amount (in thousands) | Change (YoY) | | :--- | :--- | :--- | | 3 months ended Mar 31, 2020 | $5,923 | -$295 | | 3 months ended Mar 31, 2019 | $6,218 | | Professional Services | Period | Amount (in thousands) | Change (YoY) | | :--- | :--- | :--- | | 3 months ended Mar 31, 2020 | $723 | +$519 | | 3 months ended Mar 31, 2019 | $204 | | FDIC Premiums | Period | Amount (in thousands) | Change (YoY) | | :--- | :--- | :--- | | 3 months ended Mar 31, 2020 | $43 | -$68 | | 3 months ended Mar 31, 2019 | $111 | | Provision for Income Taxes The effective income tax rate increased to 22.9% for Q1 2020, primarily due to a reduction in tax-exempt income from the investment portfolio Effective Income Tax Rate | Period | Rate | Change (YoY) | | :--- | :--- | :--- | | 3 months ended Mar 31, 2020 | 22.9% | +1.1% | | 3 months ended Mar 31, 2019 | 21.8% | | - Reason for Increase: Primarily due to reduction in tax-exempt income from the investment portfolio[164] FINANCIAL CONDITION This section reviews the company's balance sheet, loan portfolio, risk elements, investment securities, deposits, borrowings, liquidity, market risk, and capital resources Balance Sheet Overview Total assets increased by $19.5 million to $1.46 billion at March 31, 2020, driven by cash and deposit growth, while shareholders' equity decreased due to OCL and repurchases - Total Assets: Increased by $19.5 million to $1.46 billion[165] - Cash and Interest-Bearing Deposits: Increased by $22.0 million[165] - Total Liabilities: Increased by $26.9 million, primarily due to $30.4 million in deposit growth[165] - Total Shareholders' Equity: Decreased by $7.4 million, driven by increased accumulated other comprehensive loss and stock repurchases[165] Loan Portfolio The total loan portfolio remained stable at $1.1 billion at March 31, 2020, with increases in CRE, A&D, and C&I loans offset by residential mortgage declines, and reduced loan demand anticipated Total Loans Outstanding | Date | Amount (in billions) | | :--- | :--- | | March 31, 2020 | $1.1 | - Loan Growth: Commercial real estate (CRE) loans increased $2.2 million, Acquisition and development (A&D) loans increased $3.4 million, and Commercial and industrial (C&I) loans increased $1.2 million[166] - Residential Mortgage Loans: Decreased by $5.2 million, with longer-term fixed-rate loans sold to Fannie Mae[166] - Mortgage Production (Q1 2020): Record production of approximately $23.0 million, with a strong pipeline of $32.0 million[167] - Outlook: Anticipate reduced loan demand for the remainder of 2020[167] Risk Elements of Loan Portfolio Non-accrual loans increased slightly to $11.0 million, and substandard loans rose by $6.7 million, while TDRs remained stable, and foreclosure activities are temporarily suspended due to COVID-19 Non-accrual Loans | Date | Amount (in thousands) | Change (QoQ) | | :--- | :--- | :--- | | March 31, 2020 | $11,012 | +$163 | | December 31, 2019 | $10,849 | | - Substandard Loan Category Increase: $6.7 million increase from December 31, 2019, to March 31, 2020, primarily due to one large relationship[38] Troubled Debt Restructurings (TDRs) | Date | Amount (in thousands) | | :--- | :--- | | March 31, 2020 | $4,103 | | December 31, 2019 | $4,166 | - Foreclosure/Repossession Suspension: Temporarily suspended due to the COVID-19 pandemic and federal/state guidance[41] Impaired Loans | Date | Amount (in thousands) | | :--- | :--- | | March 31, 2020 | $15,274 | | Impaired loans with a valuation allowance | $9,139 | Allowance and Provision for Loan Losses The Allowance for Loan Losses (ALL) increased by 20% to $15.0 million due to COVID-19 related qualitative factor adjustments, with a provision of $2.7 million for Q1 2020 Allowance for Loan Losses (ALL) | Date | Amount (in thousands) | Change (QoQ) | | :--- | :--- | :--- | | March 31, 2020 | $15,012 | +$2,475 | | December 31, 2019 | $12,537 | | Provision for Loan Losses | Period | Amount (in thousands) | Change (YoY) | | :--- | :--- | :--- | | 3 months ended Mar 31, 2020 | $2,654 | +$2,305 | | 3 months ended Mar 31, 2019 | $349 | | ALL to Gross Loans Outstanding | Date | Ratio | | :--- | :--- | | March 31, 2020 | 1.42% | | March 31, 2019 | 1.15% | - Net Charge-offs (Q1 2020): $0.2 million (vs. net recoveries of $0.2 million in Q1 2019)[174] - COVID-19 Impact: $2.4 million of the provision expense was attributable to COVID-19 related factor adjustments[174] Investment Securities AFS investment securities fair value decreased slightly to $130.8 million, with a net unrealized loss of $3.5 million, and the CDO portfolio had $6.1 million in net unrealized losses, including $4.5 million in non-credit related OTTI Total AFS Investment Securities (Fair Value) | Date | Amount (in thousands) | Change (QoQ) | | :--- | :--- | :--- | | March 31, 2020 | $130,792 | -$513 | | December 31, 2019 | $131,305 | | Net Unrealized Loss (AFS) | Date | Amount (in millions) | | :--- | :--- | | March 31, 2020 | $3.5 | - CDO Portfolio (Level 3 AFS): Fair Value of $12.4 million at March 31, 2020, with net unrealized losses of $6.1 million, including $4.5 million in non-credit related OTTI charges[180] - No Credit-Related OTTI: Management determined no securities had credit-related OTTI during Q1 2020[189] Deposits Total deposits increased by $30.4 million to $1.17 billion at March 31, 2020, driven by growth in non-interest-bearing, savings, and money market accounts, partially offset by time deposit declines Total Deposits | Date | Amount (in thousands) | Change (QoQ) | | :--- | :--- | :--- | | March 31, 2020 | $1,172,394 | +$30,363 | | December 31, 2019 | $1,142,031 | | - Non-interest Bearing Deposits: Increased by $5.3 million[190] - Traditional Savings Accounts: Increased by $5.6 million[190] - Money Market Accounts: Increased by $22.6 million[190] - Time Deposits: Decreased by $1.5 million (less than $100k) and $3.9 million (greater than $100k)[190] Borrowed Funds Total short-term borrowings decreased by $9.3 million in Q1 2020 due to municipalities utilizing cash, while long-term borrowings remained constant Short-term Borrowings | Date | Amount (in thousands) | Change (QoQ) | | :--- | :--- | :--- | | March 31, 2020 | $39,418 | -$9,310 | | December 31, 2019 | $48,728 | | Long-term Borrowings | Date | Amount (in thousands) | | :--- | :--- | | March 31, 2020 | $100,929 | - Reason for Short-term Decrease: Municipalities utilized existing cash for working capital needs[192] Liquidity Management The company actively manages liquidity through a Treasury Team, maintaining adequate funding through various sources like unsecured lines, FHLB advances, and the Fed Discount Window, with no material adverse trends anticipated - Management: Active management by Treasury Team, with monthly and quarterly reviews[193] - Policy: Satisfy liquidity needs through normal Bank operations, minimize unplanned asset sales or emergency borrowings[194] - Funding Sources: Unsecured Fed Funds lines of credit ($115.0 million), secured FHLB advances ($158.2 million), secured line of credit with Fed Discount Window ($2.1 million), brokered deposits, and Federal Reserve PPPLF[197][207] - Outlook: Management believes adequate liquidity is available and is not aware of material adverse trends[195] Market Risk and Interest Sensitivity The company's primary market risk is interest rate fluctuation, managed through gap analysis and simulation models, indicating asset sensitivity with NII changes of $798 thousand for a +100 bps rate change and $(1.9 million) for a -100 bps change - Primary Market Risk: Interest rate fluctuation[196] - Management Tools: Interest sensitivity gap analysis and simulation models[196] - Asset Sensitivity: Company was asset sensitive at March 31, 2020[196] Simulated NII Changes (next 8 quarters) | Rate Change | Impact on NII (in thousands) | | :--- | :--- | | +400 basis points | $2,353 | | +100 basis points | $798 | | -100 basis points | $(1,897) | - No Material Changes: Management believes no material changes in market risks or mitigation procedures since December 31, 2019[204] Capital Resources The company requires capital to fund operations and meet obligations, with both the Bank and First United Corporation considered well-capitalized by federal banking regulators, exceeding required thresholds - Capital Purpose: Fund loans, satisfy obligations, meet deposit withdrawal demands[207] - Regulatory Status: Both the Bank and First United Corporation are considered well-capitalized[208] Capital Ratios (Consolidated, March 31, 2020) | Metric | Ratio | Required for Capital Adequacy | Required to be Well Capitalized | | :--- | :--- | :--- | :--- | | Total Capital (to risk-weighted assets) | 16.01% | 8.00% | 10.00% | | Tier 1 Capital (to risk-weighted assets) | 14.76% | 6.00% | 8.00% | | Common Equity Tier 1 Capital (to risk-weighted assets) | 12.43% | 4.50% | 6.50% | | Tier 1 Capital (to average assets) | 11.52% | 4.00% | 5.00% | Contractual Obligations, Commitments and Off-Balance Sheet Arrangements This section outlines contractual obligations like FHLB advances and junior subordinated debentures, and commitments to extend credit, which increased by $25.9 million primarily for consumer and commercial construction Contractual Obligations This section details contractual obligations, including FHLB advances and junior subordinated debentures, with short-term borrowings decreasing due to municipalities utilizing cash - Obligations: FHLB advances and junior subordinated debentures[210] - Short-term Borrowings Decrease: $9.3 million decrease in Q1 2020, due to municipalities utilizing cash[210] Commitments This section details commitments to extend credit, which increased by $25.9 million due to demand for consumer and commercial construction Total Commitments | Date | Amount (in thousands) | Change (QoQ) | | :--- | :--- | :--- | | March 31, 2020 | $182,872 | +$25,946 | | December 31, 2019 | $156,926 | | - Increase Driver: Increased demand for consumer and commercial construction early in the quarter[212] - Monitoring: Management will monitor balances due to COVID-19 impact on projects[212] Item 3. Quantitative and Qualitative Disclosures about Market Risk This item refers to market risk disclosures provided in Item 2 of Part I and the prior Annual Report on Form 10-K - Reference: Information is incorporated by reference from "Market Risk and Interest Sensitivity" section in Item 2 of Part I and the Annual Report on Form 10-K[214] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2020, with no material changes in internal control over financial reporting - Disclosure Controls Effectiveness: Management concluded that disclosure controls and procedures are effective at the reasonable assurance level as of March 31, 2020[216] - Internal Control Over Financial Reporting: No material changes during Q1 2020[217] PART II. OTHER INFORMATION This part contains other information not directly related to financial statements, including legal proceedings, risk factors, and equity security sales Item 1. Legal Proceedings This item states that there are no legal proceedings to report - Status: None[219] Item 1A. Risk Factors This item refers to the detailed discussion of risk factors in the company's Annual Report on Form 10-K, with no material changes since last disclosure - Reference: Risk factors are discussed in Item 1A of Part I of the Annual Report on Form 10-K for December 31, 2019[220] - No Material Changes: Management believes no material changes have occurred since last disclosure[220] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item reports that First United Corporation repurchased 145,291 shares of common stock in March 2020 at an average price of $18.96 per share, with 354,709 shares remaining authorized for repurchase Shares Repurchased (March 2020) | Metric | Value | | :--- | :--- | | Total Number of Shares Purchased | 145,291 | | Average Price Paid per Share | $18.96 | Remaining Authorization | Metric | Value | | :--- | :--- | | Maximum Number of Shares that May Yet Be Purchased | 354,709 | Item 3. Defaults upon Senior Securities This item states that there are no defaults upon senior securities to report - Status: None[222] Item 4. Mine Safety Disclosures This item states that mine safety disclosures are not applicable to the company - Status: Not Applicable[222] Item 5. Other Information This item states that there is no other information to report - Status: None[223] Item 6. Exhibits This item provides an index of exhibits filed or furnished with the quarterly report, including various plans, award agreements, certifications, and XBRL documents - Exhibits Listed: Includes Long-Term Incentive Plan, Short-Term Incentive Plan, Restricted Stock Unit Award Agreements, Certifications (Section 302, Section 906), and XBRL documents[226] SIGNATURES This section contains the signatures of the Principal Executive Officer and Principal Financial Officer of First United Corporation, certifying the report's submission - Signatories: Carissa L. Rodeheaver (Principal Executive Officer) and Tonya K. Sturm (Principal Financial Officer)[230] - Date: May 11, 2020[230]