First United (FUNC) - 2020 Q3 - Quarterly Report

PART I Item 1. Financial Statements (unaudited) First United Corporation's unaudited consolidated financial statements detail its financial position, operational results, and cash flow activities, reflecting COVID-19 impacts Consolidated Statement of Financial Condition Total assets increased to $1.69 billion, driven by higher cash and net loans, while liabilities grew to $1.56 billion due to increased deposits Consolidated Statement of Financial Condition (in thousands) | | September 30, 2020 (Unaudited) | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $1,685,907 | $1,442,027 | | Cash and cash equivalents | $155,606 | $49,979 | | Net loans | $1,173,256 | $1,037,145 | | Total Liabilities | $1,555,670 | $1,316,087 | | Total deposits | $1,377,284 | $1,142,031 | | Total Shareholders' Equity | $130,237 | $125,940 | Consolidated Statement of Operations Nine-month net income decreased to $9.3 million due to higher loan loss provisions, while third-quarter net income increased to $5.0 million from higher net gains and lower expenses Nine Months Ended September 30 (in thousands, except per share data) | Metric | 2020 (Unaudited) | 2019 | | :--- | :--- | :--- | | Net Interest Income | $36,445 | $34,469 | | Provision for loan losses | $4,981 | $669 | | Net Income | $9,285 | $10,247 | | Diluted net income per share | $1.32 | $1.44 | Three Months Ended September 30 (in thousands, except per share data) | Metric | 2020 (Unaudited) | 2019 | | :--- | :--- | :--- | | Net Interest Income | $11,902 | $11,596 | | Provision for loan losses | $160 | $(13) | | Net Income | $4,960 | $4,493 | | Diluted net income per share | $0.70 | $0.63 | Consolidated Statement of Cash Flows Cash and cash equivalents increased by $105.6 million, driven by financing activities from deposits, partially offset by cash used in investing activities for loans Cash Flow Summary for Nine Months Ended September 30 (in thousands) | Activity | 2020 (Unaudited) | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $7,802 | $6,093 | | Net cash (used in)/provided by investing activities | $(135,944) | $14,721 | | Net cash provided by financing activities | $233,769 | $39,815 | | Increase in cash and cash equivalents | $105,627 | $60,629 | Notes to Consolidated Financial Statements Notes provide detailed disclosures on accounting policies and financial statement items, covering COVID-19 impacts, PPP, loan modifications, portfolio composition, and impairment testing - In response to the COVID-19 pandemic, the company implemented loan modification programs. As of October 30, 2020, active modifications totaled $19.3 million (1.8% of the total portfolio), a significant decrease from $214.5 million (20.6% of the portfolio) as of July 31, 2020[33][34][35] - The company participated in the Small Business Administration (SBA) Paycheck Protection Program (PPP), providing loans that are 100% guaranteed by the SBA. The company anticipates receiving approximately $3.5 million in deferred loan fees from this program[27] - Due to the economic impact of COVID-19, a quantitative goodwill impairment test was performed as of September 30, 2020. The analysis, which used income and market approaches, indicated the Corporation's fair value exceeded its carrying value by approximately 3%, and therefore no impairment was recognized[121][122] - The company has adopted ASU 2018-13 regarding fair value measurement disclosures and is evaluating the impact of ASU 2020-04 on reference rate reform. The implementation of the new credit loss standard (CECL) has been delayed for the company until January 1, 2023[125][126][127] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition and results, highlighting decreased nine-month earnings due to higher loan loss provisions, pandemic response, and trends in income, expenses, portfolios, liquidity, and capital Overview of Results of Operations Nine-month net income decreased by 8.3% to $9.3 million, primarily due to a $4.3 million increase in loan loss provisions, despite growth in net interest income Selected Financial Ratios (Annualized) | | For the nine months ended September 30, | | :--- | :--- | :--- | | | 2020 | 2019 | | Return on Average Assets | 0.79% | 0.97% | | Return on Average Equity | 9.87% | 10.96% | - The primary driver for the decrease in nine-month earnings was a $4.3 million increase in the provision for loan losses, which was a direct result of the economic uncertainty related to the COVID-19 health crisis[163] Response to COVID-19 The company implemented its Business Continuity Plan in response to COVID-19, funding 1,174 PPP loans totaling $148.9 million and offering customer relief programs - As of September 30, 2020, the company had funded 1,174 PPP loans for approximately $148.9 million and anticipates recognizing approximately $3.5 million in related deferred loan fees[153] - The company implemented several measures to support customers, including waiving certain fees, offering loan modifications and deferrals, and temporarily suspending repossession and foreclosure activities[152] Financial Condition Total assets grew by $243.9 million to $1.7 billion, driven by increased loans and cash, funded by a $235.3 million surge in deposits, while the allowance for loan losses increased Loan Portfolio Composition (in thousands) | Loan Type | September 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Commercial real estate | $353,272 | $335,504 | | Acquisition and development | $127,299 | $117,890 | | Commercial and industrial | $277,723 | $122,352 | | Residential mortgage | $398,709 | $438,424 | | Consumer | $35,342 | $36,199 | | Total Loans | $1,192,345 | $1,050,369 | - The Allowance for Loan Losses (ALL) increased to $16.2 million at September 30, 2020, from $12.5 million at year-end 2019. The ratio of ALL to total loans was 1.36% (or 1.55% excluding PPP loans)[213] - Total deposits increased by $235.3 million, with significant growth in non-interest-bearing deposits (+$125.3 million), money market accounts (+$65.1 million), and savings accounts (+$25.5 million)[230] Liquidity and Capital Resources The company maintains strong liquidity with access to various credit lines and robust capital levels, remaining well-capitalized under regulatory standards Regulatory Capital Ratios | Ratio | September 30, 2020 | Required for Capital Adequacy | Required to be Well Capitalized | | :--- | :--- | :--- | :--- | | Total Capital (to risk-weighted assets) | 16.14% | 8.00% | 10.00% | | Tier 1 Capital (to risk-weighted assets) | 14.89% | 6.00% | 8.00% | | Common Equity Tier 1 Capital | 12.59% | 4.50% | 6.50% | | Tier 1 Capital (to average assets) | 10.37% | 4.00% | 5.00% | - The company has multiple sources of liquidity, including unsecured Fed Funds lines of credit, secured advances with the FHLB, the Fed Discount Window, brokered deposits, and the Federal Reserve PPPLF[236] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate fluctuation, managed through sensitivity analysis, with a simulated +100 basis point rate shock estimated to increase net interest income by $2.0 million - The company is asset sensitive, meaning its assets are expected to reprice faster than its liabilities in a changing rate environment[238] Estimated Change in Net Interest Income from Rate Shocks (in thousands) | Rate Change | September 30, 2020 | | :--- | :--- | | +400 basis points | $7,719 | | +200 basis points | $4,097 | | +100 basis points | $2,043 | | -100 basis points | $(1,841) | Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2020, with no material changes in 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, 2020[257] - No changes in internal control over financial reporting occurred during the quarter ended September 30, 2020, that materially affected, or are reasonably likely to materially affect, internal controls[258] PART II Legal Proceedings The Corporation is involved in ongoing litigation with activist investor Driver Opportunity Partners I LP, concerning a countersuit alleging breach of fiduciary duty and other claims related to the 2020 proxy contest - Driver Opportunity Partners I LP filed a lawsuit against the Corporation and its directors alleging breaches of fiduciary duties, abuse of process, defamation, and other claims related to the 2020 annual meeting and proxy contest[261][262] - The Corporation believes Driver's claims lack merit and intends to defend the lawsuit vigorously, though it anticipates incurring significant legal expenses[263] Risk Factors Ongoing litigation with Driver Opportunity Partners I LP presents a new material risk, potentially leading to significant defense costs, damages, reputational harm, and adverse business impacts - The company faces a new risk of significant expenses and potential damages arising from the litigation with Driver, which could materially and adversely affect its business, results of operations, and financial condition[265] Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2020, the Trust Department purchased 34,096 shares of common stock at an average price of $11.41 per share for the pension plan Issuer Purchases of Equity Securities (Q3 2020) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 2020 | — | — | | August 2020 | 4,031 | $11.40 | | September 2020 | 30,065 | $11.41 | | Total | 34,096 | $11.41 | Other Items (Items 3, 4, 5, 6) The company reported no defaults on senior securities, no mine safety disclosures, and no other material information, with Item 6 providing an exhibit index - There were no defaults upon senior securities, no mine safety disclosures, and no other information to report for the period[268][269][270]