First United (FUNC) - 2020 Q4 - Annual Report

Part I Business Overview First United Corporation is a well-capitalized bank holding company operating in Maryland and West Virginia, providing comprehensive banking and wealth management services under extensive regulation Financial Position as of December 31, 2020 | Metric | Value (USD) | | :--- | :--- | | Total Assets | $1.7 billion | | Net Loans | $1.1 billion | | Deposits | $1.4 billion | | Shareholders' Equity | $131.0 million | - The Bank operates 25 banking offices and 32 ATMs across several counties in Maryland and West Virginia, offering a complete range of retail and commercial banking services[15] - The Bank's Trust Department supervised approximately $1.0 billion in assets as of December 31, 2020, an increase from $902.2 million at the end of 2019[28] Deposit Market Share in Key Counties (as of June 30, 2020) | County | Market Share | Rank | | :--- | :--- | :--- | | Garrett County, MD | 64.39% | 1 | | Mineral County, WV | 39.21% | 1 | | Allegany County, MD | 25.75% | 3 | | Berkeley County, WV | 8.84% | 5 | | Washington County, MD | 4.61% | 6 | | Monongalia County, WV | 3.45% | 8 | | Frederick County, MD | 3.23% | 10 | - As of December 31, 2020, the Corporation and the Bank were classified as "well capitalized" under regulatory standards[61] Risk Factors The company faces significant risks from the COVID-19 pandemic, geographic concentration, intense competition, extensive regulation, cybersecurity threats, and ongoing litigation with an activist shareholder - The COVID-19 pandemic poses significant risks, including increased credit risk due to business shutdowns, operational risks from remote work arrangements, and market risk from interest rate volatility[90][91][95] - The business is geographically concentrated in Western Maryland and Northeastern West Virginia, with a significant portion of its loan portfolio secured by real estate, increasing its vulnerability to local economic declines[107] - The company faces significant expenses and potential damages from litigation initiated by an activist shareholder, Driver Opportunity Fund I LP, related to the 2020 annual meeting[138] - Ongoing proxy contests with activist shareholders are identified as a risk that can be costly, time-consuming, disrupt operations, and divert management's attention[157][163] - The company's heavy reliance on computer systems and the internet exposes it to cybersecurity risks, including attacks that could disrupt business, compromise confidential data, and result in significant financial and reputational damage[128][132][135] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[159] Properties The Corporation owns its headquarters and operations center in Oakland, Maryland, with 19 owned and six leased banking offices incurring $0.4 million in 2020 rent expense - The Corporation owns its headquarters and operations center in Oakland, Maryland. It owns 19 of its banking offices and leases six, with a total rent expense of $0.4 million in 2020[160] Legal Proceedings The Corporation is vigorously defending itself against a September 2020 lawsuit filed by an activist shareholder alleging fiduciary duty breaches related to the 2020 proxy contest - On September 4, 2020, the Driver Shareholder filed a lawsuit against the Corporation and its directors alleging various torts related to the 2020 proxy contest[161][162] - The shareholder seeks unspecified damages and requests the court to vacate the 2020 director election results and order a new meeting[162] - In January 2021, a district court dismissed six of the nine claims, though the shareholder has filed motions to reconsider and amend the complaint. The Corporation is vigorously defending the litigation[164][165] Mine Safety Disclosures This item is not applicable to the Corporation - Not applicable[166] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The Corporation's common stock trades on NASDAQ under "FUNC", with cash dividends reinstated in 2018 and no issuer repurchases in Q4 2020 - The Corporation's common stock trades on the NASDAQ Global Select Market under the symbol "FUNC". As of February 28, 2021, there were 1,240 shareholders of record[168] - Cash dividends were suspended in November 2010 but this suspension was lifted in 2018. Payment of dividends is at the discretion of the board[169] - No shares of common stock were repurchased by the Corporation during the three-month period ended December 31, 2020[171] Selected Financial Data The five-year financial summary highlights consistent growth in assets, loans, and deposits, with net income and diluted EPS increasing in 2020, alongside resumed and growing dividends Selected Financial Data (2019 vs. 2020) | Metric (in thousands, except per share data) | 2020 | 2019 | | :--- | :--- | :--- | | Total Assets | $1,733,414 | $1,442,027 | | Net Loans | $1,149,596 | $1,037,145 | | Deposits | $1,422,366 | $1,142,031 | | Net Interest Income | $48,546 | $46,391 | | Net Income | $13,841 | $13,129 | | Diluted EPS | $1.97 | $1.85 | | Dividends Paid per Share | $0.52 | $0.40 | | Return on Average Assets | 0.86% | 0.93% | | Return on Average Equity | 10.89% | 10.44% | Management's Discussion and Analysis of Financial Condition & Results of Operations In 2020, net income increased due to higher net interest income and mortgage gains, despite increased loan loss provisions, driven by significant asset and deposit growth, PPP loan participation, and improved credit quality 2020 vs. 2019 Performance Summary | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Net Income | $13.8 million | $13.1 million | | Diluted EPS | $1.97 | $1.85 | | Net Interest Income | $48.5 million | $46.4 million | | Provision for Loan Losses | $5.4 million | $1.3 million | | Net Interest Margin (FTE) | 3.34% | 3.68% | - The increase in the provision for loan losses was primarily driven by a $5.9 million adjustment to qualitative factors reflecting economic uncertainty related to the COVID-19 pandemic[178] - Loan growth of $117.4 million was mainly attributable to participation in the Paycheck Protection Program (PPP), with $114.0 million in PPP loans remaining on the balance sheet at year-end[182] - Total deposits increased by $280.3 million, with non-interest-bearing deposits growing by $125.8 million, driven by PPP loan proceeds and organic growth[185] - Other operating expenses decreased by $1.5 million, despite a $2.7 million increase in professional services and a $1.0 million increase in investor relations expenses, both related to the 2020 proxy contest[180][181] Quantitative and Qualitative Disclosures About Market Risk This section incorporates market risk and interest sensitivity disclosures by reference from Item 7, Management's Discussion and Analysis - This section incorporates by reference the information from the "Market Risk and Interest Sensitivity" section in Item 7[329] Financial Statements and Supplementary Data This section presents the Corporation's audited consolidated financial statements for 2020 and 2019, with an unqualified auditor's opinion from Baker Tilly US, LLP, highlighting critical audit matters related to loan loss allowance and goodwill impairment - The independent registered public accounting firm, Baker Tilly US, LLP, issued an unqualified opinion on the consolidated financial statements[331] - The auditor identified two Critical Audit Matters: the qualitative factor component of the Allowance for Loan Losses and the Goodwill Impairment Evaluation, both of which involve significant management judgment and estimation[336][338] Consolidated Financial Highlights (Year-End) | Metric (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Assets | | | | Total Assets | $1,733,414 | $1,442,027 | | Net Loans | $1,149,596 | $1,037,145 | | Liabilities & Equity | | | | Total Deposits | $1,422,366 | $1,142,031 | | Total Shareholders' Equity | $131,047 | $125,940 | | Operations | | | | Net Interest Income | $48,546 | $46,391 | | Net Income | $13,841 | $13,129 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes or disagreements with its accountants regarding accounting principles or financial disclosure - None[597] Controls and Procedures Management concluded that the Corporation's disclosure controls and procedures, along with internal control over financial reporting, were effective as of December 31, 2020 - Management, including the PEO and PFO, concluded that the Corporation's disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2020[599] - Management's assessment, based on the COSO 2013 framework, concluded that the Corporation's internal control over financial reporting was effective as of December 31, 2020[605] Other Information The company reports no other information for this item - None[607] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2021 Proxy Statement - The information required by this item is incorporated by reference from the Corporation's 2021 Proxy Statement[610] Executive Compensation Information on executive and director compensation is incorporated by reference from the 2021 Proxy Statement - The information required by this item is incorporated by reference from the 2021 Proxy Statement[610] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details equity compensation plans and incorporates security ownership information by reference from the 2021 Proxy Statement, with 248,059 securities available for future issuance - As of December 31, 2020, 248,059 securities were available for future issuance under the company's shareholder-approved equity compensation plans[611] - Information regarding security ownership of beneficial owners and management is incorporated by reference from the 2021 Proxy Statement[613] Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related party transactions, and director independence is incorporated by reference from the Proxy Statement - The information required by this item is incorporated by reference from the 2019 Proxy Statement[616] Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the 2021 Proxy Statement - The information required by this item is incorporated by reference from the 2021 Proxy Statement[617] Part IV Exhibits and Financial Statement Schedules This section lists financial statements from Item 8 and provides an index of exhibits, including corporate governance documents, material contracts, and required certifications - This section lists the financial statements filed with the report and provides an index of exhibits, including corporate governance documents, material contracts, and required certifications[620][621]