10-Q 1 func-20200331x10q.htm 10-Q 20200331 10Q Q1

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



        For quarterly period ended March 31, 2020



    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT



        For the transition period from _______________ to ________________



Commission file number 0-14237



First United Corporation

(Exact name of registrant as specified in its charter)



Maryland

 

52-1380770

(State or other jurisdiction of
incorporation or organization)

 

(I. R. S. Employer Identification No.)



 

 

19 South Second Street,  Oakland,  Maryland

 

21550-0009

(Address of principal executive offices)

 

(Zip Code)



(800)  470-4356

(Registrant's telephone number, including area code)



Securities registered pursuant to Section 12(b) of the Act:



Title of each class

Trading Symbols

Name of each exchange on which registered

Common Stock

FUNC

Nasdaq Stock Market



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    No 



Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes    No 



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.  (Check one): 





 

Large accelerated filer

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company 

 



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standard provided pursuant to Section 13(a) of the Exchange Act. 



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes    No 



Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 6,966,898 shares of common stock, par value $.01 per share, as of April 30, 2020.



 


 

 



INDEX TO QUARTERLY REPORT

FIRST UNITED CORPORATION 





 

Page

PART I.  FINANCIAL INFORMATION

Item 1.

Financial Statements (unaudited)



Consolidated Statement of Financial Condition – March 31, 2020 and December 31, 2019



Consolidated Statement of Operations – for the three months ended March 31, 2020 and 2019



Consolidated Statement of Comprehensive (Loss)/Income – for the three months ended March 31, 2020 and 2019



Consolidated Statement of Changes in Shareholders’ Equity – for three months ended March 31, 2020 and 2019



Consolidated Statement of Cash Flows – for the three months ended March 31, 2020 and 2019



Notes to Consolidated Financial Statements

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

33 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

54 

Item 4.

Controls and Procedures

54 



 

 

PART II. OTHER INFORMATION

55 

Item 1.

Legal Proceedings

55 

Item 1A.  

Risk Factors

55 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

55 

Item 3.

Defaults upon Senior Securities

55 

Item 4.

Mine Safety Disclosures

55 

Item 5.

Other Information

55 

Item 6.

Exhibits

56 

SIGNATURES

57 



 

2


 

 

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements



FIRST UNITED CORPORATION

Consolidated Statement of Financial Condition

(In thousands, except per share data)







 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,
2020

 

December 31,
2019



 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

 

Cash and due from banks

 

$

69,008 

 

$

48,512 

Interest bearing deposits in banks

 

 

3,000 

 

 

1,467 

Cash and cash equivalents

 

 

72,008 

 

 

49,979 

Investment securities – available for sale (at fair value)

 

 

130,792 

 

 

131,305 

Investment securities – held to maturity (fair value $98,311 at March 31, 2020 and $100,656 at December 31, 2019)

 

 

91,399 

 

 

93,979 

Restricted investment in bank stock, at cost

 

 

4,468 

 

 

4,415 

Loans

 

 

1,053,732 

 

 

1,052,118 

Unearned fees

 

 

(662)

 

 

(687)

Allowance for loan losses

 

 

(15,012)

 

 

(12,537)

Net loans

 

 

1,038,058 

 

 

1,038,894 

Premises and equipment, net

 

 

38,662 

 

 

38,710 

Goodwill, net

 

 

11,004 

 

 

11,004 

Bank owned life insurance

 

 

43,752 

 

 

43,449 

Deferred tax assets

 

 

9,500 

 

 

7,441 

Other real estate owned, net

 

 

4,040 

 

 

4,127 

Operating lease asset

 

 

2,590 

 

 

2,661 

Accrued interest receivable and other assets

 

 

15,240 

 

 

16,063 

Total Assets

 

$

1,461,513 

 

$

1,442,027 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Non-interest bearing deposits

 

$

299,961 

 

$

294,649 

Interest bearing deposits

 

 

872,433 

 

 

847,382 

Total deposits

 

 

1,172,394 

 

 

1,142,031 

Short-term borrowings

 

 

39,418 

 

 

48,728 

Long-term borrowings

 

 

100,929 

 

 

100,929 

Operating lease liability

 

 

3,164 

 

 

3,239 

Accrued interest payable and other liabilities

 

 

26,149 

 

 

20,235 

Dividends payable

 

 

910 

 

 

925 

Total Liabilities

 

 

1,342,964 

 

 

1,316,087 

Shareholders’ Equity: 

 

 

 

 

 

 

Common Stock – par value $.01 per share;

Authorized 25,000,000 shares; issued and outstanding

6,966,898 shares at March 31, 2020 and 7,110,022 at December 31, 2019

 

 

70 

 

 

71 

Surplus

 

 

29,756 

 

 

32,359 

Retained earnings

 

 

120,326 

 

 

119,481 

Accumulated other comprehensive loss

 

 

(31,603)

 

 

(25,971)

Total Shareholders’ Equity

 

 

118,549 

 

 

125,940 

Total Liabilities and Shareholders’ Equity

 

$

1,461,513 

 

$

1,442,027 



See accompanying notes to the consolidated financial statements



 

3


 

 

FIRST UNITED CORPORATION

Consolidated Statement of Operations

(In thousands, except per share data)





 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended



 

March 31,



 

2020

 

2019



 

(Unaudited)

Interest income

 

 

 

 

 

 

Interest and fees on loans

 

$

12,839 

 

$

12,190 

Interest on investment securities

 

 

 

 

 

 

Taxable

 

 

1,308 

 

 

1,467 

Exempt from federal income tax

 

 

260 

 

 

280 

Total investment income

 

 

1,568 

 

 

1,747 

Other

 

 

209 

 

 

135 

Total interest income

 

 

14,616 

 

 

14,072 

Interest expense

 

 

 

 

 

 

Interest on deposits

 

 

1,870 

 

 

1,771 

Interest on short-term borrowings

 

 

28 

 

 

103 

Interest on long-term borrowings

 

 

831 

 

 

852 

Total interest expense

 

 

2,729 

 

 

2,726 

Net interest income

 

 

11,887 

 

 

11,346 

Provision for loan losses

 

 

2,654 

 

 

349 

Net interest income after provision for loan losses

 

 

9,233 

 

 

10,997 

Other operating income

 

 

 

 

 

 

Net gains

 

 

41 

 

 

14 

Service charges on deposit accounts

 

 

615 

 

 

519 

Other service charges

 

 

290 

 

 

208 

Trust department

 

 

1,753 

 

 

1,715 

Debit card income

 

 

634 

 

 

600 

Bank owned life insurance

 

 

303 

 

 

303 

Brokerage commissions

 

 

277 

 

 

238 

Other

 

 

136 

 

 

124 

Total other income

 

 

4,008 

 

 

3,707 

Total other operating income

 

 

4,049 

 

 

3,721 

Other operating expenses

 

 

 

 

 

 

Salaries and employee benefits

 

 

5,923 

 

 

6,218 

FDIC premiums

 

 

43 

 

 

111 

Equipment

 

 

926 

 

 

883 

Occupancy

 

 

747 

 

 

712 

Data processing

 

 

1,052 

 

 

941 

Marketing

 

 

130 

 

 

68 

Professional services

 

 

723 

 

 

204 

Contract labor

 

 

151 

 

 

156 

Line rentals

 

 

217 

 

 

217 

Other real estate owned

 

 

 —

 

 

143 

Other

 

 

1,093 

 

 

1,037 

Total other operating expenses

 

 

11,005 

 

 

10,690 

Income before income tax expense

 

 

2,277 

 

 

4,028 

Provision for income tax expense

 

 

522 

 

 

877 

Net Income

 

$

1,755 

 

$

3,151 

Basic net income per share

 

$

0.25 

 

$

0.44 

Diluted net income per share

 

$

0.25 

 

$

0.44 

Weighted average number of basic shares outstanding

 

 

7,063 

 

 

7,088 

Weighted average number of diluted shares outstanding

 

 

7,071 

 

 

7,088 

Dividends declared per common share

 

$

0.13 

 

$

0.09 

See accompanying notes to the consolidated financial statements



 

4


 

 

FIRST UNITED CORPORATION

Consolidated Statement of Comprehensive (Loss)/Income

(In thousands)





 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended



 

March 31,



 

2020

 

2019

Comprehensive (Loss)/Income

 

(Unaudited)

Net Income

 

$

1,755 

 

$

3,151 

Other comprehensive (loss)/income, net of tax and reclassification adjustments:

 

 

 

 

 

 

Net unrealized losses on investments with OTTI

 

 

(1,225)

 

 

(80)

Net unrealized gains on all other AFS securities

 

 

1,384 

 

 

905 

Net unrealized gains on HTM securities

 

 

53 

 

 

55 

Net unrealized losses on cash flow hedges

 

 

(963)

 

 

(315)

Net unrealized (losses)/gains on pension

 

 

(4,915)

 

 

2,129 

Net unrealized gains on SERP

 

 

34 

 

 

21 

Other comprehensive (loss)/income, net of tax

 

 

(5,632)

 

 

2,715 

Comprehensive (loss)/income

 

$

(3,877)

 

$

5,866 



See accompanying notes to the consolidated financial statements

 

5


 

 



FIRST UNITED CORPORATION

Consolidated Statement of Changes in Shareholders’ Equity

(In thousands, except per share data)







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Common
Stock

 

Surplus

 

Retained

Earnings

 

Accumulated
Other
Comprehensive
Loss

 

Total
Shareholders'
Equity

Balance at January 1, 2020

 

$

71 

 

$

32,359 

 

$

119,481 

 

$

(25,971)

 

$

125,940 

Net income

 

 

 

 

 

 

 

 

1,755 

 

 

 

 

 

1,755 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(5,632)

 

 

(5,632)

Stock based compensation

 

 

 

 

 

98 

 

 

 

 

 

 

 

 

98 

Common stock issued

 

 

 

 

 

52 

 

 

 

 

 

 

 

 

52 

Stock repurchase

 

 

(1)

 

 

(2,753)

 

 

 

 

 

 

 

 

(2,754)

Common stock dividend declared -
$.13 per share

 

 

 

 

 

 

 

 

(910)

 

 

 

 

 

(910)

Balance at March 31, 2020

 

$

70 

 

$

29,756 

 

$

120,326 

 

$

(31,603)

 

$

118,549 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Common
Stock

 

Surplus

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Loss

 

Total
Shareholders'
Equity

Balance at January 1, 2019

 

$

71 

 

$

31,921 

 

$

109,477 

 

$

(24,403)

 

$

117,066 

Net income

 

 

 

 

 

 

 

 

3,151 

 

 

 

 

 

3,151 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

2,715 

 

 

2,715 

Stock based compensation

 

 

 

 

 

67 

 

 

 

 

 

 

 

 

67 

Common stock issued

 

 

 

 

 

39 

 

 

 

 

 

 

 

 

39 

Common stock dividend declared -
$.09 per share

 

 

 

 

 

 

 

 

(639)

 

 

 

 

 

(639)

Balance at March 31, 2019

 

$

71 

 

$

32,027 

 

$

111,989 

 

$

(21,688)

 

$

122,399 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 







See accompanying notes to the consolidated financial statements

 

6


 

 

FIRST UNITED CORPORATION

Consolidated Statement of Cash Flows

(In thousands)



 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended



 

March 31,



 

2020

 

2019



 

(Unaudited)

Operating activities

 

 

 

 

 

 

Net income

 

$

1,755 

 

$

3,151 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

           

 

 

           

Provision for loan losses

 

 

2,654 

 

 

349 

Depreciation

 

 

813 

 

 

756 

Stock compensation

 

 

98 

 

 

67 

Gains on sales of other real estate owned

 

 

(10)

 

 

(30)

Write-downs of other real estate owned

 

 

26 

 

 

117 

Originations of loans held for sale

 

 

(8,476)

 

 

(2,630)

Proceeds from sale of loans held for sale

 

 

8,539 

 

 

2,627 

Gains from sale of loans held for sale

 

 

(59)

 

 

(20)

Losses on disposal of fixed assets

 

 

18 

 

 

 —

Net amortization of investment securities discounts and premiums- AFS

 

 

 

 

Net amortization/(accretion) of investment securities discounts and premiums- HTM

 

 

45 

 

 

(12)

Losses on sales/calls of investment securities – available-for-sale

 

 

 —

 

 

Earnings on bank owned life insurance

 

 

(303)

 

 

(303)

Amortization of deferred loan fees

 

 

(318)

 

 

(141)

Amortization of operating lease asset

 

 

71 

 

 

65 

Increase in accrued interest receivable and other assets

 

 

(6,956)

 

 

(1,824)

Deferred tax expense/(benefit)

 

 

 

 

(1)

Operating lease liability

 

 

(75)

 

 

(67)

Increase/(decrease) in accrued interest payable and other liabilities

 

 

5,842 

 

 

(1,116)

Net cash provided by operating activities

 

 

3,669 

 

 

997 

Investing activities

 

 

 

 

 

         

Proceeds from maturities/calls of investment securities available-for-sale

 

 

18,089 

 

 

2,249 

Proceeds from maturities/calls of investment securities held-to-maturity

 

 

2,535 

 

 

1,238 

Purchases of investment securities available-for-sale

 

 

(17,421)

 

 

 —

Purchases of investment securities held-to-maturity

 

 

 —

 

 

(2,754)

Proceeds from sales of other real estate owned

 

 

92 

 

 

859 

Net (increase)/decrease in restricted stock

 

 

(53)

 

 

1,021 

Net (increase)/decrease in loans

 

 

(1,525)

 

 

2,897 

Purchases of premises and equipment

 

 

(783)

 

 

(517)

Net cash provided by investing activities

 

 

934 

 

 

4,993 

Financing activities

 

 

 

 

 

 

Net increase in deposits

 

 

30,363 

 

 

63,085 

Issuance of common stock

 

 

52 

 

 

39 

Cash dividends on common stock

 

 

(925)

 

 

(639)

Net decrease in short-term borrowings

 

 

(9,310)

 

 

(38,012)

Stock repurchase

 

 

(2,754)

 

 

 —

Net cash provided by financing activities

 

 

17,426 

 

 

24,473 

Increase in cash and cash equivalents

 

 

22,029 

 

 

30,463 

Cash and cash equivalents at beginning of the year

 

 

49,979 

 

 

23,541 

Cash and cash equivalents at end of period

 

$

72,008 

 

$

54,004 

Supplemental information

 

 

 

 

 

 

Interest paid

 

$

2,723 

 

$

2,691 

Taxes paid

 

$

74 

 

$

100 

Non-cash investing activities:

 

 

 

 

 

 

Transfers from loans to other real estate owned

 

$

21 

 

$

515 

  Recognition of operating lease right-of-use assets

 

$

 —

 

$

2,730 

  Recognition of operating lease liabilities

 

$

 —

 

$

3,317 



See accompanying notes to the consolidated financial statements

 

7


 

 

FIRST UNITED CORPORATION

NoteS to Consolidated Financial Statements (UNAUDITED)





Note 1 – Basis of Presentation



The accompanying unaudited consolidated financial statements of First United Corporation and its consolidated subsidiaries, including First United Bank & Trust (the “Bank”), have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, as required by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 270, Interim Reporting, and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X.  Accordingly, they do not include all the information and footnotes required for annual financial statements.  In the opinion of management, all adjustments considered necessary for a fair presentation, consisting of normal recurring items, have been included.  Operating results for the three-month period ended March 31, 2020 are not necessarily indicative of the results that may be expected for the full year or for any future interim period.  These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in First United Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019



As used in these notes, the terms “the Corporation” “we”, “us”, and “our” refer to First United Corporation and, unless the context clearly requires otherwise, its consolidated subsidiaries.



The Corporation has evaluated events and transactions occurring subsequent to the statement of financial condition date of March 31, 2020 for items that should potentially be recognized or disclosed in these financial statements.

 

Note 2 – Significant Event



On March 11, 2020, the World Health Organization declared a pandemic as a result of the global spread of the coronavirus, commonly referred to as COVID-19.  The spread of the disease quickly accelerated in the United States and to date, all 50 states have reported cases.  The U.S. and state governments reacted to the pandemic by issuing shelter at home orders and requiring that non-essential businesses be closed to prevent spread of the virus.  The health crisis quickly turned into a financial crisis resulting in guidance and mandates regarding foreclosures and repossessions and accounting and regulatory changes designed to encourage banks to work with customers suffering detrimental financial impact.



As a result of the pandemic effecting the states and local markets in which it operates, the Corporation successfully implemented its Business Continuity Plan with the goal of protecting the health, safety and financial well-being of its associates and customers.   As part of its plan to protect the financial well-being of its customers, the Corporation chose to participate and educate its customers on the government sponsored plans established to provide financial assistance to businesses.



The U.S. Government’s Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) established the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) which provides small businesses with resources to maintain payroll, hire back employees who may have been laid off, and to cover applicable overhead expenses.  We acted expeditiously to prepare our associates so they could guide our customers on the proper procedures necessary to enable them to take advantage of this program.  We developed an SBA PPP specific information site within our website that provided detailed information, links and materials for eligible customers to access.  Internally, we reallocated resources to review, process and enter customer applications, working tirelessly over extended hours to provide access to as many local business owners as possible.   We were able to fund 428 loan applications for approximately $111.0 million from the first tranche of PPP designated funds.  Congress allocated additional funding to the PPP on April 23, 2020.  Due to our advance preparation and software implementation, we were able to quickly gain approval for an additional 492 loan applications for approximately $29.0 million thru May 1, 2020.  In total, we have gained approval for over $140 million dollars to 920 small businesses.  Approximately 73% of the loans were under $100,000 in size and approximately 65% of the businesses receiving the loans employed less than 10 employees.  We will continue to provide access to the PPP and process applications, for as long as the PPP is open and funds are available, so that we can assist as many small business owners in our markets as possible.  These loans are 100% guaranteed by the SBA, have up to a two-year maturity, provide for a six-month deferral period, and have an interest rate of 1%.  These loans may be forgiven by the SBA if the borrower meets certain conditions, including by using at least 75% of the loan proceeds for payroll costs.  The SBA also established processing fees from 1% to 5%, depending on the loan amount.  We anticipate to receive approximately $3.5 million in fees. 



In April 2020, the Bank established eligibility to participate in the Paycheck Protection Program Liquidity Facility (“PPPLF”) which was established by Congress and administered by the Federal Reserve Bank.  This facility uses the SBA guaranteed PPP loans as collateral, offering 100% collateral coverage with no recourse to the Bank.   The majority of the PPP loan disbursements, which were all subsequent to quarter end, have been to internal, non-interest-bearing accounts awaiting use by borrowers.  As a result, we have not yet accessed the PPPLF, but are prepared to utilize the fund when management determines the timing is appropriate.



 

8


 

 

The Corporation’s allowance for loan losses increased $2.5 million to $15.0 million at March 31, 2020 compared to $12.5 million at December 31, 2019.  The allowance for loan losses (the “ALL”) to total loans was 1.42% and 1.19% at March 31, 2020 and December 31, 2019, respectively.  This increase was driven by the increased provision expense which was adjusted for qualitative factors related to the economic uncertainty and increased unemployment rates related to the COVID-19 pandemic.



While the pandemic has had an impact on most industries, some have been more impacted than others.  The following chart includes data on our consumer and commercial loan portfolios, including a breakdown by industry, the percentage of the portfolio that has been modified through May 6, 2020 as a result of COVID-19 and the corresponding allowance for loan losses for each category as of March 31, 2020.  Modifications include either deferrals of principal and interest or interest only periods of three months.  Residential mortgage deferrals result in extensions of the maturity date of the loans and commercial modifications result in either an extension of the maturity payment or a balloon payment at maturity.









 

 

 

 

 

 

 

 

 



Total Loans at 3/31/20

 

COVID Modifications through            May 6, 2020

Industry Category

# of Loans

 

Balance (000s)

Balance as % of Total Portfolio

 

# of Loans

 

Balance (000s)

Balance as % of Category

RE/Rental/Leasing - Non-Owner Occupied

84 

$

119,047  11.3% 

 

14 

$

31,069  26.1% 

RE/Rental/Leasing - All Other

289 

 

92,908  8.8% 

 

32 

 

15,934  17.2% 

Construction - Developers

21 

 

57,171  5.4% 

 

 -

 

 —

0.0% 

Accommodations

24 

 

47,169  4.5% 

 

10 

 

22,050  46.7% 

Services

186 

 

44,185  4.2% 

 

21 

 

11,187  25.3% 

Health Care/Social Assistance

94 

 

32,663  3.1% 

 

25 

 

11,598  35.5% 

RE/Rental/Leasing - Multifamily

50 

 

30,770  2.9% 

 

10 

 

4,652  15.1% 

RE/Rental/Leasing - Developers

21 

 

27,760  2.6% 

 

 

18  0.1% 

Manufacturing

46 

 

26,080  2.5% 

 

 

4,394  16.8% 

Construction - All Other

228 

 

22,739  2.2% 

 

20 

 

2,841  12.5% 

Prof/Scientific/Technical

90 

 

19,871  1.9% 

 

 

5,863  29.5% 

Trade

255 

 

17,376  1.6% 

 

 

1,036  6.0% 

Transportation/Warehousing

94 

 

15,175  1.4% 

 

 

194  1.3% 

Food Service

39 

 

9,350  0.9% 

 

11 

 

2,943  31.5% 

Public Administration

26 

 

9,258  0.9% 

 

 -

 

 —

0.0% 

Entertainment/Recreation

21 

 

5,217  0.5% 

 

 

983  18.8% 

Agriculture

43 

 

4,111  0.4% 

 

 

508  12.4% 

Energy

10 

 

1,681  0.2% 

 

 -

 

 —

0.0% 

Total Commercial

1,621 

$

582,532  55.3% 

 

173 

$

115,270  19.8% 

Total Mortgage and Consumer

7,447 

 

471,200  44.7% 

 

335 

 

45,955  9.8% 

Total Loans at March 31, 2020

9,068 

$

1,053,732  100.0% 

 

508 

$

161,225  15.3% 

 





On March 16, 2020, in response to the COVID-19 outbreak, the Federal Reserve Board reduced the federal funds rate by 150 basis points to a target range of  0% to .25%, and the yields on 10-year and 30-year treasury notes have declined to historic lows.  As a result of this decline, the Corporation’s future net interest margin and spread may be reduced.



Note 3 – Earnings Per Common Share



Basic earnings per common share is derived by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period and does not include the effect of any potentially dilutive common stock equivalents.  Diluted earnings per share is derived by dividing net income available to common shareholders by the weighted-average number of shares outstanding, adjusted for the dilutive effect of outstanding common stock equivalents, such as restricted stock units (“RSUs”)At March 31, 2020, there were RSUs relating to 25,004 shares of common stock outstanding.  

 

9


 

 

The following table sets forth the calculation of basic and diluted earnings per common share for the three-month periods ended March 31, 2020 and 2019:  







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended March 31,



 

2020

 

2019



 

 

 

 

Average

 

Per Share

 

 

 

 

Average

 

Per Share

(in thousands, except for per share amount)

 

Income

 

Shares

 

Amount

 

Income

 

Shares

 

Amount

Basic Earnings Per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,755 

 

7,063 

 

$

0.25 

 

$

3,151 

 

7,088 

 

$

0.44 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,755 

 

7,071 

 

$

0.25 

 

$

3,151 

 

7,088 

 

$

0.44 





 

Note 4 – Net Gains



The following table summarizes the gain/(loss) activity for the three-month periods ended March 31, 2020 and 2019:











 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended



 

March 31,

(in thousands)

 

2020

 

2019

Net gains/(losses):

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

    Realized losses

 

 

 —

 

 

(6)

Gains on sale of consumer loans

 

 

59 

 

 

20 

Losses on disposal of fixed assets

 

 

(18)

 

 

 —

Net gains

 

$

41 

 

$

14 

 

 

10


 

 

Note 5 – Investments



The following table shows a comparison of amortized cost and fair values of investment securities at March 31, 2020 and December 31, 2019:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

OTTI
in AOCL

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

34,580 

 

$

688 

 

$

 —

 

$

35,268 

 

$

 —

Residential mortgage-backed agencies

 

 

9,945 

 

 

202 

 

 

 —

 

 

10,147 

 

 

 —

Commercial mortgage-backed agencies

 

 

29,210 

 

 

497 

 

 

37 

 

 

29,670 

 

 

 —

Collateralized mortgage obligations

 

 

28,023 

 

 

792 

 

 

 —

 

 

28,815 

 

 

 —

Obligations of states and political subdivisions

 

 

14,108 

 

 

404 

 

 

 —

 

 

14,512 

 

 

 —

Collateralized debt obligations

 

 

18,470 

 

 

 —

 

 

6,090 

 

 

12,380 

 

 

(4,507)

Total available for sale

 

$

134,336 

 

$

2,583 

 

$

6,127 

 

$

130,792 

 

$

(4,507)

Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

16,202 

 

$

655 

 

$

 —

 

$

16,857 

 

$

 —

Residential mortgage-backed agencies

 

 

40,666 

 

 

1,249 

 

 

 

 

41,911 

 

 

 —

Commercial mortgage-backed agencies

 

 

15,443 

 

 

799 

 

 

 —

 

 

16,242 

 

 

 —

Collateralized mortgage obligations

 

 

2,873 

 

 

171 

 

 

 —

 

 

3,044 

 

 

 —

Obligations of states and political subdivisions

 

 

16,215 

 

 

4,042 

 

 

 —

 

 

20,257 

 

 

 —

Total held to maturity

 

$

91,399 

 

$

6,916 

 

$

 

$

98,311 

 

$

 —

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

39,987 

 

$

 —

 

$

93 

 

$

39,894 

 

$

 —

Residential mortgage-backed agencies

 

 

4,917 

 

 

 —

 

 

17 

 

 

4,900 

 

 

 —

Commercial mortgage-backed agencies

 

 

27,634 

 

 

222 

 

 

92 

 

 

27,764 

 

 

 —

Collateralized mortgage obligations

 

 

29,903 

 

 

129 

 

 

109 

 

 

29,923 

 

 

 —

Obligations of states and political subdivisions

 

 

14,124 

 

 

346 

 

 

 —

 

 

14,470 

 

 

 —

Collateralized debt obligations

 

 

18,443 

 

 

 —

 

 

4,089 

 

 

14,354 

 

 

(2,835)

Total available for sale

 

$

135,008 

 

$

697 

 

$

4,400 

 

$

131,305 

 

$

(2,835)

Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

16,164 

 

$

659 

 

$

 —

 

$

16,823 

 

$

 —

Residential mortgage-backed agencies

 

 

42,939 

 

 

469 

 

 

155 

 

 

43,253 

 

 

 —

Commercial mortgage-backed agencies

 

 

15,521 

 

 

344 

 

 

 —

 

 

15,865 

 

 

 —

Collateralized mortgage obligations

 

 

3,140 

 

 

 

 

 —

 

 

3,143 

 

 

 —

Obligations of states and political subdivisions

 

 

16,215 

 

 

5,357 

 

 

 —

 

 

21,572 

 

 

 —

Total held to maturity

 

$

93,979 

 

$

6,832 

 

$

155 

 

$

100,656 

 

$

 —



Proceeds from sales of available for sale securities and the realized gains and losses were as follows:





 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended



 

March 31,

(in thousands)

 

2020

 

2019

Proceeds

 

$

 —

 

$

260 

Realized losses

 

 

 —

 

 



 

11


 

 

The following table shows the Corporation’s investment securities with gross unrealized losses and fair values at March 31, 2020 and December 31, 2019, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

  Less than 12 months

 

 

 

12 months or more

 

 

(in thousands)

 

Fair
Value

 

Unrealized
Losses

 

Number of
Investments

 

Fair
Value

 

Unrealized
Losses

 

Number of
Investments

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial mortgage-backed agencies

 

 

2,683 

 

 

29 

 

 

 

1,359 

 

 

 

Collateralized debt obligations

 

 

 —

 

 

 —

 

 —

 

 

12,380 

 

 

6,090 

 

Total available for sale

 

$

2,683 

 

$

29 

 

 

$

13,739 

 

$

6,098 

 

10 

Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage-backed agencies

 

$

 —

 

$

 —

 

 —

 

$

596 

 

$

 

Total held to maturity

 

$

 —

 

$

 —

 

 —

 

$

596 

 

$

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

24,907 

 

$

80 

 

 

$

14,987 

 

$

13 

 

Residential mortgage-backed agencies

 

 

4,900 

 

 

17 

 

 

 

 —

 

 

 —

 

 —

Commercial mortgage-backed agencies

 

 

4,623 

 

 

37 

 

 

 

5,793 

 

 

55 

 

Collateralized mortgage obligations

 

 

 —

 

 

 —

 

 —

 

 

35,472 

 

 

109 

 

Collateralized debt obligations

 

 

 —

 

 

 —

 

 —

 

 

14,353 

 

 

4,089 

 

Total available for sale

 

$

34,430 

 

$

134 

 

 

$

70,605 

 

$

4,266 

 

16 

Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage-backed agencies

 

$

2,722 

 

$

 

 

$

9,486 

 

$

149 

 

12 

Total held to maturity

 

$

2,722 

 

$

 

 

$

9,486 

 

$

149 

 

12 



Management systematically evaluates securities for impairment on a quarterly basis.  Based upon application of accounting guidance for subsequent measurement in ASC Topic 320 (ASC Section 320-10-35), management assesses whether (a) the Corporation has the intent to sell a security being evaluated and (b) it is more likely than not that the Corporation will be required to sell the security prior to the anticipated recovery of any decline in fair value.  If neither applies, then any decline in the fair value below the security’s cost that is considered an other-than-temporary decline is split into two components.  The first component is the loss attributable to declining credit quality.  Credit losses are recognized in earnings as realized losses in the period in which the impairment determination is made.  The second component consists of all other losses, which are recognized in other comprehensive loss.  In estimating other than temporary impairment (“OTTI”) losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) adverse conditions specifically related to the security, an industry, or a geographic area, (3) the historic and implied volatility of the fair value of the security, (4) changes in the rating of the security by a rating agency, (5) recoveries or additional declines in fair value subsequent to the balance sheet date, (6) failure of the issuer of the security to make scheduled interest or principal payments, and (7) the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future.  Management also monitors cash flow projections for securities that are considered beneficial interests under the guidance of ASC Subtopic 325-40, Investments – Other – Beneficial Interests in Securitized Financial Assets, (ASC Section 325-40-35). 



Management believes that the valuation of certain securities is a critical accounting policy that requires significant estimates in preparation of the Corporation’s consolidated financial statements.  Management utilizes an independent third party to prepare both the impairment valuations and fair value determinations for the Corporation’s collateralized debt obligation (“CDO”) portfolio consisting of pooled trust preferred securities.  See Note 8 for a discussion of the methodology used by management to determine the fair values of these securities.  Based upon a review of credit quality and the cash flow tests performed by the independent third party, management determined that there were no securities that had credit-related non-cash OTTI charges during the first three months of 2020 or 2019



The Corporation does not believe that the investment securities that were in an unrealized loss position at March 31, 2020 represent other-than-temporary impairment.  The Corporation does not intend to sell nor is it anticipated that it would be required to sell any of its impaired investment securities at a loss. 

 

12


 

 



The following tables present a cumulative roll-forward of the amount of non-cash OTTI charges related to credit losses which have been recognized in earnings for the trust preferred securities in the CDO portfolio held and not intended to be sold for the three-month periods ended March 31, 2020 and 2019:  





 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended



 

March 31,

(in thousands)

 

2020

 

2019

Balance of credit-related OTTI at January 1

 

$

2,446 

 

$

2,646 

Reduction for increases in cash flows expected to be collected

 

 

(50)

 

 

(49)

Balance of credit-related OTTI at March 31

 

$

2,396 

 

$

2,597 



The amortized cost and estimated fair value of securities by contractual maturity at March 31, 2020 are shown in the following table.  Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.





 

 

 

 

 

 



 

 

 

 

 

 



 

March 31, 2020

(in thousands)

 

Amortized
Cost

 

Fair
Value

Contractual Maturity

 

 

 

 

 

 

Available for Sale:

 

 

 

 

 

 

Due after one year through five years

 

$

4,449 

 

$

4,528 

Due after five years through ten years

 

 

34,838 

 

 

35,530 

Due after ten years

 

 

27,871 

 

 

22,102 



 

 

67,158 

 

 

62,160 

Residential mortgage-backed agencies

 

$

9,945 

 

 

10,147 

Commercial mortgage-backed agencies

 

 

29,210 

 

 

29,670 

Collateralized mortgage obligations

 

 

28,023 

 

 

28,815 

Total available for sale

 

$

134,336 

 

$

130,792 

Held to Maturity:

 

 

 

 

 

 

Due after one year through five years

 

$

16,202 

 

$

16,857 

Due after ten years

 

 

16,215 

 

 

20,257 



 

 

32,417 

 

 

37,114 

Residential mortgage-backed agencies

 

 

40,666 

 

 

41,911 

Commercial mortgage-backed agencies

 

 

15,443 

 

 

16,242 

Collateralized mortgage obligations

 

 

2,873 

 

 

3,044 

Total held to maturity

 

$

91,399 

 

$

98,311 

 

Note 6  – Loans and Related Allowance for Loan Losses



The following table summarizes the primary segments of the loan portfolio at March 31, 2020 and December 31, 2019:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Commercial
Real Estate

 

Acquisition
and
Development

 

Commercial
and
Industrial

 

Residential
Mortgage

 

Consumer

 

Total

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

3,351 

 

$

8,661 

 

$

 —

 

$

3,259 

 

$

 

$

15,274 

Collectively evaluated for impairment

 

$

334,337 

 

$

112,672 

 

$

123,509 

 

$

431,710 

 

$

36,230 

 

$

1,038,458 

Total loans

 

$

337,688 

 

$

121,333 

 

$

123,509 

 

$

434,969 

 

$

36,233 

 

$

1,053,732 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

3,179 

 

$

8,570 

 

$

30 

 

$

3,391 

 

$

 

$

15,174 

Collectively evaluated for impairment

 

$

332,325 

 

$

109,320 

 

$

122,322 

 

$

436,782 

 

$

36,195 

 

$

1,036,944 

Total loans

 

$

335,504 

 

$

117,890 

 

$

122,352 

 

$

440,173 

 

$

36,199 

 

$

1,052,118 





 

13


 

 

The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention and Substandard within the internal risk rating system at March 31, 2020 and December 31, 2019:







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Pass

 

Special
Mention

 

Substandard

 

Total

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

Non owner-occupied

 

$

163,935 

 

$

2,729 

 

$

1,819 

 

$

168,483 

All other CRE

 

 

160,695 

 

 

2,725 

 

 

5,785 

 

 

169,205 

Acquisition and development

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential construction

 

 

14,407 

 

 

 —

 

 

 —

 

 

14,407 

All other A&D

 

 

98,549 

 

 

18 

 

 

8,359 

 

 

106,926 

Commercial and industrial

 

 

115,774 

 

 

1,454 

 

 

6,281 

 

 

123,509 

Residential mortgage

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage - term

 

 

363,076 

 

 

54 

 

 

5,900 

 

 

369,030 

Residential mortgage - home equity

 

 

64,528 

 

 

137 

 

 

1,274 

 

 

65,939 

Consumer

 

 

36,142 

 

 

 

 

88 

 

 

36,233 

Total

 

$

1,017,106 

 

$

7,120 

 

$

29,506 

 

$

1,053,732 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

Non owner-occupied

 

$

164,584 

 

$

2,765 

 

$

1,864 

 

$

169,213 

All other CRE

 

 

157,407 

 

 

6,556 

 

 

2,328 

 

 

166,291 

Acquisition and development

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential construction

 

 

10,781 

 

 

 —

 

 

 —

 

 

10,781 

All other A&D

 

 

98,823 

 

 

18 

 

 

8,268 

 

 

107,109 

Commercial and industrial

 

 

116,221 

 

 

2,896 

 

 

3,235 

 

 

122,352 

Residential mortgage

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage - term

 

 

365,899 

 

 

59 

 

 

5,597 

 

 

371,555 

Residential mortgage - home equity

 

 

67,143 

 

 

139 

 

 

1,336 

 

 

68,618 

Consumer

 

 

36,047 

 

 

 

 

148 

 

 

36,199 

Total

 

$

1,016,905 

 

$

12,437 

 

$

22,776 

 

$

1,052,118 



The increase of $6.7 million in the substandard category from December 31, 2019 to March 31, 2020 was primarily due to one large relationship in the “ALL other CRE” and “Commercial and Industrial” categories.  This loan is current and well collateralized and is not considered impaired.  It was classified as substandard due to a reduction in cash flows and a slight deterioration in the borrower’s balance sheet. 





 

14


 

 

The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and non-accrual loans at March 31, 2020 and December 31, 2019:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Current

 

30-59 Days
Past Due

 

60-89 Days
Past Due

 

90 Days+
Past Due

 

Total Past
Due and
Accruing

 

Non-
Accrual

 

Total Loans

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non owner-occupied

 

$

168,465 

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

18 

 

$

168,483 

All other CRE

 

 

167,826 

 

 

385 

 

 

114 

 

 

13 

 

 

512 

 

 

867 

 

 

169,205 

Acquisition and development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential construction

 

 

14,407 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

14,407 

All other A&D

 

 

98,518 

 

 

116 

 

 

 —

 

 

134 

 

 

250 

 

 

8,158 

 

 

106,926 

Commercial and industrial

 

 

123,414 

 

 

95 

 

 

 —

 

 

 —

 

 

95 

 

 

 —

 

 

123,509 

Residential mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage - term

 

 

366,018 

 

 

1,306 

 

 

62 

 

 

476 

 

 

1,844 

 

 

1,168 

 

 

369,030 

Residential mortgage - home equity

 

 

64,492 

 

 

349 

 

 

300 

 

 

 —

 

 

649 

 

 

798 

 

 

65,939 

Consumer

 

 

35,927 

 

 

245 

 

 

58 

 

 

 —

 

 

303 

 

 

 

 

36,233 

Total

 

$

1,039,067 

 

$

2,496 

 

$

534 

 

$

623 

 

$

3,653 

 

$

11,012 

 

$

1,053,732 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non owner-occupied

 

$

169,180 

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

33 

 

$

169,213 

All other CRE

 

 

165,289 

 

 

 —

 

 

355 

 

 

 —

 

 

355 

 

 

647 

 

 

166,291 

Acquisition and development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential construction

 

 

10,781 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

10,781 

All other A&D

 

 

98,916 

 

 

 —

 

 

 —

 

 

135 

 

 

135 

 

 

8,058 

 

 

107,109 

Commercial and industrial

 

 

122,050 

 

 

272 

 

 

 —

 

 

 —

 

 

272 

 

 

30 

 

 

122,352 

Residential mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage - term

 

 

368,631 

 

 

267 

 

 

967 

 

 

471 

 

 

1,705 

 

 

1,219 

 

 

371,555 

Residential mortgage - home equity

 

 

67,121 

 

 

288 

 

 

286 

 

 

65 

 

 

639 

 

 

858 

 

 

68,618 

Consumer

 

 

35,834 

 

 

261 

 

 

46 

 

 

54 

 

 

361 

 

 

 

 

36,199 

Total

 

$

1,037,802 

 

$

1,088 

 

$

1,654 

 

$

725 

 

$

3,467 

 

$

10,849 

 

$

1,052,118 



Non-accrual loans totaled $11.0 million at March 31, 2020, compared to $10.8 million at December 31, 2019.  The increase in non-accrual balances at March 31, 2020 was primarily related to one new CRE loan of $0.2 million.  Management continues to monitor the $8.0 million A&D participation loan that was added to non-accrual loans in the first quarter of 2019.  This loan is serviced by another lender and is now under a forbearance agreement.  Management established a specific allocation at the time the loan was placed into non-accrual and believes that the $2.1 million at March 31, 2020 is adequate based upon an appraisal obtained in the second quarter of 2019.  Discussions are currently underway for the sale of the property or notes.  The Request for Proposal process was delayed by COVID-19.



Non-accrual loans that have been subject to partial charge-offs totaled $0.1 million both at March 31, 2020 and December 31, 2019.  Loans secured by 1-4 family residential real estate properties in the process of foreclosure were $0.2 million and $0.1 million at March 31, 2020 and December 31, 2019, respectively.  All foreclosure and repossession activity have been temporarily suspended as a result of the COVID-19 pandemic and the federal and state guidance issued in response thereto.  As a percentage of the loan portfolio, accruing loans past due 30 days or more increased to 0.35%, compared to 0.33% at December 31, 2019 which offset the decrease in the 60-89 days past due.



 

15


 

 

The following table summarizes the primary segments of the ALL at March 31, 2020 and December 31, 2019, segregated by the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment: 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Commercial
Real Estate

 

Acquisition
and
Development

 

Commercial
and
Industrial

 

Residential
Mortgage

 

Consumer

 

Unallocated

 

Total

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated
for impairment

 

$

 

$

2,211 

 

$

 —

 

$

15 

 

$

 —

 

$

 —

 

$

2,233 

Collectively evaluated
for impairment

 

$

3,809 

 

$

1,852 

 

$

1,682 

 

$

4,571 

 

$

365 

 

$

500 

 

$

12,779 

Total ALL

 

$

3,816 

 

$

4,063 

 

$

1,682 

 

$

4,586 

 

$

365 

 

$

500 

 

$

15,012 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated
for impairment

 

$

 

$

2,142 

 

$

 —

 

$

22 

 

$

 —

 

$

 —

 

$

2,173 

Collectively evaluated
for impairment

 

$

2,873 

 

$

1,532 

 

$

1,341 

 

$

3,806 

 

$

312 

 

$

500 

 

$

10,364 

Total ALL

 

$

2,882 

 

$

3,674 

 

$

1,341 

 

$

3,828 

 

$

312 

 

$

500 

 

$

12,537 



The evaluation of the need and amount of a specific allocation of the ALL and whether a loan can be removed from impairment status is made on a quarterly basis. 



The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not required at March 31, 2020 and December 31, 2019:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Impaired Loans with
Specific Allowance

 

Impaired
Loans with
No Specific
Allowance

 

Total Impaired Loans

(in thousands)

 

Recorded
Investment

 

Related
Allowances

 

Recorded
Investment

 

Recorded
Investment

 

Unpaid
Principal
Balance

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non owner-occupied

 

$

115 

 

$

 

$

18 

 

$

133 

 

$

8,142 

All other CRE

 

 

 —

 

 

 —

 

 

3,218 

 

 

3,218 

 

 

3,218 

Acquisition and development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential construction

 

 

 —

 

 

 —

 

 

285 

 

 

285 

 

 

285 

All other A&D

 

 

8,287 

 

 

2,211 

 

 

89 

 

 

8,376 

 

 

8,449 

Commercial and industrial

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,213 

Residential mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage – term

 

 

737 

 

 

15 

 

 

1,724 

 

 

2,461 

 

 

2,644 

Residential mortgage – home equity

 

 

 —

 

 

 —

 

 

798 

 

 

798 

 

 

811 

Consumer

 

 

 —

 

 

 —

 

 

 

 

 

 

16 

Total impaired loans

 

$

9,139 

 

$

2,233 

 

$

6,135 

 

$

15,274 

 

$

25,778 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non owner-occupied

 

$

116 

 

$

 

$

33 

 

$

149 

 

$

8,224 

All other CRE

 

 

 —

 

 

 —

 

 

3,030 

 

 

3,030 

 

 

3,030 

Acquisition and development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential construction

 

 

 —

 

 

 —

 

 

291 

 

 

291 

 

 

291 

All other A&D

 

 

8,219 

 

 

2,142 

 

 

60 

 

 

8,279 

 

 

8,340 

Commercial and industrial

 

 

 —

 

 

 —

 

 

30 

 

 

30 

 

 

2,266 

Residential mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage – term

 

 

865 

 

 

22 

 

 

1,668 

 

 

2,533 

 

 

2,724 

Residential mortgage – home equity

 

 

 —

 

 

 —

 

 

858 

 

 

858 

 

 

986 

Consumer

 

 

 —

 

 

 —

 

 

 

 

 

 

Total impaired loans

 

$

9,200 

 

$

2,173 

 

$

5,974 

 

$

15,174 

 

$

25,865 





 

16


 

 

The following tables present the activity in the ALL for the three-month periods ended March 31, 2020 and 2019:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Commercial
Real Estate

 

Acquisition
and
Development

 

Commercial
and
Industrial

 

Residential
Mortgage

 

Consumer

 

Unallocated

 

Total

ALL balance at January 1, 2020

 

$

2,882 

 

$

3,674 

 

$

1,341 

 

$

3,828 

 

$

312 

 

$

500 

 

$

12,537 

Charge-offs

 

 

 —

 

 

(15)

 

 

(101)

 

 

(98)

 

 

(132)

 

 

 —

 

 

(346)

Recoveries

 

 

66 

 

 

14 

 

 

15 

 

 

26 

 

 

46 

 

 

 —

 

 

167 

Provision

 

 

868 

 

 

390 

 

 

427 

 

 

830 

 

 

139 

 

 

 —

 

 

2,654 

ALL balance at March 31, 2020

 

$

3,816 

 

$

4,063 

 

$

1,682 

 

$

4,586 

 

$

365 

 

$

500 

 

$

15,012 

ALL balance at January 1, 2019

 

$

2,780 

 

$

1,721 

 

$

1,187 

 

$

4,544 

 

$

315 

 

$

500 

 

$

11,047 

Charge-offs

 

 

 —

 

 

(29)

 

 

 —

 

 

(12)

 

 

(68)

 

 

 —

 

 

(109)

Recoveries

 

 

29 

 

 

12 

 

 

51 

 

 

108 

 

 

61 

 

 

 —

 

 

261 

Provision

 

 

(34)

 

 

634 

 

 

(113)

 

 

(143)

 

 

 

 

 —

 

 

349 

ALL balance at March 31, 2019

 

$

2,775 

 

$

2,338 

 

$

1,125 

 

$

4,497 

 

$

313 

 

$

500 

 

$

11,548 



The ALL is based on estimates, and actual losses may vary from current estimates.   Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date.



The following table presents the average recorded investment in impaired loans by class and related interest income recognized for the periods indicated:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended

 

Three months ended



 

March 31, 2020

 

March 31, 2019

(in thousands)

 

Average
investment

 

Interest income
recognized on
an accrual basis

 

Interest income
recognized on
a cash basis

 

Average
investment

 

Interest income
recognized on
an accrual basis

 

Interest income
recognized on
a cash basis

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non owner-occupied

 

$

141 

 

$

 

$

 —

 

$

280 

 

$

 

$

 —

All other CRE

 

 

3,124 

 

 

37 

 

 

 —

 

 

4,516 

 

 

38 

 

 

 —

Acquisition and development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential construction

 

 

288 

 

 

 

 

 —

 

 

313 

 

 

 

 

 —

All other A&D

 

 

8,328 

 

 

 

 

 

 

4,040 

 

 

 

 

 —

Commercial and industrial

 

 

15 

 

 

 —

 

 

 —

 

 

22 

 

 

 —

 

 

 —

Residential mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage – term

 

 

2,497 

 

 

22 

 

 

 —

 

 

3,462 

 

 

28 

 

 

Residential mortgage – home equity

 

 

828 

 

 

 —

 

 

 —

 

 

818 

 

 

 —

 

 

 —

Consumer

 

 

 

 

 —

 

 

 —

 

 

17 

 

 

 —

 

 

 —

Total

 

$

15,225 

 

$

67 

 

$

 

$

13,468 

 

$

77 

 

$



The Bank modifies loan terms in the normal course of business.  Among other reasons, modifications might be made in an effort to retain the loan relationship, to remain competitive in the current interest rate environment and/or to re-amortize or extend the loan’s term to better match the loan’s payment stream with the borrower’s cash flow.  A modified loan is considered to be a troubled debt restructuring (“TDR”) when the Bank has determined that the borrower is troubled (i.e., experiencing financial difficulties). The Bank evaluates the probability that the borrower will be in payment default on any of its debt obligations in the foreseeable future without modification. To make this determination, the Bank performs a global financial review of the borrower and loan guarantors to assess their current ability to meet their financial obligations.    



Section 4013 of the CARES Act allows financial institutions to suspend application of certain current TDRs accounting guidance under ASC 310-40 for loan modifications related to the COVID-19 pandemic made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the COVID-19 national emergency, provided certain criteria are met. This relief can be applied to loan modifications for borrowers that were not more than 30 days past due as of December 31, 2019 and to loan modifications that defer or delay the payment of principal or interest, or change the interest rate on the loan. In April 2020, federal and state banking regulators issued the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus to provide further interpretation of when a borrower is experiencing financial difficulty, specifically indicating that if the modification is either short-term (e.g., six months) or mandated by a federal or state government in response to the COVID-19 pandemic, the borrower is not experiencing financial difficulty under ASC 310-40. The Corporation continues to prudently work with borrowers negatively impacted by the COVID-19 pandemic while managing credit risks and recognizing appropriate

 

17


 

 

allowance for credit losses on its loan portfolio.  See Note 2 to the financial statements included elsewhere in this report for additional information. 



There were 15 loans totaling $4.1 million and $4.2  million that were classified as TDRs at March 31, 2020 and December 31, 2019, respectively.  The following tables present the volume and recorded investment in TDR’s at the times they were modified, by class and type of modification that occurred during the periods indicated:





During the three months ended March 31, 2020, there were no new TDRs and no modifications on existing TDRs.  There were no payment defaults under TDRs.



During the three months ended March 31, 2019, there were no new TDRs but two existing TDRs that had reached their modification maturity dates were re-modified.  These re-modifications did not impact the ALL.  During the three months ended March 31, 2019, there were no payment defaults under TDRs.







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Temporary Rate
Modification

 

Extension of Maturity

 

Modification of Payment
and Other Terms

(in thousands)

 

Number of
Contracts

 

Recorded
Investment

 

Number of
Contracts

 

Recorded
Investment

 

Number of
Contracts

 

Recorded
Investment

Three months ended March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Non owner-occupied

 

 —

 

$

 —

 

 —

 

$

 —

 

 —

 

$

 —

    All other CRE

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 Acquisition and development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    1-4 family residential construction

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

    All other A&D

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 

227 

 Commercial and industrial

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 Residential mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Residential mortgage – term

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 

243 

    Residential mortgage – home equity

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 Consumer

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

       Total

 

 —

 

$

 —

 

 —

 

$

 —

 

 

$

470 

 

Note 7 - Other Real Estate Owned, net



The following table presents the components of other real estate owned (“OREO”) at March 31, 2020 and December 31, 2019:







 

 

 

 

 

 



 

 

 

 

 

 

(in thousands)

 

March 31,
2020

 

December 31,
2019

Commercial real estate

 

$

2,256 

 

$

2,256 

Acquisition and development

 

 

1,708 

 

 

1,780 

Residential mortgage

 

 

76 

 

 

91 

Total OREO

 

$

4,040 

 

$

4,127 



The following table presents the activity in the OREO valuation allowance for the three-month periods ended March 31, 2020 and 2019:







 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended



 

March 31,

(in thousands)

 

2020

 

2019

Balance beginning of period

 

$

1,790 

 

$

1,988 

Fair value write-down

 

 

26 

 

 

117 

Sales of OREO

 

 

(36)

 

 

(739)

Balance at end of period

 

$

1,780 

 

$

1,366 



 

18


 

 

The following table presents the components of OREO expenses, net, for the three-month periods ended March 31, 2020 and 2019:







 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended



 

March 31,

(in thousands)

 

2020

 

2019

Gains on real estate, net

 

$

(10)

 

$

(30)

Fair value write-down, net

 

 

26 

 

 

117 

Expenses, net

 

 

34 

 

 

75 

Rental and other income

 

 

(50)

 

 

(19)

Total OREO expense, net

 

$

 —

 

$

143 

 

Note 8 – Fair Value of Financial Instruments



Fair value is defined as the price to sell an asset or to transfer a liability in an orderly transaction between willing market participants as of the measurement date.  Fair value is best determined by values quoted through active trading markets.  Active trading markets are characterized by numerous transactions of similar financial instruments between willing buyers and willing sellers. Because no active trading market exists for various types of financial instruments, many of the fair values disclosed were derived using present value discounted cash flows or other valuation techniques described below.  As a result, the Corporation’s ability to actually realize these derived values cannot be assumed. 



The Corporation measures fair values based on the fair value hierarchy established in ASC Paragraph 820-10-35-37.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of inputs that may be used to measure fair value under the hierarchy are as follows:



Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets and liabilities.  This level is the most reliable source of valuation.



Level 2: Quoted prices that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.  Level 2 inputs include inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates).  It also includes inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs).  Several sources are utilized for valuing these assets, including a contracted valuation service, Standard & Poor’s (“S&P”) evaluations and pricing services, and other valuation matrices. 



Level 3: Prices or valuation techniques that require inputs that are both significant to the valuation assumptions and not readily observable in the market (i.e. supported with little or no market activity).  Level 3 instruments are valued based on the best available data, some of which is internally developed, and consider risk premiums that a market participant would require.



The level established within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

 

Management believes that the Corporation’s valuation techniques are appropriate and consistent with the techniques used by other market participants.  However, the use of different methodologies and assumptions could result in a different estimate of fair values at the reporting date.  The valuation techniques used by the Corporation to measure, on a recurring and non-recurring basis, the fair value of assets as of March 31, 2020 are discussed in the paragraphs that follow. 



Investments – The fair value of investments is determined using a market approach.  As of March 31, 2020, the U.S. Government agencies, residential and commercial mortgage-backed securities, collateralized mortgage obligations, and state and political subdivisions bonds, excluding the TIF bonds, segments are classified as Level 2 within the valuation hierarchy.  Their fair values were determined based upon market-corroborated inputs and valuation matrices, which were obtained through third party data service providers or securities brokers through which the Corporation has historically transacted both purchases and sales of investment securities.  The TIF bonds are classified as Level 3 within the valuation hierarchy as they are not openly traded.



The CDO segment, which consists of pooled trust preferred securities issued by banks, thrifts and insurance companies, is classified as Level 3 within the valuation hierarchy.  At March 31, 2020, the Corporation owned nine trust preferred securities with an amortized cost of $18.4 million and a fair value of $12.4 million. As of March 31, 2020, the market for these securities is not active and the markets for similar securities are also not active.  The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which these securities trade and then by a significant decrease in the volume of trades relative to historical

 

19


 

 

levels.  The new issue market is also inactive, as few CDOs have been issued since 2007.  There are currently very few market participants who are willing to effect transactions in these securities.  The market values for these securities or any securities other than those issued or guaranteed by the U.S. Department of the Treasury (the “Treasury”) are depressed relative to historical levels.  Therefore, in the current market, a low market price for a particular bond may only provide evidence of stress in the credit markets in general rather than being an indicator of credit problems with a particular issue.  Given the conditions in the current debt markets and the absence of observable transactions in the secondary and new issue markets, management has determined that (a) the few observable transactions and market quotations that are available are not reliable for the purpose of obtaining fair value at March 31, 2020, (b) an income valuation approach technique (i.e. present value) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative of fair value than a market approach, and (c) the CDO segment is appropriately classified within Level 3 of the valuation hierarchy because management determined that significant adjustments were required to determine fair value at the measurement date.



Management utilizes on an independent third party to prepare both the evaluations of OTTI as well as the fair value determinations for its CDO portfolio. Management believes that the valuations are adequately reflected at March 31, 2020.



The approach used by the third party to determine fair value involved several steps, which included detailed credit and structural evaluation of each piece of collateral in each bond, projection of default, recovery and prepayment/amortization probabilities for each piece of collateral in the bond, and discounted cash flow modeling. The discount rate methodology used by the third party combines a baseline current market yield for comparable corporate and structured credit products with adjustments based on evaluations of the differences found in structure and risks associated with actual and projected credit performance of each CDO being valued.  Currently, the only active and liquid trading market that exists is for stand-alone trust preferred securities, with a limited market for highly-rated CDO securities that are more senior in the capital structure than the securities in the CDO portfolio.  Therefore, adjustments to the baseline discount rate are also made to reflect the additional leverage found in structured instruments.



Derivative financial instruments (Cash flow hedge)  The Corporation’s open derivative positions are interest rate swap agreements.  Those classified as Level 2 open derivative positions are valued using externally developed pricing models based on observable market inputs provided by a third party and validated by management.   The Corporation has considered counterparty credit risk in the valuation of its interest rate swap assets. 



Impaired loans – Loans included in the table below are those that are considered impaired with a specific allocation or with a partial charge-offFair value consists of the loan balance less its valuation allowance and is generally determined based on independent third-party appraisals of the collateral or discounted cash flows based upon the expected proceeds.  These assets are included as Level 3 fair values based upon the lowest level of input that is significant to the fair value measurements. 



Other real estate owned – OREO included in the table below are considered impaired with specific write-downs.  Fair value of other real estate owned is based on independent third-party appraisals of the properties.  These values were determined based on the sales prices of similar properties in the approximate geographic area.  These assets are included as Level 3 fair values based upon the lowest level of input that is significant to the fair value measurements.  



 

20


 

 

For Level 3 assets and liabilities measured at fair value on a recurring and non-recurring basis as of March 31, 2020 and December 31, 2019, the significant unobservable inputs used in the fair value measurements were as follows:







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

(in thousands)

 

Fair Value at
March 31,
2020

 

Valuation
Technique

 

Significant
Unobservable
Inputs

 

Significant
Unobservable
Input Value

Recurring:

 

 

 

 

 

 

 

 

 

Investment Securities – available for sale

 

$

12,380 

 

Discounted
Cash Flow

 

Discount Rate

 

LIBOR+ 5.88%

Non-recurring:

 

 

 

 

 

 

 

 

 

Impaired Loans

 

$

6,683 

 

Market Comparable
Properties

 

Marketability
Discount

 

10.0% - 15.0% (1)
(weighted avg 12.9%)

Other Real Estate Owned

 

$

534 

 

Market Comparable
Properties

 

Marketability
Discount

 

15.0%



 

 

 

 

 

 

 

 

 

(in thousands)

 

Fair Value at
December 31,
2019

 

Valuation
Technique

 

Significant
Unobservable
Inputs

 

Significant
Unobservable
Input Value

Recurring:

 

 

 

 

 

 

 

 

 

Investment Securities – available for sale

 

$

14,354 

 

Discounted
Cash Flow

 

Discount
Rate

 

LIBOR+ 4.75% 

Non-recurring:

 

 

 

 

 

 

 

 

 

Impaired Loans

 

$

6,995 

 

Market Comparable
Properties

 

Marketability
Discount

 

10.0% - 15.0% (1)
(weighted avg 12.9%)

Other Real Estate Owned

 

$

2,571 

 

Market Comparable
Properties

 

Marketability
Discount

 

10.0% - 15.0% (1)
(weighted avg 12.5%)



NOTE:

(1)

Range would include discounts taken since appraisal and estimated values

 

21


 

 

For assets measured at fair value on a recurring and non-recurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2020 and December 31, 2019 are as follows:







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Fair Value Measurements
at March 31, 2020 Using



 

Assets
Measured at
Fair Value

 

Quoted
Prices in
Active Markets
for Identical
Assets

 

Significant
Other
Observable
Inputs

 

Significant
Unobservable
Inputs

(in thousands)

 

03/31/20

 

(Level 1)

 

(Level 2)

 

(Level 3)

Recurring:

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

35,268 

 

 

 

 

$

35,268 

 

 

 

Residential mortgage-backed agencies

 

$

10,147 

 

 

 

 

$

10,147 

 

 

 

Commercial mortgage-backed agencies

 

$

29,670 

 

 

 

 

$

29,670 

 

 

 

Collateralized mortgage obligations

 

$

28,815 

 

 

 

 

$

28,815 

 

 

 

Obligations of states and political subdivisions

 

$

14,512 

 

 

 

 

$

14,512 

 

 

 

Collateralized debt obligations

 

$

12,380 

 

 

 

 

 

 

 

$

12,380 

Financial derivatives

 

$

(1,448)

 

 

 

 

$

(1,448)

 

 

 

Non-recurring:

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

6,683 

 

 

 

 

 

 

 

$

6,683 

Other real estate owned

 

$

534 

 

 

 

 

 

 

 

$

534 







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Fair Value Measurements
at December 31, 2019 Using



 

Assets
Measured at
Fair Value

 

Quoted
Prices in
Active Markets
for Identical
Assets

 

Significant
Other
Observable
Inputs

 

Significant
Unobservable
Inputs

(in thousands)

 

12/31/19

 

(Level 1)

 

(Level 2)

 

(Level 3)

Recurring:

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

39,894 

 

 

 

 

$

39,894 

 

 

 

Residential mortgage-backed agencies

 

$

4,900 

 

 

 

 

$

4,900 

 

 

 

Commercial mortgage-backed agencies

 

$

27,764 

 

 

 

 

$

27,764 

 

 

 

Collateralized mortgage obligations

 

$

29,923 

 

 

 

 

$

29,923 

 

 

 

Obligations of states and political subdivisions

 

$

14,470 

 

 

 

 

$

14,470 

 

 

 

Collateralized debt obligations

 

$

14,354 

 

 

 

 

 

 

 

$

14,354 

Financial derivatives

 

$

(133)

 

 

 

 

$

(133)

 

 

 

Non-recurring:

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

6,995 

 

 

 

 

 

 

 

$

6,995 

Other real estate owned

 

$

2,571 

 

 

 

 

 

 

 

$

2,571 



There were no transfers of assets between any of the fair value hierarchy for the three-month periods ended March 31, 2020 or 2019.

The following tables show a reconciliation of the beginning and ending balances for fair valued assets measured on a recurring basis using Level 3 significant unobservable inputs for the three-month periods ended March 31, 2020 and 2019:







 

 

 



 

 

 



 

Fair Value Measurements
Using Significant Unobservable Inputs
(Level 3)

(in thousands)

 

 Investment Securities
Available for Sale

Beginning balance January 1, 2020

 

$

14,354 

  Total losses realized/unrealized:

 

 

 

      Included in other comprehensive loss

 

 

(1,974)

Ending balance March 31, 2020

 

$

12,380 



 

22


 

 









 

 

 



 

 

 



 

Fair Value Measurements
Using Significant Unobservable Inputs
(Level 3)

(in thousands)

 

 Investment Securities
Available for Sale

Beginning balance January 1, 2019

 

$

15,277 

  Total losses realized/unrealized:

 

 

 

      Included in other comprehensive income

 

 

(125)

Ending balance March 31, 2019

 

$

15,152 



Gains/losses (realized and unrealized) included in earnings for the periods identified above are reported in the Consolidated Statement of Operations in Other Operating Income.  There were no gains or losses included in earnings attributable to the change in realized/unrealized gains or losses related to the assets for the three-month periods ended March 31, 2020 and 2019.



The disclosed fair values may vary significantly between institutions based on the estimates and assumptions used in the various valuation methodologies.  The derived fair values are subjective in nature and involve uncertainties and significant judgment. Therefore, they cannot be determined with precision. Changes in the assumptions could significantly impact the derived estimates of fair value.  Disclosure of non-financial assets such as buildings as well as certain financial instruments such as leases is not required.  Accordingly, the aggregate fair values presented do not represent the underlying value of the Corporation.



The following tables present fair value information about financial instruments, whether or not recognized in the Consolidated Statement of Financial Condition, for which it is practicable to estimate that value. The actual carrying amounts and estimated fair values of the Corporation’s financial instruments that are included in the Consolidated Statement of Financial Condition are as follows:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

March 31, 2020

 

Fair Value Measurements



 

Carrying

 

Fair

 

Quoted
Prices in
Active Markets
for Identical
Assets

 

Significant
Other
Observable
Inputs

 

Significant
Unobservable
Inputs

(in thousands)

 

Amount

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

69,008 

 

$

69,008 

 

$

69,008 

 

 

 

 

 

 

Interest bearing deposits in banks

 

 

3,000 

 

 

3,000 

 

 

3,000 

 

 

 

 

 

 

Investment securities - AFS

 

 

130,792 

 

 

130,792 

 

 

 

 

$

118,412 

 

$

12,380 

Investment securities - HTM

 

 

91,399 

 

 

98,311 

 

 

 

 

 

78,054 

 

 

20,257 

Restricted bank stock

 

 

4,468 

 

 

4,468 

 

 

 

 

 

4,468 

 

 

 

Loans, net

 

 

1,038,058 

 

 

1,040,993 

 

 

 

 

 

 

 

 

1,040,993 

Accrued interest receivable

 

 

4,217 

 

 

4,217 

 

 

 

 

 

4,217 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits - non-maturity

 

 

923,956 

 

 

923,956 

 

 

 

 

 

923,956 

 

 

 

Deposits - time deposits

 

 

248,438 

 

 

252,217 

 

 

 

 

 

252,217 

 

 

 

Financial derivatives

 

 

1,448 

 

 

1,448 

 

 

 

 

 

1,448 

 

 

 

Short-term borrowed funds

 

 

39,418 

 

 

39,418 

 

 

 

 

 

39,418 

 

 

 

Long-term borrowed funds

 

 

100,929 

 

 

102,924 

 

 

 

 

 

102,924 

 

 

 

Accrued interest payable

 

 

505 

 

 

505 

 

 

 

 

 

505 

 

 

 





 

23


 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2019

 

Fair Value Measurements



 

Carrying

 

Fair

 

Quoted
Prices in
Active Markets
for Identical
Assets

 

Significant
Other
Observable
Inputs

 

Significant
Unobservable
Inputs

(in thousands)

 

Amount

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

48,512 

 

$

48,512 

 

$

48,512 

 

 

 

 

 

 

Interest bearing deposits in banks

 

 

1,467 

 

 

1,467 

 

 

1,467 

 

 

 

 

 

 

Investment securities - AFS

 

 

131,305 

 

 

131,305 

 

 

 

 

$

116,951 

 

$

14,354 

Investment securities - HTM

 

 

93,979 

 

 

100,656 

 

 

 

 

 

79,084 

 

 

21,572 

Restricted bank stock

 

 

4,415 

 

 

4,415 

 

 

 

 

 

4,415 

 

 

 

Loans, net

 

 

1,038,894 

 

 

1,037,032 

 

 

 

 

 

 

 

 

1,037,032 

Accrued interest receivable

 

 

4,116 

 

 

4,116 

 

 

 

 

 

4,116 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits - non-maturity

 

 

888,141 

 

 

888,141 

 

 

 

 

 

888,141 

 

 

 

Deposits - time deposits

 

 

253,890 

 

 

256,227 

 

 

 

 

 

256,227 

 

 

 

Financial derivative

 

 

133 

 

 

133 

 

 

 

 

 

133 

 

 

 

Short-term borrowed funds

 

 

48,728 

 

 

48,728 

 

 

 

 

 

48,728 

 

 

 

Long-term borrowed funds

 

 

100,929 

 

 

100,848 

 

 

 

 

 

100,848 

 

 

 

Accrued interest payable

 

 

499 

 

 

499 

 

 

 

 

 

499 

 

 

 

 

Note 9 – Accumulated Other Comprehensive Loss



The following table presents the changes in each component of accumulated other comprehensive loss for the 12 months ended December 31, 2019 and the three months ended March 31, 2020:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Investment
securities-
with OTTI
AFS

 

Investment
securities-
all other
AFS

 

Investment
securities-
HTM

 

Cash Flow
Hedge

 

Pension
Plan

 

SERP

 

Total

Accumulated OCL, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance – January 1, 2019

 

$

(1,899)

 

$

(3,601)

 

$

(1,131)

 

$

773 

 

$

(18,017)

 

$

(528)

 

$

(24,403)

Other comprehensive
  income/(loss) before
  reclassifications

 

 

(497)

 

 

2,748 

 

 

 —

 

 

(858)

 

 

(3,189)

 

 

(730)

 

 

(2,526)

Amounts reclassified from
  accumulated other
  comprehensive loss

 

 

(146)

 

 

 —

 

 

232 

 

 

 —

 

 

789 

 

 

83 

 

 

958 

Balance – December 31, 2019

 

$

(2,542)

 

$

(853)

 

$

(899)

 

$

(85)

 

$

(20,417)

 

$

(1,175)

 

$

(25,971)

Other comprehensive
  income/(loss) before
  reclassifications

 

 

(1,188)

 

 

1,384 

 

 

 —

 

 

(963)

 

 

(5,177)

 

 

 —

 

 

(5,944)

Amounts reclassified from
  accumulated other
  comprehensive loss

 

 

(37)

 

 

 —

 

 

53 

 

 

 —

 

 

262 

 

 

34 

 

 

312 

Balance - March 31, 2020

 

$

(3,767)

 

$

531 

 

$

(846)

 

$

(1,048)

 

$

(25,332)

 

$

(1,141)

 

$

(31,603)



 

24


 

 

The following tables present the components of other comprehensive income/(loss) for the three-month periods ended

March 31, 2020 and 2019:







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

Components of Other Comprehensive Loss
(in thousands)

 

Before
Tax
Amount

 

Tax
(Expense)
Benefit

 

Net

For the three months ended March 31, 2020

 

 

 

 

 

 

 

 

 

Available for sale (AFS) securities with OTTI:

 

 

 

 

 

 

 

 

 

Unrealized holding losses

 

$

(1,623)

 

$

435 

 

$

(1,188)

Less:  accretable yield recognized in income

 

 

50 

 

 

(13)

 

 

37 

Net unrealized losses on investments with OTTI

 

 

(1,673)

 

 

448 

 

 

(1,225)

Available for sale securities – all other:

 

 

 

 

 

 

 

 

 

Unrealized holding gains

 

 

1,890 

 

 

(506)

 

 

1,384 

Less:  gains recognized in income

 

 

 —

 

 

 —

 

 

 —

Net unrealized gains on all other AFS securities

 

 

1,890 

 

 

(506)

 

 

1,384 

Held to maturity securities:

 

 

 

 

 

 

 

 

 

Unrealized holding gains

 

 

 —

 

 

 —

 

 

 —

Less:  amortization recognized in income

 

 

(72)

 

 

19 

 

 

(53)

Net unrealized gains on HTM securities

 

 

72 

 

 

(19)

 

 

53 

Cash flow hedges:

 

 

 

 

 

 

 

 

 

Unrealized holding losses

 

 

(1,315)

 

 

352 

 

 

(963)

Pension Plan:

 

 

 

 

 

 

 

 

 

Unrealized net actuarial loss

 

 

(7,070)

 

 

1,893 

 

 

(5,177)

Less: amortization of unrecognized loss

 

 

(358)

 

 

96 

 

 

(262)

Net pension plan liability adjustment

 

 

(6,712)

 

 

1,797 

 

 

(4,915)

SERP:

 

 

 

 

 

 

 

 

 

Unrealized net actuarial loss

 

 

 —

 

 

 —

 

 

 —

Less: amortization of unrecognized loss

 

 

(47)

 

 

12 

 

 

(35)

Less: amortization of prior service costs

 

 

 

 

 —

 

 

Net SERP liability adjustment

 

 

46 

 

 

(12)

 

 

34 

Other comprehensive loss

 

$

(7,692)

 

$

2,060 

 

$

(5,632)



 

25


 

 







 

 

 

 

 

 

 

 

 

Components of Other Comprehensive Income
(in thousands)

 

Before
Tax
Amount

 

Tax
(Expense)
Benefit

 

Net

For the three months ended March 31, 2019

 

 

 

 

 

 

 

 

 

Available for sale (AFS) securities with OTTI:

 

 

 

 

 

 

 

 

 

Unrealized holding losses

 

$

(60)

 

$

16 

 

$

(44)

Less:  accretable yield recognized in income

 

 

49 

 

 

(13)

 

 

36 

Net unrealized losses on investments with OTTI

 

 

(109)

 

 

29 

 

 

(80)

Available for sale securities – all other:

 

 

 

 

 

 

 

 

 

Unrealized holding gains

 

 

1,236 

 

 

(335)

 

 

901 

Less:  losses recognized in income

 

 

(6)

 

 

 

 

(4)

Net unrealized gains on all other AFS securities

 

 

1,242 

 

 

(337)

 

 

905 

Held to maturity securities:

 

 

 

 

 

 

 

 

 

Unrealized holding gains

 

 

 —

 

 

 —

 

 

 —

Less:  amortization recognized in income

 

 

(75)

 

 

20 

 

 

(55)

Net unrealized gains on HTM securities

 

 

75 

 

 

(20)

 

 

55 

Cash flow hedges:

 

 

 

 

 

 

 

 

 

Unrealized holding losses

 

 

(432)

 

 

117 

 

 

(315)

Pension Plan:

 

 

 

 

 

 

 

 

 

Unrealized net actuarial gain

 

 

2,652 

 

 

(719)

 

 

1,933 

Less: amortization of unrecognized loss

 

 

(269)

 

 

73 

 

 

(196)

Net pension plan liability adjustment

 

 

2,921 

 

 

(792)

 

 

2,129 

SERP:

 

 

 

 

 

 

 

 

 

Less: amortization of unrecognized loss

 

 

(29)

 

 

 

 

(22)

Less: amortization of prior service costs

 

 

 

 

 —

 

 

Net SERP liability adjustment

 

 

28 

 

 

(7)

 

 

21 

Other comprehensive income

 

$

3,725 

 

$

(1,010)

 

$

2,715 



 

26


 

 

The following table presents the details of amounts reclassified from accumulated other comprehensive loss for the three-month periods ended March 31, 2020 and 2019:





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Amounts Reclassified from

 

Three Months Ended

 

 

Accumulated Other Comprehensive Loss

 

March 31,

 

Affected Line Item in the Statement

(in thousands)

 

2020

 

2019

 

Where Net Income is Presented

Net unrealized losses on available for sale investment securities with OTTI:

 

 

 

 

 

 

 

 

Accretable yield

 

 

50 

 

 

49 

 

Interest income on taxable investment securities

Taxes

 

 

(13)

 

 

(13)

 

Provision for income tax expense



 

$

37 

 

$

36 

 

Net of tax

Net unrealized gains on available for sale investment securities - all others:

 

 

 

 

 

 

 

 

Losses on sales

 

$

 —

 

$

(6)

 

Net gains

Taxes

 

 

 —

 

 

 

Provision for income tax expense



 

$

 —

 

$

(4)

 

Net of tax

Net unrealized gains on held to maturity securities:

 

 

 

 

 

 

 

 

Amortization

 

$

(72)

 

$

(75)

 

Interest income on taxable investment securities

Taxes

 

 

19 

 

 

20 

 

Provision for income tax expense



 

$

(53)

 

$

(55)

 

Net of tax

Net pension plan liability adjustment:

 

 

 

 

 

 

 

 

Amortization of unrecognized loss

 

$

(358)

 

$

(269)

 

Other Expense

Taxes

 

 

96 

 

 

73 

 

Provision for income tax expense



 

$

(262)

 

$

(196)

 

Net of tax

Net SERP liability adjustment:

 

 

 

 

 

 

 

 

Amortization of unrecognized loss

 

$

(47)

 

$

(29)

 

Other Expense

Amortization of prior service costs

 

 

 

 

 

Salaries and employee benefits

Taxes

 

 

12 

 

 

 

Provision for income tax expense



 

$

(34)

 

$

(21)

 

Net of tax

Total reclassifications for the period

 

$

(312)

 

$

(240)

 

Net of tax



 

Note 10 – Borrowed Funds



The following is a summary of short-term borrowings with original maturities of less than one year:







 

 

 

 

 

 



 

 

 

 

 

 

(Dollars in thousands)

 

Three Months
Ended
March 31, 2020

 

Year Ended
December 31, 2019

Securities sold under agreements to repurchase:

 

 

 

 

 

 

  Outstanding at end of period

 

$

39,418 

 

$

48,728 

  Weighted average interest rate at end of period

 

 

0.28% 

 

 

0.23% 

  Maximum amount outstanding as of any month end

 

$

45,604 

 

$

50,345 

  Average amount outstanding

 

$

45,275 

 

$

39,778 

  Approximate weighted average rate during the period

 

 

0.25% 

 

 

0.28% 



At March 31, 2020, the repurchase agreements were secured by $50.7 million in investment securities issued by government related agencies.  A minimum of 102% of fair value is pledged against account balances.



At March 31, 2020, the long-term FHLB advances were secured by $228.2 million in loans.

 

 

27


 

 

Note 11 – Employee Benefit Plans



The following tables present the components of the net periodic pension plan cost for First United Corporation’s noncontributory Defined Benefit Pension Plan (the “Pension Plan”) and the Bank’s Defined Benefit Supplemental Executive Retirement Plan (“Defined Benefit SERP”) for the periods indicated:





 

 

 

 

 

 



 

 

 

 

 

 

Pension Plan

 

Three Months Ended



 

March 31,

(in thousands)

 

2020

 

2019

Service cost

 

$

56 

 

$

67 

Interest cost

 

 

407 

 

 

437 

Expected return on assets

 

 

(887)

 

 

(764)

Amortization of net actuarial loss

 

 

358 

 

 

269 

Net pension (credit)/expense included in employee benefits
  and other expense

 

$

(66)

 

$







 

 

 

 

 

 



 

 

 

 

 

 

Defined Benefit SERP

 

Three Months Ended



 

March 31,

(in thousands)

 

2020

 

2019

Service cost

 

$

31 

 

$

24 

Interest cost

 

 

67 

 

 

82 

Amortization of recognized loss

 

 

47 

 

 

29 

Amortization of prior service cost

 

 

(1)

 

 

(1)

Net Defined Benefit SERP expense included in
  employee benefits and other expense

 

$

144 

 

$

134 



The service cost component of net periodic benefit cost is included in salaries and benefits and all other components of net periodic benefit cost are included in other operating expenses in the Consolidated Statement of Operations for the Corporation’s Pension and Defined Benefit SERP plans. 



The Pension Plan is a noncontributory defined benefit pension plan that covers our employees who were hired prior to the freeze and others who were grandfathered into the plan.  The benefits are based on years of service and the employees’ compensation during the last five years of employment.  At March 31, 2020, the market value of the pension plan assets declined approximately $7.0 million as a result of the decline in the rate environment related to the COVID-19 pandemic. 



Effective April 30, 2010, the Pension Plan was amended, resulting in a “soft freeze”, the effect of which prohibits new entrants into the plan and ceases crediting of additional years of service after that date.  Effective January 1, 2013, the Pension Plan was amended to unfreeze it for those employees for whom the sum of their (a) ages, at their closest birthday plus (b) years of service for vesting purposes equals 80 or greater.  The “soft freeze” continues to apply to all other plan participants.  Pension benefits for these participants are managed through discretionary contributions to the First United Corporation 401(k) Profit Sharing Plan (the “401(k) Plan”). 



The Bank established the Defined Benefit SERP in 2001 as an unfunded supplemental executive retirement plan.  The Defined Benefit SERP is available only to a select group of management or highly compensated employees to provide supplemental retirement benefits in excess of limits imposed on qualified plans by federal tax law.  Concurrent with the establishment of the Defined Benefit SERP, the Bank acquired Bank Owned Life Insurance (“BOLI”) policies on the senior management personnel and officers of the Bank.  The benefits resulting from the favorable tax treatment accorded the earnings on the BOLI policies are intended to provide a source of funds for the future payment of the Defined Benefit SERP benefits as well as other employee benefit costs. 



The benefit obligation activity for both the Pension Plan and Defined Benefit SERP was calculated using an actuarial measurement date of January 1. Plan assets and the benefit obligations were calculated using an actuarial measurement date of December 31.



The Corporation will assess the need for future annual contributions to the pension plan based upon its funded status and an evaluation of the future benefits to be provided thereunder.  A contribution of $1.0 million was made to the Pension Plan during the first three months of 2020.  The Corporation expects to fund the annual projected benefit payments for the Defined Benefit SERP from operations.



On January 9, 2015, First United Corporation and members of management who do not participate in the Defined Benefit SERP entered into participation agreements under the Deferred Compensation Plan, each styled as a Defined Contribution SERP Agreement (the “Contribution Agreement”).  Pursuant to each Contribution Agreement, First United Corporation agreed, for each Plan Year (as

 

28


 

 

defined in the Deferred Compensation Plan) in which it determines that it has been Profitable (as defined in the Contribution Agreement), to make a discretionary contribution to the participant’s Employer Account in an amount equal to 15% of the participant’s base salary level for such Plan Year, with the first Plan Year being the year ending December 31, 2015.  The Contribution Agreement provides that the participant will become 100% vested in the amount maintained in his or her Employer Account upon the earliest to occur of the following events: (a) Normal Retirement (as defined in the Contribution Agreement); (b)  Separation from Service (as defined in the Contribution Agreement) following a Change of Control (as defined in the Deferred Compensation Plan) and subsequent Triggering Event (as defined in the Contribution Agreement); (c) Separation from Service due to a Disability (as defined in the Contribution Agreement); (d) with respect to a particular award of Employer Contribution Credits, the participant’s completion of two consecutive Years of Service (as defined in the Contribution Agreement) immediately following the Plan Year for which such award was made; or (e) death.  Notwithstanding the foregoing, however, a participant will lose entitlement to the amount maintained in his or her Employer Account in the event employment is terminated for Cause (as defined in the Contribution Agreement).  In addition, the Contribution Agreement conditions entitlement to the amounts held in the Employer Account on the participant (1) refraining from engaging in Competitive Employment (as defined in the Contribution Agreement) for three years following his or her Separation from Service, (2) refraining from injurious disclosure of confidential information concerning the Corporation, and (3) remaining available, at the First United Corporation’s reasonable request, to provide at least six hours of transition services per month for 12 months following his or her Separation from Service (except in the case of death or Disability), except that only item (2) will apply in the event of a Separation from Service following a Change of Control and subsequent Triggering Event. 



In January 2018, the Board approved discretionary contributions to four participants totaling $119,252.  The contributions vested on December 31, 2019.   In January 2019, the Board of Directors of First United Corporation approved discretionary contributions to four participants totaling $123,179.  The Corporation recorded $12,007 and $18,788 of related compensation expense for the first three months of 2020 and 2019, respectively, related to these contributions.  In January 2020, the Board approved discretionary contributions to four participants totaling $126,058. The Corporation recorded $15,757 of related compensation for the first quarter of 2020 related to these contributions.  Each of the above annual contributions has a two-year vesting period.

  

Note 12 - Equity Compensation Plan Information



At the 2018 Annual Meeting of Shareholders, First United Corporation’s shareholders approved the First United Corporation 2018 Equity Compensation Plan which authorizes the issuance of up to 325,000 shares of common stock to employees, directors and qualifying consultants pursuant to stock options, stock appreciation rights, stock awards, dividend equivalents, and other stock-based awards. 



The Corporation complies with the provisions of ASC Topic 718, Compensation-Stock Compensation, in measuring and disclosing stock compensation cost.   The measurement objective in ASC Paragraph 718-10-30-6 requires public companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award.  The cost is recognized in expense over the period in which an employee is required to provide service in exchange for the award (the vesting period).



Stock-based awards were made to non-employee directors in May 2019 pursuant to First United Corporation’s director compensation policy.  Each director receives an annual retainer of 1,000 shares of First United Corporation common stock, plus $10,000 to be paid, at the director’s election, in cash or additional shares of common stock.  In 2019, a total of 14,641 fully-vested shares of common stock were issued to directors, which had a grant date fair market value of $18.30 per share.  Director stock compensation expense was $66,983 for the three months ended March 31, 2020 and $66,717 for the three months ended March 31, 2019. 



Restricted Stock Units



On March 26, 2020, pursuant to the recently-adopted Long-Term Incentive Plan (the "LTIP"), the Compensation Committee (the "Committee") of the Corporation granted restricted stock units ("RSUs") to the Corporation's principal executive officer, its principal financial officer, and certain of its other executive officers.  An RSU contemplates the issuance of shares of common stock of the Corporation if and when the RSU vests.



The RSUs granted to each of the foregoing officers consist of (a) a performance-vesting award for a three-year performance period ending December 31, 2021, (b) a performance-vesting award for a three-year performance period ending December 31, 2022, and (c) a time-vesting award that will vest ratably over a three-year period beginning on March 26, 2021. Under the performance-vesting RSUs, the officers will receive 50% of the target number of shares if at least one of the threshold performance levels is met, 100% of the target number of shares if at least one of the target performance levels is met, and 150% of the target number of shares if at least one of the maximum performance levels is met. Actual vesting amounts will be pro-rated between threshold and target levels and target and maximum levels to reward incremental improvement. For the performance period ending December 31, 2021, the RSUs' performance goal is based on earnings per share for the year ending December 31, 2021. For the performance period ending December 31, 2022, the RSUs' performance goals are based on earnings per share for the year ending December 31, 2022 and growth in tangible book value per

 

29


 

 

share during the performance period. The threshold, target and maximum performance levels for these grants will be disclosed pursuant to Item 402 of Regulation S-K following the conclusion of the applicable performance period.



To receive any shares under a RSU, a grantee must be employed by the Corporation or one of its subsidiaries on the applicable vesting date, except that a grantee whose employment terminates prior to such vesting date due to death, disability or retirement will be entitled to a pro-rated portion of the shares subject to the RSUs, assuming that, in the case of performance-vesting RSUs, the performance goals had been met at their "target" levels.



In the first quarter of 2020, RSUs relating to 25,004 shares of common stock (target level) were granted, which had a grant date fair market value of $12.54 per share of common stock underlying each RSU.  Stock compensation expense was $31,242 for the first quarter of 2020.  Compensation expense related to unvested units was $282,282.

 

Note 13 – Derivative Financial Instruments



As a part of managing interest rate risk, the Bank entered into interest rate swap agreements to modify the re-pricing characteristics of certain interest-bearing liabilities. The Corporation has designated these interest rate swap agreements as cash flow hedges under the guidance of ASC Subtopic 815-30, Derivatives and Hedging – Cash Flow Hedges. Cash flow hedges have the effective portion of changes in the fair value of the derivative, net of taxes, recorded in net accumulated other comprehensive loss. 



In March 2016, the Corporation entered into four interest rate swap contracts totaling $30.0 million notional amount, hedging future cash flows associated with floating rate trust preferred debt.  These contracts include a three-year $5.0 million contract that matured on June 17, 2019, a five-year $5.0 million contract that matures on March 17, 2021, a seven-year $5.0 million contract that matures on March 17, 2023 and a 10-year $15.0 million contract that matures on March 17, 2026.



The fair value of the interest rate swap contracts was $(1.4) million and $(133) thousand at March 31, 2020 and December 31, 2019, respectively.



For the three months ended March 31, 2020, the Corporation recorded a decrease in the value of the derivatives of $1.3 million and the related deferred tax of $352 thousand in net accumulated other comprehensive loss to reflect the effective portion of cash flow hedges.  ASC Subtopic 815-30 requires the net accumulated other comprehensive loss to be reclassified to earnings if the hedge becomes ineffective or is terminated.  There was no hedge ineffectiveness recorded for the three months ended March 31, 2020.  The Corporation does not expect any losses relating to these hedges to be reclassified into earnings within the next 12 months.



Interest rate swap agreements are entered into with counterparties that meet established credit standards and the Corporation believes that the credit risk inherent in these contracts is not significant as of March 31, 2020.



The table below discloses the impact of derivative financial instruments on the Corporation’s Consolidated Financial Statements for the three-month periods ended March 31, 2020 and 2019.







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

Derivative in Cash Flow Hedging Relationships

 

 

 

 

 

 

 

 

 

(in thousands)

 

Amount of gain or (loss) recognized in OCI on derivative (effective portion)

 

Amount of gain or (loss) reclassified from accumulated OCI into income (effective portion) (a)

 

Amount of gain or (loss) recognized in income or derivative (ineffective portion and amount excluded from effectiveness testing) (b)

Interest rate contracts:

 

 

 

 

 

 

 

 

 

Three months ended:

 

 

 

 

 

 

 

 

 

March 31, 2020

 

$

(963)

 

$

 —

 

$

 —

March 31, 2019

 

 

(315)

 

 

 —

 

 

 —



Notes:

(a) Reported as interest expense

(b) Reported as other income

 

Note 14 – Assets and Liabilities Subject to Enforceable Master Netting Arrangements



Interest Rate Swap Agreements



The Corporation has entered into interest rate swap agreements to modify the re-pricing characteristics of certain interest-bearing liabilities as a part of managing interest rate risk.  The swap agreements have been designated as cash flow hedges, and accordingly, the fair value of the interest rate swap contracts is reported in Other Assets or Other Liabilities on the Consolidated Statement of Financial Condition.  The swap agreements were entered into with a third-party financial institution.  The Corporation is

 

30


 

 

party to master netting arrangements with its financial institution counterparty; however, the Corporation does not offset assets and liabilities under these arrangements for financial statement presentation purposes.  The master netting arrangements provide for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract.  Collateral, in the form of cash and investment securities, are pledged by the Corporation as the counterparty with net liability positions in accordance with contract thresholds.  See Note 13 to the Consolidated Financial Statements for more information.



Securities Sold Under Agreements to Repurchase (“Repurchase Agreements”)



The Bank enters into agreements under which it sells interests in U.S. securities to certain customers subject to an obligation to repurchase, and on the part of the customers to resell, such interests.  Under these arrangements, the Bank may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Bank to repurchase the assets.  As a result, these repurchase agreements are accounted for as collateralized financing arrangements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities.  The obligation to repurchase the securities is reflected as a liability in the Consolidated Statement of Condition, while the securities underlying the repurchase agreements remain in the respective investment securities asset accounts.  There is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities.  In addition, as the Bank does not enter into reverse repurchase agreements, there is no such offsetting to be done with the repurchase agreements.  The right of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral would be used to settle the fair value of the repurchase agreement should the Bank be in default (i.e. fails to repurchase the U.S. securities on the maturity date of the agreement).  The investment security collateral, maintained at 102% of the borrowing, is held by a third party financial institution in the counterparty’s custodial account.



The following table presents the assets and liabilities subject to an enforceable master netting arrangement or repurchase agreements at March 31, 2020 and December 31, 2019.  





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

Gross Amounts
Not Offset in the
Statement of Condition

 

 

 

(in thousands)

 

Gross
Amounts of
Recognized
(Assets)/
Liabilities

 

Gross
Amounts
Offset in the
Statement of
Condition

 

Net Amounts
of (Assets)/
Liabilities
Presented in
the Statement
of Condition

 

Financial
Instruments

 

Cash
Collateral
Pledged

 

Net
Amount

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Swap Agreements

 

$

1,448 

 

$

 —

 

$

1,448 

 

$

(1,448)

 

$

 —

 

$

 —

Repurchase Agreements

 

$

39,418 

 

$

 —

 

$

39,418 

 

$

(39,418)

 

$

 —

 

$

 —

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Swap Agreements

 

$

133 

 

$

 —

 

$

133 

 

$

(133)

 

$

 —

 

$

 —

Repurchase Agreements

 

$

48,728 

 

$

 —

 

$

48,728 

 

$

(48,728)

 

$

 —

 

$

 —

 



Note 15 - Goodwill



Goodwill is not amortized but is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Corporation is considered the only reporting unit.  Impairment testing requires that the fair value of each of the Corporation’s reporting units be compared to the carrying amount of its net assets, including goodwill.  If the fair value of the reporting unit exceeds the carrying value, no additional testing is required, and an impairment loss is not recognized. Otherwise, an impairment loss is recognized to the extent the carrying value exceeds fair value but is limited to the amount of goodwill.  The annual impairment test was completed in December 2019 and no impairment was recognized.

 

The emergence of COVID-19 as a global pandemic during the first quarter of 2020 has resulted in significant deterioration in the economic environment which has impacted expected earnings and the price of the Corporation’s common stock.  These events are considered triggering events requiring interim testing and, accordingly, we performed an analysis to determine whether the Corporation’s fair value exceeds its carrying value in March 31, 2020.  Based on the analysis, fair value continues to exceed carrying value and, therefore, no impairment was recognized. In the event of a prolonged economic uncertainty or further deterioration in the economic outlook, continued assessments of our goodwill will likely be required in future periods.

 

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Note 16 – Adoption of New Accounting Standards and Effects of New Accounting Pronouncements



In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  ASU 2016-13 introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments.  It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchases financial assets with credit deterioration since their origination.  The new model referred to as current expected credit losses (“CECL”) model, will apply to: (a) financial assets subject to credit losses and measured at amortized cost; and (b) certain off-balance sheet credit exposures.  This includes loans, held to maturity debt securities, loan commitments, financial guarantees and net investments in leases as well as reinsurance and trade receivables.  The estimate of expected credit losses should consider historical information, current information, and supportable forecasts, including estimates of prepayments.  ASU 2016-13 was originally effective for SEC filers for annual periods beginning after December 15, 2019, and interim periods within those annual periods.  In November 2019, the FASB approved a delay of the required implementation date of ASU No. 2016-13 for smaller reporting companies, as defined by the SEC, including the Corporation, resulting in a required implementation date for the Corporation of January 1, 2023. 



In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements on fair value measurements by requiring that Level 3 fair value disclosures include the range and weighted average of significant unobservable inputs used to develop those fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 became effective for the Corporation on January 1, 2020 and did not have a significant impact on its financial condition or results of operations.



In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848).”  The ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.  The amendment only applies to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of the reference rate reform.  The ASU is effective as of March 12, 2020 through December 31, 2022.  The Corporation is in the process of evaluating the impact of this standard but believes that its adoption will not have a material impact on the Corporation’s financial condition or results of operations.



 

32


 

 

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations



INTRODUCTION



The following discussion and analysis is intended as a review of material changes in and significant factors affecting the financial condition and results of operations of First United Corporation and its consolidated subsidiaries for the periods indicated.  This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and the notes thereto contained in Item 1 of Part I of this report, as well as the audited consolidated financial statements and related notes included in First United Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019.



Unless the context clearly suggests otherwise, references in this report to “us”, “we”, “our”, and “the Corporation” are to First United Corporation and its consolidated subsidiaries.



FORWARD-LOOKING STATEMENTS



This report contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.  Forward-looking statements do not represent historical facts, but are statements about management's beliefs, plans and objectives about the future, as well as its assumptions and judgments concerning such beliefs, plans and objectives.  These statements are evidenced by terms such as "anticipate," "estimate," "should," "expect," "believe," "intend," and similar expressions.  Although these statements reflect management's good faith beliefs and projections, they are not guarantees of future performance and they may not prove true.  The beliefs, plans and objectives on which forward-looking statements are based involve risks and uncertainties that could cause actual results to differ materially from those addressed in the forward-looking statements.  For a discussion of these risks and uncertainties, see the section of the periodic reports that First United Corporation files with the Securities and Exchange Commission entitled "Risk Factors", including the risk factor set forth in First United Corporation’s Annual Report on Form 10-K, as amended, for the year ended December 31, 2019 entitled, “The outbreak of the recent coronavirus (‘COVID-19’), or an outbreak of another highly infectious or contagious disease, could adversely affect the Corporation’s business, financial condition and results of operations.” and any updates thereto that might be contained in subsequent reports filed by First United Corporation.  The risks and uncertainties associated with the COVID-19 pandemic and its impact on the Corporation will depend on, among other things, the length of time that the pandemic continues; the duration of shelter-in-place orders and the potential imposition of further restrictions on travel in the future; the effect of the pandemic on the global, national, and local economies and on the businesses of our borrowers and their ability to make payments on their obligations; the remedial actions and stimulus measures adopted by federal, state, and local governments; and the inability of employees to work due to illness, quarantine, or government mandates.



FIRST UNITED CORPORATION



First United Corporation is a Maryland corporation chartered in 1985 and a bank holding company registered with the Board of Governors of the Federal Reserve System (the “FRB”) under the Bank Holding Company Act of 1956, as amended.   The Corporation’s primary business is serving as the parent company of First United Bank & Trust, a Maryland trust company (the “Bank”), First United Statutory Trust I (“Trust I”) and First United Statutory Trust II (“Trust II”), both Connecticut statutory business trusts. 

(Trust I and Trust II, the “Trusts”).  The Trusts were formed for the purpose of selling trust preferred securities that qualified as Tier 1 capital.  The Bank has two consumer finance company subsidiaries - OakFirst Loan Center, Inc., a West Virginia corporation, and OakFirst Loan Center, LLC, a Maryland limited liability company - and two subsidiaries that it uses to hold real estate acquired through foreclosure or by deed in lieu of foreclosure - First OREO Trust, a Maryland statutory trust, and FUBT OREO I, LLC, a Maryland limited liability company. 



At March 31, 2020, the Corporation’s total assets were $1.5 billion, net loans were $1.0 billion, and deposits were $1.2 billion.  Shareholders’ equity at March 31, 2020 was $118.5 million.



The Corporation maintains an Internet site at www.mybank.com on which it makes available, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the foregoing as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the SEC.

 

33


 

 

ESTIMATES AND CRITICAL ACCOUNTING POLICIES



This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities.  (See Note 1 of the Notes to Consolidated Financial Statements included in Item 8 of Part II of First United Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019). On an on-going basis, management evaluates estimates, including those related to loan losses and potential impairment of goodwill, other-than-temporary impairment (“OTTI”) of investment securities, income taxes, fair value of investments and pension plan assumptions.  Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.  Management believes the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the consolidated financial statements.



Management does not believe that any material changes in our critical accounting policies have occurred since December 31, 2019.



Allowance for Loan Losses



One of our most important accounting policies is that related to the monitoring of the loan portfolio.  A variety of estimates impact the carrying value of the loan portfolio, including the calculation of the allowance for loan losses (the “ALL”), the valuation of underlying collateral, the timing of loan charge-offs and the placement of loans on non-accrual status. The ALL is established and maintained at a level that management believes is adequate to cover losses resulting from the inability of borrowers to make required payment on loans. Estimates for loan losses are arrived at by analyzing risks associated with specific loans and the loan portfolio, current and historical trends in delinquencies and charge-offs, and changes in the size and composition of the loan portfolio. The analysis also requires consideration of the economic climate and outlook, including the economic conditions specific to Western Maryland and Northeastern West Virginia, changes in lending rates, political conditions, and legislation impacting the banking industry.  Because the calculation of the ALL relies on management’s estimates and judgments relating to inherently uncertain events, actual results may differ from management’s estimates.



Goodwill



Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, Intangibles - Goodwill and Other, establishes standards for the amortization of acquired intangible assets and impairment assessment of goodwill.  The $11.0 million recorded as goodwill at March 31, 2020 is primarily related to the Bank’s 2003 acquisition of Huntington National Bank branches and is not subject to periodic amortization. 



Goodwill arising from business combinations represents the value attributable to unidentifiable intangible elements in the business acquired. Goodwill is not amortized but is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. Impairment testing requires that the fair value of each of the Corporation’s reporting units be compared to the carrying amount of its net assets, including goodwill.  If the estimated current fair value of the reporting unit exceeds the carrying value, no additional testing is required and an impairment loss is not recorded. Otherwise, additional testing is performed, and to the extent such additional testing results in a conclusion that the carrying value of goodwill exceeds its implied fair value, an impairment loss is recognized.



Our goodwill relates to value inherent in the banking business, and that value is dependent upon our ability to provide quality, cost effective services in a highly competitive local market.  This ability relies upon continuing investments in processing systems, the development of value-added service features and the ease of use of our services.  As such, goodwill value is ultimately supported by revenue that is driven by the volume of business transacted.  A decline in earnings as a result of a lack of growth or the inability to deliver cost effective services over sustained periods can lead to impairment of goodwill, which could adversely impact earnings in future periods.  ASC Topic 350 requires an annual evaluation of goodwill for impairment and a re-valuation at an interim period if there have been indications of impairment. The determination of whether or not these assets are impaired involves significant judgments and estimates. 



The emergence of COVID-19 as a global pandemic during the first quarter of 2020 has resulted in significant deterioration in the economic environment which has impacted expected earnings and the price of the Corporation’s common stock.  These events are considered triggering events requiring interim testing and, accordingly, we performed an analysis to determine whether the Corporation’s fair value exceeds its carrying value in March 31, 2020.  Based on the analysis, fair value continues to exceed carrying value and, therefore, no impairment was recognized. In the event of a prolonged economic uncertainty or further deterioration in the economic outlook, continued assessments of our goodwill will likely be required in future periods.

 

34


 

 

Accounting for Income Taxes



We account for income taxes in accordance with ASC Topic 740, Income Taxes.  Under this guidance, deferred taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  Increases or decreases in the value of deferred tax assets and liabilities due to a change in tax rates are recognized as income or expense, respectively, in the period that includes the date on which the change becomes effective.



Management regularly reviews the carrying amount of the Corporation’s net deferred tax assets to determine if the establishment of a valuation allowance is necessary.  If management determines, based on the available evidence, that it is more likely than not that all or a portion of our net deferred tax assets will not be realized in future periods, then a deferred tax valuation allowance will be established.  Consideration is given to various positive and negative factors that could affect the realization of the deferred tax assets.  In evaluating this available evidence, management considers, among other things, historical performance, expectations of future earnings, the ability to carry back losses to recoup taxes previously paid, length of statutory carry forward periods, experience with utilization of operating loss and tax credit carry forwards not expiring, tax planning strategies and timing of reversals of temporary differences.  Significant judgment is required in assessing future earnings trends and the timing of reversals of temporary differences.  Management’s evaluation is based on current tax laws as well as management’s expectations of future performance.



Management expects that our adherence to the required accounting guidance may result in increased volatility in quarterly and annual effective income tax rates because of changes in judgment or measurement including changes in actual and forecasted income before taxes, tax laws and regulations, and tax planning strategies.



Other-Than-Temporary Impairment of Investment Securities



Management systematically evaluates securities for impairment on a quarterly basis.  Based upon application of accounting guidance for subsequent measurement in ASC Topic 320, Investments – Debt and Equity Securities (Section 320-10-35), management assesses whether (a) the Corporation has the intent to sell a security being evaluated and (b) it is more likely than not that the Corporation will be required to sell the security prior to the anticipated recovery of any decline in fair value.  If neither applies, then any decline in the fair value below the security’s cost that is considered an other-than-temporary decline is split into two components.  The first is the loss attributable to declining credit quality.  Credit losses are recognized in earnings as realized losses in the period in which the impairment determination is made.  The second component consists of all other losses, which are recognized in other comprehensive loss.  In estimating OTTI losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) adverse conditions specifically related to the security, an industry, or a geographic area, (3) the historic and implied volatility of the fair value of the security, (4) changes in the rating of the security by a rating agency, (5) recoveries or additional declines in fair value subsequent to the balance sheet date, (6) failure of the issuer of the security to make scheduled interest or principal payments, and (7) the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future.  Management also monitors cash flow projections for securities that are considered beneficial interests under the guidance of ASC Subtopic 325-40, Investments – Other – Beneficial Interests in Securitized Financial Assets, (ASC Section 325-40-35).  This process is described more fully in the Investment Securities section of the Consolidated Balance Sheet Review. 



Fair Value of Investments



We have determined the fair value of our investment securities in accordance with the requirements of ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements required under other accounting pronouncements.  The Corporation measures the fair market values of its investments based on the fair value hierarchy established in Topic 820.  The determination of fair value of investments and other assets is discussed further in Note 8 to the consolidated financial statements presented elsewhere in this report.



Pension Plan Assumptions



Our pension plan costs are calculated using actuarial concepts, as discussed within the requirements of ASC Topic 715, Compensation – Retirement Benefits.  Pension expense and the determination of our projected pension liability are based upon two critical assumptions: (a) the discount rate; and (b) the expected return on plan assets.  We evaluate each of these critical assumptions annually.  Other assumptions impact the determination of pension expense and the projected liability including the primary employee demographics, such as retirement patterns, employee turnover, mortality rates, and estimated employer compensation increases.  These factors, along with the critical assumptions, are carefully reviewed by management each year in consultation with our pension plan consultants and actuaries.  Further information about our pension plan assumptions, the plan’s funded status, and other plan information is included in Note 11 to the consolidated financial statements presented elsewhere in this report.    

 

35


 

 

Response to COVID-19



Protecting the health, safety, protection and financial well-being of our associates and customers was and continues to be our goal as we quickly adapted to COVID-19. 



The following actions were implemented from our well-designed and tested Business Continuity Plan:



·

Notified our shareholders and customers in early March as to our enhanced measures to protect our associates and customers



·

Suspended all business travel, reduced all face to face meetings with outside vendors and customers, and requested all associates postpone personal travel outside of their market areas



·

Implemented plans in mid-March for all eligible associates to work remotely via our Virtual Private Network (“VPN”); utilized Skype and Microsoft teams for internal communication



·

Implemented a Pandemic Pay Policy for associates who are unable to work for COVID-19 related reasons, including those who need to care for family members and school children



·

Increased cleaning and disinfecting services in all physical locations



·

On March 19, communicated the closure of our branch lobbies and promoted the use of drive up facilities as well as our robust digital banking platform



·

Regular and up-to-date communication:



o

Daily COVID-19 update calls with internal Pandemic Team

o

Daily emails to all associates with international, national and state specific updates

o

Regularly updated website with helpful links to keep our customers well-informed at www.mybank.com



·

Relieved the financial pressure for customers:



o

Waived certificates of deposit early withdrawal penalties and overdraft fees for non-sufficient funds

o

Positive pay/Treasury Management fees temporarily waived for new customer signup for fraud prevention

o

Implemented loan modifications and deferral programs for eligible consumer and commercial loan customers experiencing hardships; See Note 2 for more details

o

Temporarily suspended repossession and foreclosure activity

o

Relentlessly processed applications to provide access to our community-oriented business owners for the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”)



Paycheck Protection Program



The U.S. Government’s Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) established the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) which provides small businesses with resources to maintain payroll, hire back employees who may have been laid off, and to cover applicable overhead expenses.  We acted expeditiously to prepare our associates so they could guide our customers on the proper procedures necessary to enable them to take advantage of this program.  We developed an SBA PPP specific information site within our website that provided detailed information, links and materials for eligible customers to access.  Internally, we reallocated resources to review, process and data enter customer applications, working tirelessly over extended hours to provide access to as many local business owners as possible.   We were able to fund 428 loan applications for approximately $111.0 million from the first tranche of PPP designated funds.  Congress allocated additional funding to the program on April 23, 2020.  Due to our advance preparation and software implementation, we were able to quickly gain approval for an additional 492 loan applications for approximately $29.0 million thru May 1, 2020.  In total, we have gained approval for over $140 million dollars to 920 small business, protecting in excess of 16,000 jobs.  Approximately 73% of the loans were under $100,000 in size and approximately 65% of the businesses receiving the loans employed less than 10 employees.  We will continue to provide access to the PPP and process applications for as long as the PPP is open and funds are available so that we can assist as many small business owners in our markets as possible.    These loans are 100% guaranteed by the SBA, have up to a two year maturity, provide for a six-month deferral period, and have an interest rate of 1%.  These loans may be forgiven by the SBA if the borrower meets certain conditions, including by using at least 75% of the loan proceeds for payroll costs.  The SBA also established processing fees from 1% to 5%, depending on the loan amount.  We anticipate receiving approximately $3.5 million in fees.



In April 2020, the Bank established eligibility to participate in the Paycheck Protection Program Liquidity Facility (“PPPLF”) which was established by Congress and administered by the Federal Reserve Bank.  This facility uses the SBA guaranteed PPP loans as

 

36


 

 

collateral, offering 100% collateral coverage with no recourse to the Bank. First United’s Board of Directors (the “Board”) and management feel it is prudent to maintain our existing liquidity facilities available for our contingency funding plan given the current economic conditions.   The majority of the PPP loan disbursements, which were all subsequent to quarter end, have been to internal, non-interest-bearing accounts awaiting use by borrowers.  As a result, we have not yet accessed the PPPLF, but are prepared to utilize the fund when management determines the timing is appropriate.



Liquidity Sources



Management has reviewed its Liquidity Contingency Funding Plan in preparation of funding needs as it relates to the COVID-19 pandemic.  As of March 31, 2020, the Corporation had approximately $115.0 million in unsecured lines of credit with its correspondent banks, $2.1 million with the Federal Reserve Discount Window, and approximately $158.2 million of secured borrowings with the Federal Home Loan Bank of Atlanta.  Additionally, the Corporation has access to the brokered certificates of deposit market.



As noted above, the Corporation is eligible to access the PPPLF when it is deemed appropriate.



Capital 



The Corporation’s and the Bank’s capital ratios are strong, and both institutions are considered to be well-capitalized by applicable regulatory measures. 

 

37


 

 

SELECTED FINANCIAL DATA



The following table sets forth certain selected financial data for the three-month periods ended March 31, 2020 and 2019 and is qualified in its entirety by the detailed information and unaudited financial statements, including the notes thereto, included elsewhere in this quarterly report.







 

 

 

 

 

 



 

 

 

 

 

 



 

As of or for the three months ended



 

March 31,



 

2020

 

2019

Per Share Data

 

 

 

 

 

 

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

 

 

 

 

 

 

Return on Average Assets (a)

 

 

0.49% 

 

 

0.91% 

Return on Average Equity (a)

 

 

5.62% 

 

 

10.49% 

Average Equity to Average Assets

 

 

8.69% 

 

 

8.68% 



Note: (a) Annualized             



RESULTS OF OPERATIONS



Overview



Consolidated net income was $1.8 million for the quarter ended March 31, 2020, compared to $3.2 million for 2019.  Basic and diluted net income per share for the first three months of 2020 were both $.25, compared to basic and diluted net income per share of $.44 for the same period of 2019, a 43% decrease. The decrease in earnings was due to an increase in the provision for loan losses of $2.3 million and a $0.3 million increase in other operating expenses, offset by an increase in net interest income of $0.5 million, a decrease in income tax expense of $0.4 million, and a slight increase of $0.3 million in other operating income and gains.  The increase in provision expense for the first quarter of 2020 was due to the uncertainty of the economic environment related to the COVID-19 health crisis.  While we believe that our borrowers, both consumer and commercial, will be negatively impacted, the extent of this impact is unknown and very uncertain. Accordingly, we believe it was prudent to adjust qualitative factors to increase our first quarter provision expense to account for the rapidly declining economic conditions and the inherent effects on our loan portfolio. Of the $2.7 million expense for the quarter, $2.4 million is related to qualitative factor adjustments and $.3 million is related to loan growth.  The net interest margins, on a fully tax-equivalent (“FTE”) basis, were stable for the quarters ended March 31, 2020 and 2019 at 3.69% and 3.72%, respectively. 

 

The provision for loan losses was $2.7 million for the three-month period ended March 31, 2020 and $0.3 million for the three-month period ended March 31, 2019The increase in provision expense for the first quarter of 2020 was due to the uncertainty of the economic environment related to the COVID-19 health crisis.  Of the $2.7 million expense for the quarter, $2.4 million is related to qualitative factor adjustments and $0.3 million is related to loan growth.



Net interest income increased $0.5 million during the first three months of 2020 over the same period in 2019.  Comparing the three-months ended March 31, 2020 to the same period of 2019, the increase in interest income was due to a $0.7 million increase in interest and fees on loans.  The increase in interest and fees on loans was due primarily to an increase in average balances of $39.2 million related to the loan growth in the fourth quarter of 2019.  The rate earned on the loan portfolio increased slightly, by 2 basis points, despite the significant decline in the rate environment over the past year.  The average balance of the investment portfolio decreased by $9.2 million due primarily to calls in the portfolio.  Excess cash balances attributable to deposit growth were invested at the lower Fed Funds rate which negatively offset interest income for the quarter ended March 31, 2020.



Interest expense on our interest-bearing liabilities remained flat during the quarter ended March 31, 2020 when compared to 2019 due to continued rate reductions on our deposit products in response to the declining rate environment, particularly our money market products.  With approximately 75% of our deposit portfolio adjustable, we can respond quickly to declining rates. Average growth of $24.1 million in our non-interest bearing accounts offset the higher interest expense and allowed continued control of our cost of deposits.



Other operating income, including gains, increased $0.3 million for the quarter ended March 31, 2020 when compared to 2019.  The increase was attributable to the $0.1 million increase in Trust and brokerage income despite the significant decline in market values in the latter part of March.  Trust fees are directly impacted by changes in market value. At March 31, 2020, assets under management

 

38


 

 

in the Trust Department totaled $821.4 million as compared to $864.8 million at March 31, 2019.  We believe market values will recover but anticipate trust department income may be reduced for the remainder of 2020.  Debit card income remained flat for the quarter ended March 31, 2020 when compared to the same period of 2019.  Service charge income increased $0.2 million for the quarter ended March 31, 2020 when compared to the same period of 2019, as we experienced growth in fee income on our new YouFirst deposit account package.



Other operating expenses increased slightly by $0.3 million for the quarter ended March 31, 2020 when compared to the same period of 2019.  Salaries and benefits decreased $0.3 million due primarily to the reduced headcount as a result of the voluntary separation program implemented in the fourth quarter of 2019 and reduced life and health insurance costs.  These reductions offset the annual merit increases awarded to our associates in April 2019.  FDIC premiums decreased $0.1 million due to a credit received on our quarterly assessments. Equipment, occupancy and technology expenses increased $0.2 million when compared to 2019.  Professional services increased $0.5 million as a result of increased legal and professional expenses.  Other miscellaneous expenses remained flat when compared to 2019 due to our continued focus on expense control.  Increased consulting, fraud expenses, Visa processing fees, and investor relations expense were offset by reductions in schools and seminars, dues and licenses, office supplies, contract labor, business related meals and other employee benefits expenses.



Net Interest Income



Net interest income is our largest source of operating revenue.  Net interest income is the difference between the interest that we earn on our interest-earning assets and the interest expense we incur on our interest-bearing liabilities.  For analytical and discussion purposes, net interest income is adjusted to a FTE basis to facilitate performance comparisons between taxable and tax-exempt assets by increasing tax-exempt income by an amount equal to the federal income taxes that would have been paid if this income were taxable at the statutorily applicable rate.  This is a non-GAAP disclosure and management believes it is not materially different than the corresponding GAAP disclosure.



The table below summarizes net interest income for the three months ended March 31, 2020 and 2019.







 

 

 

 

 

 

 

 

 



 

GAAP

 

 

Non-GAAP - FTE



Three Months Ended

 

 

Three Months Ended

(Dollars in thousands)

 

2020

 

2019

 

 

2020

 

2019

Interest income

$

14,616 

$

14,072 

 

$

14,839 

$

14,305 

Interest expense

 

2,729 

 

2,726 

 

 

2,729 

 

2,726 

Net interest income

$

11,887 

$

11,346 

 

$

12,110 

$

11,579 

Net interest margin %

 

3.66% 

 

3.65% 

 

 

3.69% 

 

3.72% 



 

39


 

 

The following table sets forth the average balances, net interest income and expense, and average yields and rates of our interest-earning assets and interest-bearing liabilities for the three-month periods ended March 31, 2020 and 2019:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended



 

March 31,



 

2020

 

2019

(dollars in thousands)

 

Average
Balance

 

Interest

 

Average
Yield/Rate

 

Average
Balance

 

Interest

 

Average
Yield/Rate

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

1,045,820 

 

$

12,856 

 

4.94% 

 

$

1,006,612 

 

$

12,203 

 

4.92% 

Investment Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Taxable

 

 

197,115 

 

 

1,308 

 

2.67% 

 

 

204,047 

 

 

1,467 

 

2.92% 

    Non taxable

 

 

25,417 

 

 

466 

 

7.37% 

 

 

27,654 

 

 

500 

 

7.33% 

    Total

 

 

222,532 

 

 

1,774 

 

3.21% 

 

 

231,701 

 

 

1,967 

 

3.22% 

Federal funds sold

 

 

45,118 

 

 

139 

 

1.24% 

 

 

17,070 

 

 

45 

 

1.07% 

Interest-bearing deposits with other banks

 

 

643 

 

 

 

3.75% 

 

 

1,479 

 

 

 

1.37% 

Other interest earning assets

 

 

4,416 

 

 

64 

 

5.83% 

 

 

4,744 

 

 

85 

 

7.27% 

Total earning assets

 

 

1,318,529 

 

 

14,839 

 

4.53% 

 

 

1,261,606 

 

 

14,305 

 

4.60% 

Allowance for loan losses

 

 

(12,715)

 

 

 

 

 

 

 

(11,314)

 

 

 

 

 

Non-earning assets

 

 

138,642 

 

 

 

 

 

 

 

133,874 

 

 

 

 

 

Total Assets

 

$

1,444,456 

 

 

 

 

 

 

$

1,384,166 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand deposits

 

$

163,433 

 

$

184 

 

0.45% 

 

$

160,085 

 

$

129 

 

0.33% 

Interest-bearing money markets

 

 

271,581 

 

 

503 

 

0.74% 

 

 

253,451 

 

 

505 

 

0.81% 

Savings deposits

 

 

161,067 

 

 

62 

 

0.15% 

 

 

158,467 

 

 

73 

 

0.19% 

Time deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Less than $100k

 

 

109,419 

 

 

416 

 

1.53% 

 

 

103,695 

 

 

315 

 

1.23% 

    $100k or more

 

 

140,732 

 

 

705 

 

2.01% 

 

 

150,293 

 

 

749 

 

2.02% 

Short-term borrowings

 

 

45,278 

 

 

28 

 

0.25% 

 

 

48,963 

 

 

103 

 

0.85% 

Long-term borrowings

 

 

100,929 

 

 

831 

 

3.31% 

 

 

100,929 

 

 

852 

 

3.42% 

Total interest-bearing liabilities

 

 

992,439 

 

 

2,729 

 

1.11% 

 

 

975,883 

 

 

2,726 

 

1.13% 

Non-interest-bearing deposits

 

 

289,634 

 

 

 

 

 

 

 

265,494 

 

 

 

 

 

Other liabilities

 

 

36,866 

 

 

 

 

 

 

 

22,630 

 

 

 

 

 

Shareholders’ Equity

 

 

125,517 

 

 

 

 

 

 

 

120,159 

 

 

 

 

 

Total Liabilities and Shareholders’ Equity

 

$

1,444,456 

 

 

 

 

 

 

$

1,384,166 

 

 

 

 

 

Net interest income and spread

 

 

 

 

$

12,110 

 

3.42% 

 

 

 

 

$

11,579 

 

3.47% 

Net interest margin

 

 

 

 

 

 

 

3.69% 

 

 

 

 

 

 

 

3.72% 



Note: 

(1)

The above table reflects the average rates earned or paid stated on an FTE basis assuming a 21% tax rate for 2020 and 2019.  Non-GAAP interest income on a fully taxable equivalent was $223 and $233, respectively.

(2)

Net interest margin is calculated as net interest income divided by average earning assets.

(3)

The average yields on investments are based on amortized cost.



Net interest income, on a non-GAAP, FTE basis, increased $0.5 million (4.6%) during the quarter ended March 31, 2020 when compared to the quarter ended March 31, 2019 due to a $0.5 million (3.7%) increase in interest income.  Interest expense remained stable when comparing the first quarter of 2020 to the first quarter of 2019.  The net interest margin for the quarter ended March 31, 2020 was 3.69%, compared to 3.72% for the quarter ended March 31, 2019, declining only 3 basis points despite a 2.25% drop in the Fed Funds rates year over year.

 

Comparing the three-months ended March 31, 2020 to the same period of 2019, the increase in interest income was due to a $0.7 million increase in interest and fees on loans.  The increase in interest and fees on loans was due primarily to an increase in average balances of $39.2 million related to the loan growth in the fourth quarter of 2019.  The rate earned on the loan portfolio increased slightly, by 2 basis points, despite the significant decline in the rate environment over the past year.  The average balance of the investment portfolio decreased by $9.2 million due primarily to calls in the portfolio.  Excess cash balances attributable to deposit growth were invested at the lower Fed Funds rate which negatively offset interest income for the quarter ended March 31, 2020.

 

 

40


 

 

Interest expense on our interest-bearing liabilities remained flat during the quarter ended March 31, 2020 when compared to 2019 due to continued rate reductions on our deposit products in response to the declining rate environment, particularly our money market products.  With approximately 75% of our deposit portfolio adjustable, we can respond quickly to declining rates. Average growth of $24.1 million in our non-interest bearing accounts offset the higher interest expense and allowed continued control of our cost of deposits.



The following table sets forth an analysis of volume and rate changes in interest income and interest expense for our average interest-earning assets and average interest-bearing liabilities for the three-month periods ended March 31, 2020 and 2019:







 

 

 

 

 

 

 

 

 



 

2020 Compared to 2019

(in thousands and tax equivalent basis)

 

Volume

 

Rate

 

Net

Interest Income:

 

 

 

 

 

 

 

 

 

Loans

 

$

482 

 

$

171 

 

$

653 

Taxable Investments

 

 

(51)

 

 

(108)

 

 

(159)

Non-taxable Investments

 

 

(41)

 

 

 

 

(34)

Federal funds sold

 

 

75 

 

 

19 

 

 

94 

Interest-bearing deposits

 

 

(3)

 

 

 

 

Other interest earning assets

 

 

(6)

 

 

(15)

 

 

(21)

Total interest income

 

 

456 

 

 

78 

 

 

534 

Interest Expense:

 

 

 

 

 

 

 

 

 

Interest-bearing demand deposits

 

 

 

 

52 

 

 

55 

Interest-bearing money markets

 

 

37 

 

 

(39)

 

 

(2)

Savings deposits

 

 

 

 

(12)

 

 

(11)

Time deposits less than $100

 

 

18 

 

 

83 

 

 

101 

Time deposits $100 or more

 

 

(48)

 

 

 

 

(44)

Short-term borrowings

 

 

(8)

 

 

(67)

 

 

(75)

Long-term borrowings

 

 

 

 

(21)

 

 

(21)

Total interest expense

 

 

 

 

 

 

Net interest income

 

$

453 

 

$

78 

 

$

531 



Note: 

(1)

The change in interest income/expense due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.





 

41


 

 

Provision for Loan Losses



The provision for loan losses was $2.7 million for the three-month period ended March 31, 2020 and $0.3 million for the three-month period ended March 31, 2019The increase in provision expense for the first quarter of 2020 was due to the uncertainty of the economic environment related to the COVID-19 health crisis.  While we believe that our borrowers, both consumer and commercial, will be negatively impacted by the COVID-19 pandemic, the extent of this impact is unknown and very uncertain. Accordingly, we believe it was prudent to adjust qualitative factors to increase our first quarter provision expense to account for the rapidly declining economic conditions and the inherent effects on our loan portfolio. Of the $2.7 million expense for the quarter, $2.4 million is related to qualitative factor adjustments and $0.3 million is related to loan growth.



Other Operating Income



The following table shows the major components of other operating income for the three-month periods ended March 31, 2020 and 2019, exclusive of net gains: 







 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

Income as % of
Total Other Operating Income



 

Three Months Ended



 

March 31,



 

2020

 

2019

Service charges on deposit accounts

 

$

615 

 

15% 

 

$

519 

 

15% 

Other service charges

 

 

290 

 

7% 

 

 

208 

 

6% 

Trust department

 

 

1,753 

 

44% 

 

 

1,715 

 

45% 

Debit card income

 

 

634 

 

16% 

 

 

600 

 

16% 

Bank owned life insurance

 

 

303 

 

8% 

 

 

303 

 

8% 

Brokerage commissions

 

 

277 

 

7% 

 

 

238 

 

7% 

Other income

 

 

136 

 

3% 

 

 

124 

 

3% 



 

$

4,008 

 

100% 

 

$

3,707 

 

100% 



Other Operating Expenses



The composition of other operating expenses for the three-month periods ended March 31, 2020 and 2019 is illustrated in the following table:







 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

Expense as % of
Total Other Operating Expenses



 

Three Months Ended



 

March 31,



 

2020

 

2019

Salaries and employee benefits

 

$

5,923 

 

54% 

 

$

6,218 

 

56% 

FDIC premiums

 

 

43 

 

0% 

 

 

111 

 

1% 

Equipment

 

 

926 

 

8% 

 

 

883 

 

7% 

Occupancy

 

 

747 

 

7% 

 

 

712 

 

6% 

Data processing

 

 

1,052 

 

10% 

 

 

941 

 

9% 

Marketing

 

 

130 

 

1% 

 

 

68 

 

1% 

Professional services

 

 

723 

 

7% 

 

 

204 

 

3% 

Contract labor

 

 

151 

 

1% 

 

 

156 

 

2% 

Line rentals

 

 

217 

 

2% 

 

 

217 

 

2% 

Other real estate owned

 

 

 —

 

0% 

 

 

143 

 

2% 

Other

 

 

1,093 

 

10% 

 

 

1,037 

 

11% 



 

$

11,005 

 

100% 

 

$

10,690 

 

100% 



Provision for Income Taxes



In reporting interim financial information, income tax provisions should be determined under the procedures set forth in ASC Topic 740, Income Taxes (Section 740-270-30).  This guidance provides that at the end of each interim period, an entity should make its best estimate of the effective tax rate expected to be applicable for the full fiscal year.  The rate so determined should be used in providing for income taxes on a current year-to-date basis.  The effective tax rate should reflect anticipated investment tax credits, capital gains rates, and other available tax planning alternatives.  In arriving at this effective tax rate, however, no effect should be included for the tax related to significant, unusual or extraordinary items that will be separately reported or reported net of their related tax effect in reports for the interim period or for the fiscal year. 



 

42


 

 

The effective income tax rate as a percentage of income for the quarter ended March 31, 2020 increased from 21.8% to 22.9% when compared to the same period of 2019, primarily due to the reduction in tax exempt income from the investment portfolio.



FINANCIAL CONDITION



Balance Sheet Overview



Total assets at March 31, 2020 remained stable at $1.4 billion, with an increase of $19.5 million from December 31, 2019.  During the quarter, cash and interest-bearing deposits in other banks increased $22.0 million, the investment portfolio decreased $3.1 million and gross loans increased $1.6 million.  The increase in cash was due to strong deposit growth, cash flow from calls on the investment portfolio, commercial loan payoffs early in the quarter as well as refinances of balances in our mortgage portfolio.   Other real estate owned (“OREO”) balances remained stable as there was minimal activity in this portfolio during the first quarter.  Other assets decreased by $0.9 million. Total liabilities increased $26.9 million.  This increase was attributable to the strong deposit growth of $30.4 million in the first quarter of 2020, offset by a decline in short-term borrowings of $9.3 million. The deposit growth during the first quarter was due to increased relationship balances for customers adding new funds to our insured products.  Our Treasury Management overnight investment sweep decreased $9.3 million as municipalities utilized their existing cash for working capital needs during these unprecedented times. Other liabilities increased $5.9 million due to the change in the market value of the pension plan assets.  Total shareholders’ equity decreased $7.4 million in the first quarter of 2020.  This decrease was due to the increase in accumulated other comprehensive loss related to a decline in the market values of our pension plan assets, the stock repurchase of $2.7 million, and the payment of dividends of $0.9 million in the first quarter of 2020.



Loan Portfolio



The following table presents the composition of our loan portfolio at the dates indicated:







 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

March 31, 2020

 

December 31, 2019

Commercial real estate

 

$

337,688 

 

32% 

 

$

335,504 

 

31% 

Acquisition and development

 

 

121,333 

 

12% 

 

 

117,890 

 

12% 

Commercial and industrial

 

 

123,509 

 

12% 

 

 

122,352 

 

11% 

Residential mortgage

 

 

434,969 

 

41% 

 

 

440,173 

 

43% 

Consumer

 

 

36,233 

 

3% 

 

 

36,199 

 

3% 

  Total Loans

 

$

1,053,732 

 

100% 

 

$

1,052,118 

 

100% 



Outstanding loans remained stable at $1.1 billion at March 31, 2020 when compared to December 31, 2019.  Commercial real estate (“CRE”) loans increased $2.2 million due to expansion of customer relationships as well as an increase in small business loans.  Acquisition and development (“A&D”) loans increased $3.4 million as new production offset amortization and payoffs.   Commercial and industrial (“C&I”) loans increased slightly by $1.2 million.  The growth in the commercial portfolios was offset by a decline in residential mortgage loans of $5.2 million as the customer preferred longer-term fixed rate loans were sold to Fannie Mae. Given the current low-rate interest environment, management prefers utilizing the secondary market at this time. The consumer loan portfolio remained stable during the first quarter.  We have not seen an increase in usage on lines of credits to date, but anticipate that these lines will be utilized for cash needs in these uncertain times related to the COVID-19 pandemic.



Commercial loan production for the first quarter of 2020 was approximately $35.0 million of new money, most of which was construction production that has not yet funded.  Amortization and payoffs were approximately $15.0 million in the first quarter.  Despite a decline in balances, the mortgage department had record production of approximately $23.0 million in the first quarter of 2020.  While both in-house and secondary market products are utilized, the longer-term fixed rate loans are primarily being sold to Fannie Mae. We continue to book first time homebuyer, adjustable rate and non-conforming jumbo mortgages to our portfolio. The mortgage pipeline remains strong at $32.0 million.  We anticipate reduced loan demand for the remainder of 2020, which may impact the net interest margin.

 

43


 

 

Risk Elements of Loan Portfolio



The following table presents the risk elements of our loan portfolio at the dates indicated.  Management is not aware of any potential problem loans other than those listed in this table or discussed below.









 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

March 31,
2020

 

% of
Applicable
Portfolio

 

December 31,
2019

 

% of
Applicable
Portfolio

Non-accrual loans:

 

 

 

 

 

 

 

 

 

 

  Commercial real estate

 

$

885 

 

0.26% 

 

$

680 

 

0.20% 

  Acquisition and development

 

 

8,158 

 

6.72% 

 

 

8,058 

 

6.80% 

  Commercial and industrial

 

 

 —

 

0.00% 

 

 

30 

 

0.00% 

  Residential mortgage

 

 

1,966 

 

0.45% 

 

 

2,077 

 

0.50% 

  Consumer

 

 

 

0.01% 

 

 

 

0.00% 

    Total non-accrual loans

 

$

11,012 

 

1.05% 

 

$

10,849 

 

1.03% 

Accruing Loans Past Due 90 days or more:

 

 

 

 

 

 

 

 

 

 

  Commercial real estate

 

$

13 

 

 

 

$

 —

 

 

  Acquisition and development

 

 

134 

 

 

 

 

135 

 

 

  Residential mortgage

 

 

476 

 

 

 

 

536 

 

 

  Consumer

 

 

 —

 

 

 

 

54 

 

 

    Total loans past due 90 days or more

 

$

623 

 

 

 

$

725 

 

 

Total non-accrual and accruing loans past due
  90 days or more

 

$

11,635 

 

 

 

$

11,574 

 

 

Restructured Loans (TDRs):

 

 

 

 

 

 

 

 

 

 

  Performing

 

$

3,784 

 

 

 

$

3,842 

 

 

  Non-accrual (included above)

 

 

319 

 

 

 

 

324 

 

 

    Total TDRs

 

$

4,103 

 

 

 

$

4,166 

 

 

Other real estate owned

 

$

4,040 

 

 

 

$

4,127 

 

 

Impaired loans without a valuation allowance

 

$

6,135 

 

 

 

$

5,974 

 

 

Impaired loans with a valuation allowance

 

 

9,139 

 

 

 

 

9,200 

 

 

  Total impaired loans

 

$

15,274 

 

 

 

$

15,174 

 

 

Valuation allowance related to impaired loans

 

$

2,233 

 

 

 

$

2,174 

 

 



Performing loans considered to be impaired (including performing troubled debt restructurings, or TDRs), as defined and identified by management, amounted to $4.3 million at March 31, 2020 and December 31, 2019.  Loans are identified as impaired when, based on current information and events, management determines that we will be unable to collect all amounts due according to contractual terms.  These loans consist primarily of A&D loans and CRE loans.  The fair values are generally determined based upon independent third-party appraisals of the collateral or discounted cash flows based upon the expected proceeds.  Specific allocations have been made where management believes there is insufficient collateral to repay the loan balance if liquidated and there is no secondary source of repayment available.



 

44


 

 

The following table presents the details of impaired loans that are TDRs by class at March 31, 2020 and December 31, 2019:





 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

March 31, 2020

 

December 31, 2019

(in thousands)

 

Number of
Contracts

 

Recorded
Investment

 

Number of
Contracts

 

Recorded
Investment

Performing

 

 

 

 

 

 

 

 

 

 

 Commercial real estate

 

 

 

 

 

 

 

 

 

 

    Non owner-occupied

 

 

$

232 

 

 

$

235 

    All other CRE

 

 

 

2,235 

 

 

 

2,265 

 Acquisition and development

 

 

 

 

 

 

 

 

 

 

    1-4 family residential construction

 

 

 

285 

 

 

 

291 

    All other A&D

 

 

 

218 

 

 

 

220 

 Commercial and industrial

 

 —

 

 

 —

 

 —

 

 

 —

 Residential mortgage

 

 

 

 

 

 

 

 

 

 

    Residential mortgage – term

 

 

 

814 

 

 

 

831 

    Residential mortgage – home equity

 

 —

 

 

 —

 

 —

 

 

 —

 Consumer

 

 —

 

 

 —

 

 —

 

 

 —

       Total performing

 

13 

 

$

3,784 

 

13 

 

$

3,842 

Non-accrual

 

 

 

 

 

 

 

 

 

 

 Commercial real estate

 

 

 

 

 

 

 

 

 

 

    Non owner-occupied

 

 —

 

$

 —

 

 —

 

$

 —

    All other CRE

 

 —

 

 

 —

 

 —

 

 

 —

 Acquisition and development

 

 

 

 

 

 

 

 

 

 

    1-4 family residential construction

 

 —

 

 

 —

 

 —

 

 

 —

    All other A&D

 

 —

 

 

 —

 

 —

 

 

 —

 Commercial and industrial

 

 —

 

 

 —

 

 —

 

 

 —

 Residential mortgage

 

 

 

 

 

 

 

 

 

 

    Residential mortgage – term

 

 

 

319 

 

 

 

324 

    Residential mortgage – home equity

 

 —

 

 

 —

 

 —

 

 

 —

 Consumer

 

 —

 

 

 —

 

 —

 

 

 —

       Total non-accrual

 

 

 

319 

 

 

 

324 

       Total TDRs

 

15 

 

$

4,103 

 

15 

 

$

4,166 



The level of TDRs remained stable at $4.1 million at March 31, 2020 when compared to December 31, 2019, with a slight reduction due to payments made during the quarter.  There were no new TDRs during the first quarter of 2020.



Allowance and Provision for Loan Losses 



The ALL is maintained to absorb losses from the loan portfolio.  The ALL is based on management’s continuing evaluation of the quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.



The ALL is also based on estimates, and actual losses will vary from current estimates.  These estimates are reviewed quarterly, and as adjustments, either positive or negative, become necessary, a corresponding increase or decrease is made in the ALL.  The methodology used to determine the adequacy of the ALL is consistent with prior years.  An estimate for probable losses related to unfunded lending commitments, such as letters of credit and binding but unfunded loan commitments is also prepared.  This estimate is computed in a manner similar to the methodology described above, adjusted for the probability of actually funding the commitment.



 

45


 

 

The following table presents a summary of the activity in the ALL for the three months ended March 31:







 

 

 

 

 

 



 

 

 

 

 

 

(dollars in thousands)

 

2020

 

2019

Balance, January 1

 

$

12,537 

 

$

11,047 

Charge-offs:

 

 

 

 

 

 

Commercial real estate

 

 

 —

 

 

 —

Acquisition and development

 

 

(15)

 

 

(29)

Commercial and industrial

 

 

(101)

 

 

 —

Residential mortgage

 

 

(98)

 

 

(12)

Consumer

 

 

(132)

 

 

(68)

Total charge-offs

 

 

(346)

 

 

(109)

Recoveries:

 

 

 

 

 

 

Commercial real estate

 

 

66 

 

 

29 

Acquisition and development

 

 

14 

 

 

12 

Commercial and industrial

 

 

15 

 

 

51 

Residential mortgage

 

 

26 

 

 

108 

Consumer

 

 

46 

 

 

61 

Total recoveries

 

 

167 

 

 

261 

Net credit (charge-offs)/recoveries

 

 

(179)

 

 

152 

Provision for loan losses

 

 

2,654 

 

 

349 

Balance at end of period

 

$

15,012 

 

$

11,548 



 

 

 

 

 

 

Allowance for loan losses to gross loans outstanding (as %)

 

 

1.42% 

 

 

1.15% 

Net credit (charge-offs)/recoveries to average loans outstanding during the period, annualized (as %)

 

 

-0.07%

 

 

0.06% 



The ALL was $15.0 million at March 31, 2020 compared to $12.5 million at December 31, 2019, an increase of 20% that primarily resulted from the adjustment to qualitative factors associated with the negative trend in economic outlook directly related to COVID-19.  The provision for loan losses was $2.7 million for the quarter ended March 31, 2020 and $0.3 million for the quarter ended March 31, 2019.  Net charge-offs of $0.2 million were recorded for the first three months of 2020, compared to net recoveries of $0.2 million for 2019. Absent the COVID-19 related factor adjustments attributable to $2.4 million in provision expense for the quarter, the provision expense would have been approximately $0.3 million. The ratio of the ALL to loans outstanding was 1.42% at March 31, 2020 and 1.15% at March 31, 2019. 



The ratio of net charge offs to average loans for the quarter ended March 31, 2020 was an annualized 0.07%, compared to net recoveries to average loans of 0.06% for the quarter ended March 31, 2019.  The CRE portfolio had an annualized net recovery rate of .08% as of March 31, 2020, compared to a net recovery rate of 0.04% as of March 31, 2019.  The A&D loans had an annualized net charge-off rate of 0.00% as of March 31, 2020, compared to a net charge-off rate of 0.06% as of March 31, 2019.  The C&I portfolio had net charge-offs to average loans of 0.28% as of March 31, 2020, compared to a net recovery rate of 0.18% as of March 31, 2019.  The residential mortgage ratios were a net charge-off rate of 0.07% as of March 31, 2020, compared to a net recovery rate of 0.09% as of March 31, 2019, and the consumer loan ratios were net charge-off rates of 0.95% and 0.08% as of March 31, 2020 and March 31, 2019, respectively.  Our special assets team continues to aggressively collect on charged-off loans.



Management believes that the ALL at March 31, 2020 is adequate to provide for probable losses inherent in our loan portfolio.  Amounts that will be recorded for the provision for loan losses in future periods will depend upon trends in the loan balances, including the composition of the loan portfolio, changes in loan quality and loss experience trends, potential recoveries on previously charged-off loans and changes in other qualitative factors.  Management also applies interest rate risk, collateral value and debt service sensitivity analyses to the Commercial real estate loan portfolio and obtains new appraisals on specific loans under defined parameters to assist in the determination of the periodic provision for loan losses.



Investment Securities



At March 31, 2020, the total amortized cost basis of the available-for-sale investment portfolio was $134.3 million, compared to a fair value of $130.8 million.  Unrealized gains and losses on securities available-for-sale are reflected in accumulated other comprehensive loss, a component of shareholders’ equity.  The amortized cost basis of the held to maturity portfolio was $91.4 million, compared to a fair value of $98.3 million. 



 

46


 

 

The following table presents the composition of our securities portfolio at amortized cost and fair values at the dates indicated:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

March 31, 2020

 

December 31, 2019



 

Amortized

 

Fair Value

 

FV as % 

 

Amortized

 

Fair Value

 

FV as % 

(dollars in thousands)

 

Cost

 

(FV)

 

of Total

 

Cost

 

(FV)

 

of Total

Securities Available-for-Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

34,580 

 

$

35,268 

 

27% 

 

$

39,987 

 

$

39,894 

 

30% 

Residential mortgage-backed agencies

 

 

9,945 

 

 

10,147 

 

8% 

 

 

4,917 

 

 

4,900 

 

4% 

Commercial mortgage-backed agencies

 

 

29,210 

 

 

29,670 

 

23% 

 

 

27,634 

 

 

27,764 

 

21% 

Collateralized mortgage obligations

 

 

28,023 

 

 

28,815 

 

22% 

 

 

29,903 

 

 

29,923 

 

23% 

Obligations of state and political subdivisions

 

 

14,108 

 

 

14,512 

 

11% 

 

 

14,124 

 

 

14,470 

 

11% 

Collateralized debt obligations

 

 

18,470 

 

 

12,380 

 

9% 

 

 

18,443 

 

 

14,354 

 

11% 

Total available for sale

 

$

134,336 

 

$

130,792 

 

100% 

 

$

135,008 

 

$

131,305 

 

100% 

Securities Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

16,202 

 

$

16,857 

 

17% 

 

$

16,164 

 

$

16,823 

 

17% 

Residential mortgage-backed agencies

 

 

40,666 

 

 

41,911 

 

43% 

 

 

42,939 

 

 

43,253 

 

43% 

Commercial mortgage-backed agencies

 

 

15,443 

 

 

16,242 

 

16% 

 

 

15,521 

 

 

15,865 

 

16% 

Collateralized mortgage obligations

 

 

2,873 

 

 

3,044 

 

3% 

 

 

3,140 

 

 

3,143 

 

3% 

Obligations of state and political subdivisions

 

 

16,215 

 

 

20,257 

 

21% 

 

 

16,215 

 

 

21,572 

 

21% 

Total held to maturity

 

$

91,399 

 

$

98,311 

 

100% 

 

$

93,979 

 

$

100,656 

 

100% 



Total fair value of investment securities available-for-sale decreased by $0.5 million since December 31, 2019.  At March 31, 2020, the securities classified as available-for-sale included a net unrealized loss of $3.5 million, which represents the difference between the fair value and amortized cost of securities in the portfolio.



As discussed in Note 8 to the consolidated financial statements presented elsewhere in this report, the Corporation measures fair market values based on the fair value hierarchy established in ASC Topic 820, Fair Value Measurements and Disclosures. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Level 3 prices or valuation techniques require inputs that are both significant to the valuation assumptions and are not readily observable in the market (i.e. supported with little or no market activity).  These Level 3 instruments are valued based on both observable and unobservable inputs derived from the best available data, some of which is internally developed, and considers risk premiums that a market participant would require. 



Approximately $118.4 million of the available-for-sale portfolio was valued using Level 2 pricing and had net unrealized gains of $2.5 million at March 31, 2020.  The remaining $12.4 million of the securities available-for-sale represents the entire CDO portfolio, which was valued using significant unobservable inputs (Level 3 assets).  The $6.1 million in net unrealized losses associated with this portfolio relates to 9 pooled trust preferred securities that comprise the CDO portfolio. Net unrealized losses of $4.5 million represent non-credit related OTTI charges on seven of the securities, while $1.6 million of unrealized losses relates to two securities which have had no credit related OTTI. 



 

47


 

 

The following table provides a summary of the trust preferred securities in the CDO portfolio and the credit status of these securities as of March 31, 2020:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 3 Investment Securities Available for Sale

(Dollars in thousands)

Investment Description

 

First United Level 3 Investments

 

Security Credit Status

Deal

 

Class

 

Amortized
Cost

 

Fair
Market
Value

 

Unrealized
Gain/
(Loss)

 

Lower
Credit
Rating

 

Original
Collateral

 

Deferrals/
Defaults
as % of
Original
Collateral

 

Performing
Collateral

 

Collateral
Support

 

Collateral
Support
as % of
Performing
Collateral

 

Number of
Performing
Issuers/
Total
Issuers

Preferred Term Security XVIII*

 

C

$

1,894 

$

1,099 

$

(795)

 

C

 

676,565 

 

14.83% 

 

290,437 

 

19,130 

 

6.59% 

 

41 / 57

Preferred Term Security XVIII

 

C

 

2,717 

 

1,649 

 

(1,068)

 

C

 

676,565 

 

14.83% 

 

290,437 

 

19,130 

 

6.59% 

 

41 / 57

Preferred Term Security XIX*

 

C

 

1,837 

 

1,360 

 

(477)

 

C

 

700,535 

 

5.48% 

 

469,762 

 

31,451 

 

6.70% 

 

50 / 55

Preferred Term Security XIX*

 

C

 

1,095 

 

816 

 

(279)

 

C

 

700,535 

 

5.48% 

 

469,762 

 

31,451 

 

6.70% 

 

50 / 55

Preferred Term Security XIX*

 

C

 

2,529 

 

1,904 

 

(625)

 

C

 

700,535 

 

5.48% 

 

469,762 

 

31,451 

 

6.70% 

 

50 / 55

Preferred Term Security XIX*

 

C

 

1,096 

 

816 

 

(280)

 

C

 

700,535 

 

5.48% 

 

469,762 

 

31,451 

 

6.70% 

 

50 / 55

Preferred Term Security XXII*

 

C-1

 

1,568 

 

1,059 

 

(509)

 

C

 

1,386,600 

 

10.31% 

 

679,548 

 

69,263 

 

10.19% 

 

60 / 74

Preferred Term Security XXII*

 

C-1

 

3,918 

 

2,648 

 

(1,270)

 

C

 

1,386,600 

 

10.31% 

 

679,548 

 

69,263 

 

10.19% 

 

60 / 74

Preferred Term Security XXIII

 

C-1

 

1,816 

 

1,029 

 

(787)

 

C

 

1,467,000 

 

14.79% 

 

713,788 

 

66,514 

 

9.32% 

 

75 / 89



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Level 3 Securities Available for Sale

$

18,470 

$

12,380 

$

(6,090)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Security has been deemed other-than-temporarily impaired and loss has been recognized in accordance with ASC Section 320-10-35.





The terms of the debentures underlying trust preferred securities allow the issuer of the debentures to defer interest payments for up to 20 quarters, and, in such case, the terms of the related trust preferred securities allow their issuers to defer dividend payments for up to 20 quarters.  Some of the issuers of the trust preferred securities in our investment portfolio have defaulted and/or deferred payments ranging from 5.48% to 14.83% of the total collateral balances underlying the securities.  The securities were designed to include structural features that provide investors with credit enhancement or support to provide default protection by subordinated tranches.  These features include over-collateralization of the notes or subordination, excess interest or spread which will redirect funds in situations where collateral is insufficient, and a specified order of principal payments.  There are securities in our portfolio that are under-collateralized, which does represent additional stress on our tranche.  However, in these cases, the terms of the securities require excess interest to be redirected from subordinate tranches as credit support, which provides additional support to our investment.



Management systematically evaluates securities for impairment on a quarterly basis.  Based upon application of ASC Topic 320 (Section 320-10-35), management must assess whether (a) the Corporation has the intent to sell the security and (b) it is more likely than not that the Corporation will be required to sell the security prior to its anticipated recovery.  If neither applies, then declines in the fair value of securities below their cost that are considered other-than-temporary declines are split into two components.  The first is the loss attributable to declining credit quality.  Credit losses are recognized in earnings as realized losses in the period in which the impairment determination is made.  The second component consists of all other losses.  The other losses are recognized in other comprehensive income.  In estimating OTTI charges, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) adverse conditions specifically related to the security, an industry, or a geographic area, (3) the historic and implied volatility of the security, (4) changes in the rating of a security by a rating agency, (5) recoveries or additional declines in fair value subsequent to the balance sheet date, (6) failure of the issuer of the security to make scheduled interest payments, and (7) the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future.  Due to the duration and the significant market value decline in the pooled trust preferred securities held in our portfolio, we performed more extensive testing on these securities for purposes of evaluating whether or not an OTTI has occurred. 



The market for these securities as of March 31, 2020 is not active and markets for similar securities are also not active.  The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which these securities trade and then by a significant decrease in the volume of trades relative to historical levels.  The new issue market is also inactive, as no new CDOs have been issued since 2007.  There are currently very few market participants who are willing to effect transactions in these securities.  The market values for these securities, or any securities other than those issued or guaranteed by the U.S. Department of the Treasury (the “Treasury”), are very depressed relative to historical levels.  Therefore, in the current market, a low market price for a particular bond may only provide evidence of stress in the credit markets in general rather than being an indicator of credit problems with a particular issue.  Given the conditions in the current debt markets and the absence of observable transactions in the secondary and new issue markets, management has determined that (a) the few observable transactions and market quotations that are available are not reliable for the purpose of obtaining fair value at March 31, 2020, (b) an income valuation approach technique (i.e. present value) that maximizes the use of relevant unobservable inputs and minimizes the use of observable inputs will be equally or more representative of fair value than a market approach, and (c) the CDO segment is appropriately classified within Level 3 of the valuation hierarchy because management determined that significant adjustments were required to determine fair value at the measurement date.

 

48


 

 

Management utilizes on an independent third party to prepare both the evaluations of OTTI and the fair value determinations for the CDO portfolio.  Management does not believe that there were any material differences in the OTTI evaluations and pricing between December 31, 2019 and March 31, 2020.



The approach used by the third party to determine fair value involved several steps, which included detailed credit and structural evaluation of each piece of collateral in each bond, projection of default, recovery and prepayment/amortization probabilities for each piece of collateral in the bond, and discounted cash flow modeling. The discount rate methodology used by the third party combines a baseline current market yield for comparable corporate and structured credit products with adjustments based on evaluations of the differences found in structure and risks associated with actual and projected credit performance of each CDO being valued.  Currently, the only active and liquid trading market that exists is for stand-alone trust preferred securities, with a limited market for highly-rated CDO securities that are more senior in the capital structure than the securities in the CDO portfolio.  Therefore, adjustments to the baseline discount rate are also made to reflect the additional leverage found in structured instruments.



Based upon a review of credit quality and the cash flow tests performed by the independent third party, management determined that no securities had credit-related OTTI during the first three months of 2020.   Additionally, there has been no change in the performing collateral, no decline in the percentage of deferrals/defaults to original collateral, and increases in collateral support for each of the positions held by the Corporation.



Deposits



The following table presents the composition of our deposits at the dates indicated:





 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

March 31, 2020

 

December 31, 2019

Non-interest bearing demand deposits:

 

 

 

 

 

 

 

 

 

 

    Retail

 

$

299,961 

 

26% 

 

$

294,649 

 

26% 

Interest-bearing deposits:

 

 

 

 

 

 

 

 

 

 

  Demand

 

 

161,818 

 

14% 

 

 

159,567 

 

14% 

  Money Market:

 

 

 

 

 

 

 

 

 

 

    Retail

 

 

297,616 

 

25% 

 

 

275,007 

 

24% 

Savings deposits

 

 

164,561 

 

14% 

 

 

158,918 

 

14% 

Time deposits less than $100,000:

 

 

 

 

 

 

 

 

 

 

  Retail

 

 

94,611 

 

8% 

 

 

96,198 

 

8% 

Time deposits $100,000 or more:

 

 

 

 

              

 

 

 

 

              

  Retail

 

 

143,827 

 

12% 

 

 

147,692 

 

13% 

  Brokered

 

 

10,000 

 

1% 

 

 

10,000 

 

1% 

    Total Deposits

 

$

1,172,394 

 

100% 

 

$

1,142,031 

 

100% 



Total deposits at March 31, 2020 increased $30.4 million when compared to deposits at December 31, 2019.  During the first quarter of 2020, non-interest-bearing deposits increased $5.3 million. This growth was driven by both our retail and commercial markets. Traditional savings accounts increased $5.6 million, as our Prime Saver product continued to be the savings product of choice.  Total demand deposits increased by $2.3 million and total money market accounts increased by $22.6 million, due primarily to growth in our variable rate Value Money Market account introduced in late 2019.  Time deposits less than $100,000 decreased by $1.5 million and time deposits greater than $100,000 decreased by $3.9 million.  The decline in time deposits greater than $100,000 was primarily related to a local municipality utilizing a maturing certificate of deposit for cash needs during this unprecedented economic environment. 



Borrowed Funds



The following table presents the composition of our borrowings at the dates indicated:





 

 

 

 

 

 



 

 

 

 

 

 

(in thousands)

 

March 31,
2020

 

December 31,
2019

Securities sold under agreements to repurchase

 

$

39,418 

 

$

48,728 

Total short-term borrowings

 

 

39,418 

 

 

48,728 

FHLB advances

 

$

70,000 

 

$

70,000 

Junior subordinated debt

 

 

30,929 

 

 

30,929 

Total long-term borrowings

 

$

100,929 

 

$

100,929 



 

49


 

 

Total short-term borrowings decreased by $9.3 million during the first three months of 2020This decrease is due to the decline in our Treasury Management overnight investment sweep as municipalities utilized their existing cash for working capital needs during these unprecedented times.  Long-term borrowings remained constant during the first three months of 2020.



Liquidity Management



Liquidity is a financial institution’s capability to meet customer demands for deposit withdrawals while funding all credit-worthy loans.  The factors that determine the institution’s liquidity are:



·

Reliability and stability of core deposits;

·

Cash flow structure and pledging status of investments; and

·

Potential for unexpected loan demand.



We actively manage our liquidity position through regular meetings of a sub-committee of executive management, known as the Treasury Team, which looks forward 12 months at 30-day intervals.  The measurement is based upon the projection of funds sold or purchased position, along with ratios and trends developed to measure dependence on purchased funds and core growth.  Monthly reviews by management and quarterly reviews by the Asset and Liability Committee under prescribed policies and procedures are designed to ensure that we will maintain adequate levels of available funds.



It is our policy to manage our affairs so that liquidity needs are fully satisfied through normal Bank operations.  That is, the Bank will manage its liquidity to minimize the need to make unplanned sales of assets or to borrow funds under emergency conditions.  The Bank will use funding sources where the interest cost is relatively insensitive to market changes in the short run (periods of one year or less) to satisfy operating cash needs.  The remaining normal funding will come from interest-sensitive liabilities, either deposits or borrowed funds.  When the marginal cost of needed wholesale funding is lower than the cost of raising this funding in the retail markets, the Corporation may supplement retail funding with external funding sources such as:



1.

Unsecured Fed Funds lines of credit with upstream correspondent banks (M&T Bank, Pacific Coast Banker’s Bank (“PCBB”), PNC Financial Services (“PNC”), Atlantic Community Bankers Bank, Community Bankers Bank, SunTrust and Zions National Bank).

2.

Secured advances with the FHLB of Atlanta, which are collateralized by eligible one to four family residential mortgage loans, home equity lines of credit, commercial real estate loans, various securities and pledged cash. 

3.

Secured line of credit with the Fed Discount Window for use in borrowing funds up to 90 days, using municipal securities as collateral.

4.

Brokered deposits, including CDs and money market funds, provide a method to generate deposits quickly.  These deposits are strictly rate driven but often provide the most cost-effective means of funding growth.

5.

One Way Buy CDARS/ICS funding – a form of brokered deposits that has become a viable supplement to brokered deposits obtained directly.

6.

Federal Reserve PPPLF – provides funding and uses SBA PPP loans as collateral at 100% value



Management believes that we have adequate liquidity available to respond to current and anticipated liquidity demands and is not aware of any trends or demands, commitments, events or uncertainties that are likely to materially affect our ability to maintain liquidity at satisfactory levels.  Please refer to the section of this Item 2 entitled “Response to COVID-19 for more details on our primary sources of liquidity.



Market Risk and Interest Sensitivity



Our primary market risk is interest rate fluctuation.  Interest rate risk results primarily from the traditional banking activities that we engage in, such as gathering deposits and extending loans.  Many factors, including economic and financial conditions, movements in interest rates and consumer preferences affect the difference between the interest earned on our assets and the interest paid on our liabilities.  Interest rate sensitivity refers to the degree that earnings will be impacted by changes in the prevailing level of interest rates.  Interest rate risk arises from mismatches in the repricing or maturity characteristics between interest-bearing assets and liabilities.  Management seeks to minimize fluctuating net interest margins, and to enhance consistent growth of net interest income through periods of changing interest rates.  Management uses interest sensitivity gap analysis and simulation models to measure and manage these risks.  The interest rate sensitivity gap analysis assigns each interest-earning asset and interest-bearing liability to a time frame reflecting its next repricing or maturity date.  The differences between total interest-sensitive assets and liabilities at each time interval represent the interest sensitivity gap for that interval.  A positive gap generally indicates that rising interest rates during a given interval will increase net interest income, as more assets than liabilities will reprice. A negative gap position would benefit us during a period of declining interest rates. 



At March 31, 2020, we were asset sensitive.



 

50


 

 

Our interest rate risk management goals are:



·

Ensure that the Board of Directors and senior management will provide effective oversight and ensure that risks are adequately identified, measured, monitored and controlled;

·

Enable dynamic measurement and management of interest rate risk;

·

Select strategies that optimize our ability to meet our long-range financial goals while maintaining interest rate risk within policy limits established by the Board of Directors;

·

Use both income and market value oriented techniques to select strategies that optimize the relationship between risk and return; and

·

Establish interest rate risk exposure limits for fluctuation in net interest income (“NII”), net income and economic value of equity.



In order to manage interest sensitivity risk, management formulates guidelines regarding asset generation and pricing, funding sources and pricing, and off-balance sheet commitments.  These guidelines are based on management’s outlook regarding future interest rate movements, the state of the regional and national economy, and other financial and business risk factors.  Management uses computer simulations to measure the effect on net interest income of various interest rate scenarios.  Key assumptions used in the computer simulations include cash flows and maturities of interest rate sensitive assets and liabilities, changes in asset volumes and pricing, and management’s capital plans.  This modeling reflects interest rate changes and the related impact on net interest income over specified periods. 



We evaluate the effect of a change in interest rates of +/-100 basis points to +/-400 basis points on both NII and Net Portfolio Value (“NPV”) / Economic Value of Equity (“EVE”).  We concentrate on NII rather than net income as long as NII remains the significant contributor to net income.



NII modeling allows management to view how changes in interest rates will affect the spread between the yield paid on assets and the cost of deposits and borrowed funds.  Unlike traditional Gap modeling, NII modeling takes into account the different degree to which installments in the same repricing period will adjust to a change in interest rates. It also allows the use of different assumptions in a falling versus a rising rate environment.  The period considered by the NII modeling is the next eight quarters.



NPV / EVE modeling focuses on the change in the market value of equity. NPV / EVE is defined as the market value of assets less the market value of liabilities plus/minus the market value of any off-balance sheet positions.  By effectively looking at the present value of all future cash flows on or off the balance sheet, NPV / EVE modeling takes a longer-term view of interest rate risk.  This complements the shorter-term view of the NII modeling.



Measures of NII at risk produced by simulation analysis are indicators of an institution’s short-term performance in alternative rate environments.  These measures are typically based upon a relatively brief period, usually one year.  They do not necessarily indicate the long-term prospects or economic value of the institution.



Based on the simulation analysis performed at March 31, 2020 and December 31, 2019, management estimated the following changes in net interest income, assuming the indicated rate changes:







 

 

 

 

 

 

(Dollars in thousands)

 

March 31,
2020

 

December 31,
2019

+400 basis points

 

$

2,353 

 

$

1,500 

+300 basis points

 

$

1,990 

 

$

1,381 

+200 basis points

 

$

1,529 

 

$

1,075 

+100 basis points

 

$

798 

 

$

645 

-100 basis points

 

$

(1,897)

 

$

(2,477)



This estimate is based on assumptions that may be affected by unforeseeable changes in the general interest rate environment and any number of unforeseeable factors.  Rates on different assets and liabilities within a single maturity category adjust to changes in interest rates to varying degrees and over varying periods of time.  The relationships between lending rates and rates paid on purchased funds are not constant over time.  Management can respond to current or anticipated market conditions by lengthening or shortening the Bank’s sensitivity through loan repricings or changing its funding mix.  The rate of growth in interest-free sources of funds will influence the level of interest-sensitive funding sources.  In addition, the absolute level of interest rates will affect the volume of earning assets and funding sources.  As a result of these limitations, the interest-sensitive gap is only one factor to be considered in estimating the net interest margin.



Management believes that no material changes in our market risks, our procedures used to evaluate and mitigate those risks, or our actual or simulated sensitivity positions have occurred since December 31, 2019.  Our NII simulation analysis as of December 31,

 

51


 

 

2019 is included in Item 7 of Part II Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2019 under the heading “Market Risk and Interest Sensitivity.



Impact of Inflation – Our assets and liabilities are primarily monetary in nature, and as such, future changes in prices do not affect the obligations to pay or receive fixed and determinable amounts of money.  During inflationary periods, monetary assets lose value in terms of purchasing power and monetary liabilities have corresponding purchasing power gains.  The concept of purchasing power is not an adequate indicator of the impact of inflation on financial institutions because it does not incorporate changes in our earnings.



Capital Resources



We require capital to fund loans, satisfy our obligations under the Bank’s letters of credit, meet the deposit withdrawal demands of the Bank’s customers, and satisfy our other monetary obligations.  To the extent that deposits are not adequate to fund our capital requirements, we can rely on the funding sources identified above under the heading “Liquidity Management”.  At March 31, 2020, the Bank had $115.0 million available through unsecured lines of credit with correspondent banks, $2.1 million available through a secured line of credit with the Fed Discount Window and approximately $158.2 million available through the FHLBManagement is not aware of any demands, commitments, events or uncertainties that are likely to materially affect our ability to meet our future capital requirements.    



In addition to operational requirements, the Bank and the Corporation are subject to risk-based capital regulations, which were adopted and are monitored by federal banking regulators.  These regulations are used to evaluate capital adequacy and require an analysis of an institution’s asset risk profile and off-balance sheet exposures, such as unused loan commitments and stand-by letters of credit.   Based on capital ratios at March 31, 2020, both the Bank and First United Corporation are considered to be well-capitalized.





The following table presents our capital ratios as of the dates indicated:





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

March 31,
2020

 

December 31,
2019

 

Required for
Capital
Adequacy
Purposes

 

Required
to be Well
Capitalized

Total Capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

Consolidated

 

16.01% 

 

16.29% 

 

8.00% 

 

10.00% 

First United Bank & Trust

 

15.29% 

 

15.60% 

 

8.00% 

 

10.00% 

Tier 1 Capital (to risk-weighted assets)

 

 

 

 

 

         

 

 

Consolidated

 

14.76% 

 

15.17% 

 

6.00% 

 

8.00% 

First United Bank & Trust

 

14.04% 

 

14.44% 

 

6.00% 

 

8.00% 

Common Equity Tier 1 Capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

Consolidated

 

12.43% 

 

12.79% 

 

4.50% 

 

6.50% 

First United Bank & Trust

 

14.04% 

 

14.44% 

 

4.50% 

 

6.50% 

Tier 1 Capital (to average assets)

 

 

 

 

 

 

 

        

Consolidated

 

11.52% 

 

11.77% 

 

4.00% 

 

5.00% 

First United Bank & Trust

 

10.77% 

 

10.99% 

 

4.00% 

 

5.00% 



Contractual Obligations, Commitments and Off-Balance Sheet Arrangements



Contractual Obligations



The Corporation enters into contractual obligations in the normal course of business.  Among these obligations are FHLB advances and junior subordinated debentures, operating lease agreements for banking and subsidiaries’ offices and for data processing and telecommunications equipment.  Comparing March 31, 2020 to December 31, 2019, short-term borrowings decreased $9.3 million, primarily due to the decline in our Treasury Management overnight investment sweep accounts as municipalities utilized their cash for working capital needs during these unprecedented times.



Commitments



Loan commitments are made to accommodate the financial needs of our customers.  Letters of credit commit us to make payments on behalf of customers when certain specified future events occur.  The credit risks inherent in loan commitments and letters of credit are essentially the same as those involved in extending loans to customers, and these arrangements are subject to our normal credit policies.  We are not a party to any other off-balance sheet arrangements. 

 

52


 

 



Commitments to extend credit in the form of consumer, commercial and business at the dates indicated were as follows:







 

 

 

 

 

 



 

 

 

 

 

 

(in thousands)

 

March 31,
2020

 

December 31,
2019

Residential Mortgage - home equity

 

$

54,308 

 

$

53,827 

Residential Mortgage - construction

 

 

8,335 

 

 

4,995 

Commercial

 

 

107,067 

 

 

85,089 

Consumer - personal credit lines

 

 

4,018 

 

 

3,903 

Standby letters of credit

 

 

9,144 

 

 

9,112 

    Total

 

$

182,872 

 

$

156,926 



The increase of $25.9 million in commitments at March 31, 2020 compared to December 31, 2019 was due to increased demand for consumer and commercial construction early in the quarter.  Management will continue to monitor these balances as the COVID-19 pandemic has slowed the underlying projects and disbursements of funds.

 

53


 

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk



The information required by this item is included in Item 2 of Part I of this report under the caption “Market Risk and Interest Sensitivity” and in Item 7 of Part II of First United Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019 under the heading “Market Risk and Interest Sensitivity” both of which are incorporated in this Item 3 by reference.



Item 4.  Controls and Procedures



We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 with the SEC, such as this Quarterly Report, is recorded, processed, summarized and reported within the periods specified in those rules and forms, and that such information is accumulated and communicated to our management, including First United Corporation’s principal executive officer (“PEO”) and its principal financial officer (“PFO”), as appropriate, to allow for timely decisions regarding required disclosure.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.  The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. 



An evaluation of the effectiveness of these disclosure controls as of March 31, 2020 was carried out under the supervision and with the participation of management, including the PEO and the PFO.  Based on that evaluation, management, including the PEO and the PFO, has concluded that our disclosure controls and procedures are, in fact, effective at the reasonable assurance level. 



During the quarter ended March 31, 2020, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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Part II.  OTHER INFORMATION



Item 1.  Legal Proceedings



None.



Item 1A.  Risk Factors



The risks and uncertainties to which our financial condition and operations are subject are discussed in detail in Item 1A of Part I of First United Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019.  Management does not believe that any material changes in our risk factors have occurred since they were last disclosed.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds



The following table provides information about shares of common stock purchased by or on behalf of First United Corporation and its affiliates (as defined by Exchange Act Rule 10b-18) during the three-month period ended March 31, 2020:







 

 

 

 

 

Issuer Purchases of Equity Securities

Period

Total Number of Shares (or Units) Purchased (1)

 

Average Price Paid per Share (or Unit)

Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs

Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs

January 2020

 —

 

 —

 —

 —

February 2020

 —

 

 —

 —

 —

March 2020

145,291 

 $

18.96  145,291  354,709 

Total

145,291 

 $

18.96  145,291  354,709 





(1)

All shares were purchased in open-market transactions pursuant to First United Corporation’s stock repurchase plan that was initially adopted effective April 30, 2019.  The plan, which originally authorized the repurchase of up to 354,449 shares of common stock of First United Corporation, was amended in November 2019 to increase the maximum number of shares to 500,000.  Both the adoption of the plan and its amendment were announced publicly.  The plan, as amended, will expire on November 20, 2020 and authorizes the repurchases to be conducted through open market or private transactions at such times and in such amounts per transaction as the Chairman and Chief Executive Officer of First United Corporation determines to be appropriate

   

Item 3.  Defaults upon Senior Securities



None. 



Item 4.  Mine Safety Disclosures



Not Applicable.



Item 5.  Other Information



None.



 

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Item 6.  Exhibits



The exhibits filed or furnished with this quarterly report are listed in the following Exhibit Index.





Exhibit

 

Description

10.1

 

First United Corporation Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the Corporation’s Current Report on Form 8-K filed on March 16, 2020)

10.2

 

First United Corporation Short-Term Incentive Plan (incorporated by reference to Exhibit 10.2 to the Corporation’s Current Report on Form 8-K filed on March 16, 2020)

10.3

 

Form of Restricted Stock Unit Award Agreement (Performance-Vesting) (incorporated by reference by Exhibit 10.1 to the Corporation’s Current Report on Form 8-K filed on March 27, 2020)

10.4

 

Form of Restricted Stock Unit Award Agreement (Time-Vesting) (incorporated by reference by Exhibit 10.2 to the Corporation’s Current Report on Form 8-K filed on March 27, 2020)

31.1

 

Certifications of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith)

31.2

 

Certifications of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith)

32

 

Certification of the Principal Executive Officer and the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act (furnished herewith)

101.INS

 

XBRL Instance Document (filed herewith)

101.SCH

 

XBRL Taxonomy Extension Schema (filed herewith)

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase (filed herewith)

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase (filed herewith)

101.LAB

 

XBRL Taxonomy Extension Label Linkbase (filed herewith)

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase (filed herewith)



 

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SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





 

 

FIRST UNITED CORPORATION



 



 

Date: May 11, 2020

/s/ Carissa L. Rodeheaver



Carissa L. Rodeheaver, CPA, CFP



Chairman of the Board, President and Chief Executive Officer



(Principal Executive Officer)



 



 

Date: May 11, 2020

/s/ Tonya K. Sturm



Tonya K. Sturm, Senior Vice President,



Chief Financial Officer



(Principal Financial Officer and Principal Accounting Officer)



 

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