Item 2. Management’s Discussion and Analysis
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, 2020.
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, 2020 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 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” and together with Trust I, the “Trusts”), both Connecticut statutory business 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. In addition, the Bank owns 99.9% of the limited partnership interests in Liberty Mews Limited Partnership; a Maryland limited partnership formed for the purpose of acquiring, developing and operating low-income housing units in Garrett County, Maryland, and 99.9% of the membership interests in MCC FUBT Fund, LC, an Ohio limited liability company formed for the purpose of acquiring, developing and operating low-income housing units in Allegany County, Maryland.
At June 30, 2021, the Corporation’s total assets were $1.8 billion, net loans were $1.1 billion, and deposits were $1.5 billion. Shareholders’ equity at June 30, 2021 was $130.6 million.
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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.
COVID-19
The COVID-19 pandemic has adversely impacted our business and financial results and that of many of our customers, and the ultimate impact will depend on future developments, which are highly uncertain, cannot be predicted, and are largely outside of our control, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic. The COVID-19 pandemic has created extensive disruptions to the global and U.S. economies and to the lives of individuals throughout the world. Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including closures of businesses and schools, fiscal and monetary stimulus, and legislation designed to deliver financial aid and other relief. While the scope, duration, and full effects of COVID-19 are not fully known, the pandemic and the efforts to contain it have disrupted global economic activity, adversely affected the functioning of financial markets, impacted market interest rates, increased economic and market uncertainty, and disrupted trade and supply chains.
Congress, the President, and the FRB have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), a $2 trillion legislative package, was signed into law at the end of March 2020. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors, such as by providing funds for loans under the Paycheck Protection Program (the “PPP”) administered by the Small Business Administration (the “SBA”). Section 4013 of the CARES Act, “Temporary Relief from Troubled Debt Restructurings,” provides banks the option to temporarily suspend certain requirements under U.S. GAAP related to trouble debt restructurings (“TDRs”) for a limited period of time to account for the effects of COVID-19. Additionally, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”) was enacted on December 27, 2020 and provided for a second round of PPP loans. The PPP Extension Act of 2021, which was enacted on March 30, 2021, extended the PPP application deadline to May 31, 2021 and provided the SBA with additional time to process applications through June 30, 2021. Also, the Consolidated Appropriations Act (the “CAA”) passed on December 27, 2020, which, among other things, extended the provisions of Section 4013 of the CARES Act to January 1, 2022. The Federal Reserve also took actions to mitigate the economic impact of the COVID-19 pandemic, including cutting the federal funds rate 150 basis points and targeting a 0 to 25 basis point rate. In addition to the general impact of the COVID-19 pandemic, certain provisions of the CARES Act as well as other legislative and regulatory relief efforts are expected to have a material impact on the Company’s operations.
During the first six months of 2021, we continued to assist our business customers with the PPP loan forgiveness process and to originate additional PPP loans. We remained diligent in protecting our associates and customers from the lingering effects of the pandemic, delaying opening our lobbies until April 1, 2021. Many of our sales and support employees continue to work remotely as we have adjusted to a hybrid work environment. We have continued to monitor our market areas, maintaining travel protocols and utilizing safety precautions while continuing to provide full banking services to our customers.
Paycheck Protection Program
The Corporation actively participated in the PPP. On January 19, 2021, the SBA implemented a second round of funding for PPP loans. The Corporation originated $66.1 million in PPP loans during the first six months of 2021, consisting of 870 loans with an average loan size of $80 thousand. New PPP loans are no longer available. A total of 1,174 loans totaling $148.5 million were originated in 2020. As of June 30, 2021, approximately $140.5 million have been forgiven with a remaining balance of $74.1 million.
COVID Modifications
While the COVID-19 pandemic has had an impact on most industries, some have been more affected than others. In accordance with Section 4013 of the CARES Act and related regulatory pronouncements, we have not accounted for modifications of loans affected by the pandemic as troubled debt restructurings nor have we designated them as past due or nonaccrual.
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As of July 16, 2021, there were six commercial loans totaling $7.3 million in total loan modifications related to the real estate rental and health care sectors. These loans are scheduled to return to contractual payment terms within the next quarter.
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 June 30, 2021, the Corporation had approximately $130.0 million in unsecured lines of credit with its correspondent banks, $1.0 million with the Federal Reserve Discount Window, and approximately $122.2 million of secured borrowings with the Federal Home Loan Bank of Atlanta (“FHLB”). Additionally, the Corporation has access to the brokered certificates of deposit market.
The Corporation was eligible to access the FRB’s Paycheck Protection Program Liquidity Facility (“PPPLF”), a source providing funding using PPP loans as collateral at 100% value. The Corporation did not use this program, which expired on July 31, 2021.
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.
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SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data for the six month periods ended June 30, 2021 and 2020 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 the six months ended
June 30,
2021
2020
Per Share Data
Basic net income per common share (1) - as reported
$
1.15
$
0.62
Basic net income per common share (1) - non-GAAP
1.52
0.62
Diluted net income per common share (1) - as reported
$
1.15
$
0.62
Diluted net income per common share (1) - non-GAAP
1.52
0.62
Basic book value per common share (1) - as reported
$
19.74
$
17.82
Basic book value per common share (1) - non-GAAP
20.12
17.01
Diluted book value per common share (1) - as reported
$
19.72
$
17.81
Diluted book value per common share (1) - non-GAAP
20.10
16.95
Significant Ratios:
Return on Average Assets (1) - as reported
0.88
%
0.57
%
Settlement expenses, net of income tax
0.30
%
—
Adjusted Return on Average Assets (1) (non-GAAP)
1.18
%
0.57
%
Return on Average Equity (1) - as reported
12.21
%
6.97
%
Settlement expenses
2.64
%
—
Income tax effect of adjustment
1.13
%
—
Adjusted Return on Average Equity (1) (non-GAAP)
15.98
%
6.97
%
Average Equity to Average Assets
7.29
%
8.15
%
Capital Ratios:
Consolidated Total Capital (to risk weighted assets) - as reported
15.80
%
16.08
%
Consolidated Total Capital (to risk weighted assets) - (non-GAAP)
16.03
%
16.08
%
Consolidated Tier 1 Capital (to risk weighted assets) - as reported
14.55
%
14.83
%
Consolidated Tier 1 Capital (to risk weighted assets) - (non-GAAP)
14.78
%
14.83
%
Consolidated Common Equity Tier 1 Capital (to risk weighted assets) - as reported
12.37
%
12.61
%
Consolidated Common Equity Tier 1 Capital (to risk weighted assets) - (non-GAAP)
12.58
%
12.61
%
Consolidated Tier 1 Capital (to average assets) - as reported
9.94
%
10.36
%
Consolidated Tier 1 Capital (to average assets) - (non-GAAP)
10.10
%
10.36
%
(1) See reconciliation of this non-GAAP financial measure provided elsewhere herein associated with settlement expenses incurred during the first quarter of 2021.
Note: (a) Annualized
RESULTS OF OPERATIONS
Overview
Consolidated net income was $7.8 million, inclusive of litigation settlement expenses of $3.3 million, for the six months ended June 30, 2021 compared to $4.3 million for the six months ended June 30, 2020. Basic and diluted net income per share for
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the first six months of 2021 were both $1.15, compared to basic and diluted net income per share of $0.62 for the same period of 2020, an 85.5% increase.
The increase in earnings for the first six months of 2021 was attributable to an increase in net interest income of $0.5 million, an increase in other operating income, including gains, of $1.8 million and a decrease in provision expense of $4.2 million, partially offset by an increase in other operating expenses of $1.5 million, inclusive of the $3.3 million in litigation settlement expenses.
The provision for loan losses was $0.7 million for the six month period ended June 30, 2021 and $4.8 million for the six month period ended June 30, 2020. Net charge-offs of $83 thousand were recorded for the first six months of 2021, compared to net charge offs of $0.3 million for first six months of 2020. The higher provision expense recorded in 2021 was driven by an increase in the qualitative factors reflecting the uncertainty of the economic environment related to the COVID-19 pandemic and its impact on our borrowers. The ratio of the ALL to loans outstanding, including PPP loan balances, was 1.49% at June 30, 2021 compared to 1.43% at June 30, 2020 and 1.41% at December 31, 2020. The ratio of ALL to loans outstanding, on a non-GAAP basis, excluding PPP loan balances of $74.1 million, was 1.59% at June 30, 2021.
Net interest income, on a non-GAAP, fully-taxable equivalent (“FTE”) basis, increased by $0.5 million (1.9%) during the six months ended June 30, 2021 when compared with the six months ended June 30, 2020, driven by a $1.7 million (32.4%) decrease in interest expense, partially offset by a decrease in interest income of $1.2 million. The net interest margin, on a FTE basis, declined for the six months ended June 30, 2021 to 3.13% compared to 3.61% for the same period of 2020.
The decrease in interest income was driven by a slight decrease in interest and fees on loans and reduced income on the investment portfolio. While the average balance of the investment portfolio increased by $65.8 million, bonds at higher yielding rates were called and replaced with lower yielding investments, resulting in a decrease in average yield on the investment portfolio of 118 basis points. The increase in the average balance of investments is due to a strategic decision in December 2020 to invest $70.0 million of excess cash into the investment portfolio. Significantly higher cash levels invested at an average yield on Fed Funds of 0.08% for the first six months of 2021, compared to 0.52% for the first six months of 2020, also negatively impacted the margin for the first six months of 2021. The increase in average balance of loans of $82.8 million, primarily driven by PPP loans, offset the declining yield in the portfolio leading to slightly reduced interest and fees on loans when comparing the first six months of 2021 to the first six months of 2020. The average balances of PPP loans of approximately $126.6 million generated $2.6 million of interest and fees but had a negative impact on the margin. The average loan yield was also negatively impacted by the low-rate environment, which resulted in loan production and loans repricing at lower rates. These factors resulted in a decrease of approximately 38 basis points in average loan yield when compared with the six months ended June 30, 2020.
The decrease in interest expense of $1.7 million, despite an increase in average interest-bearing liabilities of $117.9 million, was a direct result of a reduction in the cost of deposits of 28 basis points, a 3 basis point decrease in the cost of our short-term borrowings and a 67 basis point decrease in the cost of long-term borrowings. The decrease in the rate on long-term borrowings was primarily due to the restructuring of three long-term FHLB advances late in the fourth quarter of 2020 that resulted in a reduced weighted average rate of 80 basis points on the $70.0 million portfolio. The average balance on our interest-bearing money market accounts increased $49.1 million, while the rate on these accounts decreased by 43 basis points. Average growth of $140.9 million in our non-interest-bearing accounts benefited our overall cost of deposits.
Other operating income, including net gains, increased $1.8 million for the six months ended June 30, 2021 when compared to the six months ended June 30, 2020. Gains on the sale of mortgages to the secondary market, which we have utilized in lieu of retaining long-term fixed rate loans in our portfolio, increased $0.1 million related to continued refinancing activity. Trust and brokerage income increased $0.9 million year-over-year due to continued growth in new client relationships and assets under management. Debit card income increased $0.4 million for the six months ended June 30, 2021 when compared with the same period of 2020 as we continued to grow our deposit relationships and our customers increase use of our electronic services. Other income increased $0.4 million, due primarily to the receipt of insurance proceeds related to litigation claims recorded in the first quarter of 2021. Service charge income remained stable when comparing the six months of 2021 to the same time period of 2020.
Other operating expenses increased $1.5 million, inclusive of litigation settlement expenses, for the six months ended June 30, 2021 when compared with the same period of 2020. Salaries and benefits decreased $0.4 million when compared to the six months of 2020, primarily due to reductions of $0.2 million in life and health insurance costs, a $0.5 million offset in salary expense
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from deferred loan origination costs primarily attributable to PPP loans and $0.1 million of reduced executive equity compensation due to a timing difference in long-term incentive grants. These decreases were offset by an increase of $0.4 million in salaries, incentives and related payroll costs. Federal Deposit Insurance Corporation premiums increased slightly by $0.2 million due to credits received on quarterly assessments in 2020. Equipment, occupancy and technology expenses decreased $0.6 million when compared to the six months of 2020 as we began to realize cost savings from our core processor related to a new contract negotiated in the fourth quarter of 2020. OREO expenses were a net credit in the first six months of 2021 due to $0.8 million in gains attributable to the sale of OREO properties. Professional services increased $0.8 million as a result of increased legal and professional fees, partially offset by decreased investor relations expenses related to the 2021 annual meeting of shareholders and related litigation.
Consolidated net income was $4.4 million for the second quarter of 2021 compared to $2.6 million for the second quarter of 2020. Basic and diluted net income per common share for the second quarter of 2021 were both $0.66, compared to basic and diluted net income per common share of $0.37 for the second quarter of 2020, an 78.4% increase.
The increase in earnings for the second quarter of 2021 was due to stable net interest income (inclusive of PPP origination fee accretion), an increase in other operating income, including gains, of approximately $0.5 million, a decrease in provision expense of $1.6 million and a decrease in other operating expenses of $0.4 million.
The provision for loan losses was $0.6 million for the three month period ended June 30, 2021 and $2.2 million for the three month period ended June 30, 2020. The higher provision expense recorded in 2021 was driven by an increase in the qualitative factors reflecting the uncertainty of the economic environment related to the COVID-19 pandemic and its impact on our borrowers.
Net interest income, on a non-GAAP, FTE basis, increased $0.1 million (0.9%) during the second quarter of 2021 over the same period in 2020 and was driven by a decrease in interest expense of approximately $0.8 million (31.7%), offset by a $0.7 million (4.4%) decrease in interest income. The net interest margin for the second quarter of 2021 was 3.15%, compared to 3.53% for the second quarter of 2020.
Participation in the PPP, with an average outstanding loan balance of $110.7 million and a loan rate of 1.0% at June 30, 2021, negatively impacted the margin for the second quarter of 2021 by 12 basis points. However, deferred fees of approximately $1.3 million recognized during the second quarter of 2021 positively impacted the margin by 28 basis points, with a net positive impact of 16 basis points. Continued elevated cash levels have also negatively impacted the margin. We expect to see continued margin compression during the remainder of 2021 as deposit rates approach floors and loans continue to reprice to lower rates.
The decrease in interest income was driven by a slight decrease in interest and fees on loans and reduced income on the investment portfolio. While the average balance of the investment portfolio increased by $72.3 million, bonds at higher yielding rates were called and replaced with lower yielding investments, resulting in a decrease in average yield on the investment portfolio of 128 basis points. The increase in the average balance of investments is due to a strategic decision in December 2020 to invest $70.0 million of excess cash into the investment portfolio. Significantly higher cash levels invested also negatively impacted the margin for the second quarter of 2021 when compared to the second quarter of 2020. The increase in average balance of loans of $9.0 million, primarily driven by PPP loans, offset the declining yield in the portfolio leading to slightly reduced interest and fees on loans when comparing the second quarter of 2021 to the second quarter of 2020. The average loan yield was also negatively impacted by the low-rate environment, which resulted in loan production and loans repricing at lower rates. These factors resulted in a decrease of approximately 12 basis points in average loan yield when compared with the second quarter of 2020.
The decrease in interest expense of $0.8 million, despite an increase in average interest-bearing liabilities of $81.3 million, was a direct result of a reduction in the cost of deposits of 23 basis points, a 1 basis point decrease in the cost of our short-term borrowings and a 68 basis point decrease in the cost of long-term borrowings. The decrease in the rate on long-term borrowings is primarily due to the restructuring of three long-term FHLB advances late in the fourth quarter of 2020 that resulted in a reduced weighted average rate of 80 basis points on the $70.0 million portfolio. The average balance on our interest-bearing money market accounts increased $7.9 million, while the rate on these accounts decreased by 33 basis points. Average growth of $105.4 million in our non-interest-bearing accounts benefited our overall cost of deposits.
Other operating income, including gains, for the second quarter of 2021 increased by approximately $0.5 million when compared with the same period of 2020. Service charge income increased by $0.2 million during the second quarter of 2021 when compared with the second quarter of 2020. Trust and brokerage income increased $0.5 million due to increased production and
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market values on assets under management. Net gains decreased $0.4 million when comparing the second quarter of 2021 to the second quarter of 2020. While the refinancing activity continued into the second quarter of 2021, the pace of activity slowed when compared to the second quarter of 2020, which resulted in reduced gains on the sale of mortgages.
Other operating expenses decreased by $0.4 million when comparing the second quarter of 2021 to the second quarter of 2020. This decrease was driven by reduced occupancy, equipment and technology service during the second quarter of 2021 when compared with the second quarter of 2020 as we began to see reduced costs associated with our core processor due to contract negotiations during 2020. Investor relations costs decreased by $0.7 million during the second quarter of 2021 when compared with the second quarter of 2020 due to costs associated with the 2020 annual meeting of shareholders. These changes were partially offset by increased salaries and benefits related to a reduction in deferred loan origination costs and an increase in professional services related to final legal expenses associated with litigation that was settled in April 2021. Other miscellaneous expenses, such as contributions, consulting, Visa processing fees, office supplies, travel and lodging, schools and seminars, and business-related meals declined. Most of the expense reductions are related to limited operations as a result of the pandemic and management’s continued focus on cost savings and efficiencies. The decreases were offset by increases in mileage, line rentals and contract labor.
The effective income tax rates as a percentage of income for the six-month periods ended June 30, 2021 and 2020 were 25.2% and 22.2%, respectively. The increase in the tax rate was primarily due to the reduction in tax exempt income as well as the reduction in tax credits related to the expiration of a low-income housing tax credit in June 2021.
Non-GAAP Financial Measures
The Corporation believes that certain non-GAAP financial measures are meaningful because they reflect adjustments commonly made by management, investors, regulators and analysts to evaluate performance trends and the adequacy of common equity. This non-GAAP disclosure has limitations as an analytical tool, should not be viewed as a substitute for performance and financial condition measures determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of results as reported under GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies.
The following table presents a reconciliation of net income and basic and diluted earnings per share (as reported) to adjusted net income and adjusted basic and diluted earnings per share excluding settlement expense:
Six months ended June 30,
2021
2020
(in thousands, except for per share amount)
Net income - as reported
$
7,833
$
4,325
Adjustments:
Settlement Expense
3,300
—
Income tax effect of adjustment
(735)
—
Adjusted net income (non-GAAP)
$
10,398
$
4,325
Basic and Diluted earnings per share - as reported
$
1.15
$
0.62
Adjustments:
Settlement Expense
0.47
—
Income tax effect of adjustment
(0.10)
—
Adjusted basic and diluted earnings per share (non-GAAP)
$
1.52
$
0.62
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The following table presents a reconciliation of basic and diluted book value per share (as reported) to adjusted basic and diluted book value per share excluding settlement expense:
Six months ended June 30,
2021
2020
(in thousands, except for per share amount)
Basic book value per share
Equity
130,556
124,453
Outstanding shares
6,615
6,984
Basic book value per share - as reported
$
19.74
$
17.82
Adjustments:
Equity without net settlement expenses
133,122
124,453
Outstanding shares
6,615
6,984
Adjusted basic book value per share (non-GAAP)
$
20.12
$
17.82
Diluted book value per share
Equity
130,556
124,453
Outstanding shares
6,622
6,989
Diluted book value per share - as reported
$
19.72
$
17.81
Adjustments:
Equity without net settlement expenses
133,122
124,453
Outstanding shares
6,622
6,989
Adjusted diluted book value per share (non-GAAP)
$
20.10
$
17.81
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The following table presents a reconciliation of capital ratios (as reported) to adjusted ratios excluding settlement expense:
June 30,
2021
December 31,
2020
(in thousands)
Retained Earnings - as reported
$
135,536
$
129,691
Adjustments:
Settlement Expense
3,300
—
Income tax effect of adjustment
(735)
—
Adjusted Retained Earnings (non-GAAP)
$
138,101
$
129,691
Total Capital - as reported
$
192,591
$
193,391
Adjustments:
Retained Earnings adjustment
2,565
—
Changes to capital due to retained earnings adjustment
265
—
Total Capital (non-GAAP)
$
195,421
$
193,391
Average Assets used for calculation
$
1,773,016
$
1,720,809
Consolidated Tier 1 Capital (to average assets) - as reported
9.94
%
10.36
%
Consolidated Tier 1 Capital (to average assets) - non-GAAP
10.10
%
10.36
%
Total risk weighted assets used for calculation
$
1,208,706
$
1,202,877
Consolidated Total Capital (to risk weighted assets) - as reported
15.80
%
16.08
%
Consolidated Total Capital (to risk weighted assets) - (non-GAAP)
16.03
%
16.08
%
Consolidated Tier 1 Capital (to risk weighted assets) - as reported
14.55
%
14.83
%
Consolidated Tier 1 Capital (to risk weighted assets) - (non-GAAP)
14.78
%
14.83
%
Consolidated Common Equity Tier 1 Capital (to risk weighted assets) - as reported
12.37
%
12.61
%
Consolidated Common Equity Tier 1 Capital (to risk weighted assets) - (non-GAAP)
12.58
%
12.61
%
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 six months ended June 30, 2021 and 2020.
GAAP
Non-GAAP - FTE
Six Months Ended
Six Months Ended
(dollars in thousands)
2021
2020
2021
2020
Interest income
$
28,498
$
29,720
$
28,971
$
30,169
Interest expense
3,499
5,177
3,499
5,177
Net interest income
$
24,999
$
24,543
$
25,472
$
24,992
Net interest margin %
3.07
%
3.54
%
3.13
%
3.61
%
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The following tables set 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 six and three month periods ended June 30, 2021 and 2020:
Six Months Ended
June 30,
2021
2020
Average
Average
Average
Average
(dollars in thousands)
Balance
Interest
Yield/Rate
Balance
Interest
Yield/Rate
Assets
Loans
$
1,187,760
$
25,873
4.39
%
$
1,104,922
$
26,280
4.77
%
Investment Securities:
Taxable
264,525
1,984
1.51
%
198,418
2,652
2.69
%
Non taxable
25,698
972
7.63
%
25,974
954
7.39
%
Total
290,223
2,956
2.05
%
224,392
3,606
3.23
%
Federal funds sold
155,009
63
0.08
%
59,103
154
0.52
%
Interest-bearing deposits with other banks
2,980
1
0.07
%
753
7
1.90
%
Other interest earning assets
4,054
78
3.88
%
4,442
122
5.53
%
Total earning assets
1,640,026
28,971
3.56
%
1,393,612
30,169
4.33
%
Allowance for loan losses
(16,582)
(13,936)
Non-earning assets
152,853
142,354
Total Assets
$
1,776,297
$
1,522,030
Liabilities and Shareholders’ Equity
Interest-bearing demand deposits
$
208,930
$
347
0.33
%
$
169,055
$
341
0.41
%
Interest-bearing money markets
344,100
288
0.17
%
295,035
877
0.60
%
Savings deposits
212,342
46
0.04
%
167,681
101
0.12
%
Time deposits:
Less than $100k
106,506
726
1.37
%
111,854
875
1.57
%
$100k or more
114,908
738
1.30
%
132,942
1,288
1.95
%
Short-term borrowings
50,670
50
0.20
%
42,975
49
0.23
%
Long-term borrowings
100,929
1,304
2.61
%
100,929
1,646
3.28
%
Total interest-bearing liabilities
1,138,385
3,499
0.62
%
1,020,471
5,177
1.02
%
Non-interest-bearing deposits
481,803
340,904
Other liabilities
26,704
36,548
Shareholders’ Equity
129,405
124,107
Total Liabilities and Shareholders’ Equity
$
1,776,297
$
1,522,030
Net interest income and spread
$
25,472
2.94
%
$
24,992
3.31
%
Net interest margin
3.13
%
3.61
%
Note:
(1) The above table reflects the average rates earned or paid stated on an FTE basis assuming a 21% tax rate for 2021 and 2020. Non-GAAP interest income on a fully taxable equivalent was $473 and $449, 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 (1.9%) for the six months ended June 30, 2021 when compared with the same period of 2020, driven by a $1.7 million (32.4%) decrease in interest expense, partially offset by a decrease in interest income of $1.2 million. The net interest margin, on an FTE basis, declined for the six months ended June 30, 2021 to 3.13% compared to 3.61% for the same period of 2020.
The decrease in interest income was driven by a slight decrease in interest and fees on loans and reduced income on the investment portfolio. While the average balance of the investment portfolio increased by $65.8 million, bonds at higher yielding rates were called and replaced with lower yielding investments, resulting in a decrease in average yield on the investment portfolio
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of 118 basis points. The increase in the average balance of investments is due to a strategic decision in December 2020 to invest $70.0 million of excess cash into the investment portfolio. Significantly higher cash levels invested at an average yield on Fed Funds of 0.08% for the first six months of 2021, compared to 0.52% for the first six months of 2020, also negatively impacted the margin for the first six months of 2021. The increase in average balance of loans of $82.8 million, primarily driven by PPP loans, offset the declining yield in the portfolio leading to slightly reduced interest and fees on loans when comparing the first six months of 2021 to the first six months of 2020. The average balances of PPP loans of approximately $126.6 million generated $2.6 million of interest and fees but had a negative impact on the margin. The average loan yield was also negatively impacted by the low-rate environment, which resulted in loan production and loans repricing at lower rates. These factors resulted in a decrease of approximately 38 basis points in average loan yield when compared with the six months ended June 30, 2020.
The decrease in interest expense of $1.7 million, despite an increase in average interest-bearing liabilities of $117.9 million, was a direct result of a reduction in the cost of deposits of 28 basis points, a 3 basis point decrease in the cost of our short-term borrowings and a 68 basis point decrease in the cost of long-term borrowings. The decrease in the rate on long-term borrowings is primarily due to the restructuring of three long-term Federal Home Loan Bank advances late in the fourth quarter of 2020 that resulted in a reduced weighted average rate of 80 basis points on the $70.0 million portfolio. The average balance on our interest-bearing money market accounts increased $49.1 million, while the rate on these accounts decreased by 43 basis points. Average growth of $140.9 million in our non-interest-bearing accounts benefited our overall cost of deposits.
Three Months Ended
June 30,
2021
2020
(dollars in thousands)
Average
Balance
Interest
Average
Yield/Rate
Average
Balance
Interest
Average
Yield/Rate
Assets
Loans
$
1,173,007
$
13,119
4.49
%
$
1,164,023
$
13,424
4.61
%
Investment Securities:
Taxable
273,196
994
1.46
%
199,721
1,344
2.71
%
Non taxable
25,325
480
7.60
%
26,530
488
7.40
%
Total
298,521
1,474
1.98
%
226,251
1,832
3.26
%
Federal funds sold
174,346
39
0.09
%
73,089
15
0.08
%
Interest-bearing deposits with other banks
3,288
—
—
%
863
1
0.53
%
Other interest earning assets
3,654
38
4.17
%
4,468
58
5.23
%
Total earning assets
1,652,816
14,670
3.56
%
1,468,694
15,330
4.18
%
Allowance for loan losses
(16,758)
(15,157)
Non-earning assets
147,763
146,065
Total Assets
$
1,783,821
$
1,599,602
Liabilities and Shareholders’ Equity
Interest-bearing demand deposits
$
214,310
$
175
0.33
%
$
174,498
$
157
0.36
%
Interest-bearing money markets
328,100
118
0.14
%
320,219
374
0.47
%
Savings deposits
221,614
21
0.04
%
174,295
39
0.09
%
Time deposits:
Less than $100k
105,084
337
1.29
%
114,288
459
1.62
%
$100k or more
110,265
348
1.27
%
125,152
583
1.87
%
Short-term borrowings
51,035
26
0.20
%
40,671
21
0.21
%
Long-term borrowings
100,929
648
2.57
%
100,929
815
3.25
%
Total interest-bearing liabilities
1,131,337
1,673
0.59
%
1,050,052
2,448
0.94
%
Non-interest-bearing deposits
498,130
392,701
Other liabilities
27,085
34,152
Shareholders’ Equity
127,269
122,697
Total Liabilities and Shareholders’ Equity
$
1,783,821
$
1,599,602
Net interest income and spread
$
12,997
2.97
%
$
12,882
3.24
%
Net interest margin
3.15
%
3.53
%
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Note:
(4)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 $234 and $226, respectively.
(5)Net interest margin is calculated as net interest income divided by average earning assets.
(6)The average yields on investments are based on amortized cost.
Net interest income, on a non-GAAP, FTE basis, increased $0.1 million (0.9%) during the second quarter of 2021 over the same period in 2020 and was driven by a decrease in interest expense of approximately $0.8 million (31.7%), offset by a $0.7 million (4.4%) decrease in interest income. The net interest margin for the second quarter of 2021 was 3.15%, compared to 3.53% for the second quarter of 2020.
Participation in the PPP, with an average outstanding loan balance of $110.7 million and a loan rate of 1.0%, negatively impacted the margin for the second quarter of 2021 by 12 basis points. However, deferred fees of approximately $1.3 million recognized during the second quarter of 2021 positively impacted the margin by 28 basis points, with a net positive impact of 16 basis points. Continued elevated cash levels have also negatively impacted the margin. We expect to see continued margin compression during the remainder of 2021 as deposit rates approach floors and loans continue to reprice to lower rates.
The decrease in interest income was driven by a slight decrease in interest and fees on loans and reduced income on the investment portfolio. While the average balance of the investment portfolio increased by $72.3 million, bonds at higher yielding rates were called and replaced with lower yielding investments, resulting in a decrease in average yield on the investment portfolio of 128 basis points. The increase in the average balance of investments is due to a strategic decision in December 2020 to invest $70.0 million of excess cash into the investment portfolio. Significantly higher cash levels invested also negatively impacted the margin for the second quarter of 2021 when compared to the second quarter of 2020. The increase in average balance of loans of $9.0 million, primarily driven by PPP loans, offset the declining yield in the portfolio leading to slightly reduced interest and fees on loans when comparing the second quarter of 2021 to the second quarter of 2020. The average loan yield was also negatively impacted by the low-rate environment, which resulted in loan production and loans repricing at lower rates. These factors resulted in a decrease of approximately 12 basis points in average loan yield when compared with the second quarter of 2020.
The decrease in interest expense of $0.8 million, despite an increase in average interest-bearing liabilities of $81.3 million, was a direct result of a reduction in the cost of deposits of 23 basis points, a 1 basis point decrease in the cost of our short-term borrowings and a 68 basis point decrease in the cost of long-term borrowings. The decrease in the rate on long-term borrowings is primarily due to the restructuring of three long-term Federal Home Loan Bank advances late in the fourth quarter of 2020 that resulted in a reduced weighted average rate of 80 basis points on the $70.0 million portfolio. The average balance on our interest-bearing money market accounts increased $7.9 million, while the rate on these accounts decreased by 33 basis points. Average growth of $105.4 million in our non-interest-bearing accounts benefited our overall cost of deposits.
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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 six and three month periods ended June 30, 2021 and 2020:
For the Six months ended June 30, 2021
compared to the Six months ended June 30, 2020
(in thousands and tax equivalent basis)
Volume
Rate
Net
Interest Income:
Loans
$
1,976
$
(2,383)
$
(407)
Taxable Investments
888
(1,556)
(668)
Non-taxable Investments
(10)
28
18
Federal funds sold
251
(342)
(91)
Interest-bearing deposits
21
(27)
(6)
Other interest earning assets
(11)
(33)
(44)
Total interest income
3,115
(4,313)
(1,198)
Interest Expense:
Interest-bearing demand deposits
81
(75)
6
Interest-bearing money markets
147
(736)
(589)
Savings deposits
27
(82)
(55)
Time deposits less than $100K
(42)
(107)
(149)
Time deposits $100K or more
(176)
(374)
(550)
Short-term borrowings
9
(8)
1
Long-term borrowings
—
(342)
(342)
Total interest expense
46
(1,724)
(1,678)
Net interest income
$
3,069
$
(2,589)
$
480
For the Three months ended June 30, 2021 compared to the Three months ended June 30, 2020
(in thousands and tax equivalent basis)
Volume
Rate
Net
Interest Income:
Loans
$
104
$
(409)
$
(305)
Taxable Investments
498
(848)
(350)
Non-taxable Investments
(22)
14
(8)
Federal funds sold
20
4
24
Interest-bearing deposits
3
(4)
(1)
Other interest earning assets
(11)
(9)
(20)
Total interest income
592
(1,252)
(660)
Interest Expense:
Interest-bearing demand deposits
36
(18)
18
Interest-bearing money markets
9
(265)
(256)
Savings deposits
11
(29)
(18)
Time deposits less than $100K
(37)
(85)
(122)
Time deposits $100K or more
(70)
(165)
(235)
Short-term borrowings
5
0
5
Long-term borrowings
—
(167)
(167)
Total interest expense
(46)
(729)
(775)
Net interest income
$
638
$
(523)
$
115
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.
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Provision for Loan Losses
The provision for loan losses was $0.7 million for the six-months ended June 30, 2021 and $4.8 million for the six-months ended June 30, 2020. Net charge-offs of $83 thousand were recorded for the first six months of 2021, compared to net charge offs of $0.3 million for first six months of 2020. The higher provision expense recorded in 2020 was driven by an increase in the qualitative factors reflecting the uncertainty of the economic environment related to the COVID-19 pandemic and its impact on our borrowers. The ratio of the ALL to loans outstanding, including PPP loan balances, was 1.49% at June 30, 2021 compared to 1.43% at June 30, 2020 and 1.41% at December 31, 2020. The ALL to loans outstanding, on a non-GAAP basis, excluding PPP loan balances of $74.1 million, was 1.60% at June 30, 2021, and 1.55% at December 31, 2020, excluding PPP loan balances of $114.0 million. Specific allocations have been made for impaired loans where management has determined that the collateral supporting the loans is not adequate to cover the loan balance, and the qualitative factors affecting the ALL have been adjusted based on the current economic environment and the characteristics of the loan portfolio.
Other Income
Income as % of
Income as % of
Total Other Income
Total Other Income
Six Months Ended
Three Months Ended
June 30,
June 30,
(in thousands)
2021
2020
2021
2020
Service charges on deposit accounts
$
817
9%
$
992
13%
$
412
10%
$
377
11%
Other service charges
432
5%
322
4%
221
5%
32
1%
Trust department
4,275
47%
3,484
47%
2,034
47%
1,731
51%
Debit card income
1,723
19%
1,314
18%
913
21%
680
20%
Bank owned life insurance
579
6%
588
8%
293
7%
285
8%
Brokerage commissions
625
7%
479
7%
357
8%
202
6%
Other income
612
7%
254
3%
91
2%
118
3%
$
9,063
100%
$
7,433
100%
$
4,321
100%
$
3,425
100%
Other Operating Expenses
The composition of other operating expenses for the six month periods ended June 30, 2021 and 2020 is illustrated in the following table:
Expense as % of
Expense as % of
Total Other Operating Expenses
Total Other Operating Expenses
Six Months Ended
Three Months Ended
June 30,
June 30,
(in thousands)
2021
2020
2021
2020
Salaries and employee benefits
$
10,495
44%
$
10,866
49%
$
5,507
50%
$
4,943
44%
FDIC premiums
366
2%
203
1%
183
2%
160
1%
Equipment
1,805
7%
1,893
8%
954
9%
967
8%
Occupancy
1,418
6%
1,493
7%
693
6%
746
7%
Data processing
1,601
7%
2,025
9%
875
8%
973
9%
Marketing
279
1%
283
1%
133
1%
153
1%
Professional services
2,661
11%
1,904
8%
1,491
14%
1,181
10%
Contract labor
333
1%
300
1%
185
2%
149
1%
Line rentals
483
2%
438
2%
268
2%
221
2%
Other real estate owned
(610)
(3)%
(3)
0%
(198)
(2)%
(3)
0%
Investor relations
430
2%
1,106
5%
306
3%
1,013
9%
Settlement expense
3,300
14%
—
0%
Other
1,398
6%
1,924
9%
635
6%
924
8%
$
23,959
100%
$
22,432
100%
$
11,032
100%
$
11,427
100%
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Table of Contents
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.
The effective income tax rate as a percentage of income increased to 25.2% at June 30, 2021 from 22.2% at June 30, 2020 primarily due to a reduction in tax exempt income and the reduction in low income housing tax credits that expire in June 2021.
FINANCIAL CONDITION
Balance Sheet Overview
Total assets at June 30, 2021 increased to $1.8 billion, representing a $30.4 million increase since December 31, 2020. During the first six months of 2021, cash and interest-bearing deposits in other banks increased by $45.0 million, the investment portfolio increased by $12.5 million and gross loans decreased by $22.5 million. The increase in cash was due to continued deposit growth, commercial loan payoffs and normal amortization, PPP loan forgiveness, and continued refinancing of balances in our mortgage portfolio. OREO balances decreased $2.6 million due to the sale of a parcel of real estate securing a large commercial participation loan in the first quarter of 2021 and the additional sales of undeveloped lots.
Total liabilities increased by $30.9 million when compared to liabilities at December 31, 2020. The increase in the first six months of 2021 was primarily attributable to deposit growth of $33.7 million due to stimulus programs and to growth in core relationships. Total shareholders’ equity was stable during the first six months of 2021, as net income of $7.8 million was offset by the repurchase of $7.2 million of First United Corporation common stock (400,000 shares).
Loan Portfolio
The following table presents the composition of our loan portfolio at the dates indicated:
(dollars in thousands)
June 30, 2021
December 31, 2020
Commercial real estate
$
361,941
32%
$
369,176
32%
Acquisition and development
131,630
11%
116,961
10%
Commercial and industrial
229,852
20%
266,745
23%
Residential mortgage
364,408
32%
379,170
32%
Consumer
57,512
5%
35,760
3%
Total Loans
$
1,145,343
100%
$
1,167,812
100%
Outstanding loans of $1.1 billion at June 30, 2021 reflected a decline of $22.5 million during the first six months of 2021, which was primarily attributable to core commercial loan growth offset by PPP loan forgiveness and a decline in our mortgage loan portfolio. Commercial real estate (“CRE”) loans decreased by $7.2 million, acquisition and development (“A&D”) loans increased by $14.7 million and commercial and industrial (“C&I”) loans decreased by $36.9 million, as newly originated PPP loans and growth in portfolio loans was offset by PPP loan forgiveness. The growth in the commercial portfolios was offset by a decline in residential mortgage loans of $14.8 million, as refinancing activity continued during the first six months of 2021. Given the current low interest rate environment, customers prefer longer-term fixed-rate loans and we continued to utilize the secondary market rather than hold these longer-term fixed rate mortgage loans in the portfolio. The consumer loan portfolio increased by $21.8 million due to the purchase of a pool of consumer loans in an effort to deploy excess cash into higher yielding, short-term assets.
Commercial loan production for the first six months of 2021 was approximately $89.2 million, with $39.2 million originated during the second quarter, exclusive of PPP loan production. SBA PPP loan production was approximately $64.3 million for the six months of 2021. Commercial construction funding continues to ramp up as projects are entering their larger draw periods. At June
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30, 2021, unfunded, committed commercial construction loans totaled approximately $22.5 million. Commercial amortization and payoffs were approximately $69.7 million through June 30, 2021, exclusive of PPP.
Consumer mortgage loan production was approximately $57.9 million through June 30, 2021. The production and pipeline mix of in-house, portfolio loans and investor loans remained strong as of June 30, 2021, with those loans totaling $25.0 million, consisting of $22.0 million in portfolio loans and $3.0 million in investor loans. At the end of the second quarter of 2021, management implemented special promotions for residential mortgage products to shift production towards portfolio loans and utilize excess cash balances.
Non-accrual loans totaled $7.3 million at June 30, 2021 compared to $3.3 million at December 31, 2020. The increase in non-accrual balances at June 30, 2021 was due to the addition of two hospitality loans totaling approximately $4.5 million to non-accrual status during the first quarter of 2021. These loans suffered reduced cash flows due to the impact of the pandemic, received modifications and were classified as substandard at December 31, 2020. These loans have returned to their contractual payment terms but will remain on non-accrual status until the borrowers make full contractual payments for six months.
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)
June 30,
2021
% of
Applicable
Portfolio
December 31,
2020
% of
Applicable
Portfolio
Non-accrual loans:
Commercial real estate
$
5,132
1.42%
$
898
0.24%
Acquisition and development
401
0.30%
366
0.31%
Residential mortgage
1,752
0.48%
2,048
0.54%
Consumer
—
0.00%
27
0.08%
Total non-accrual loans
$
7,285
0.64%
$
3,339
0.29%
Accruing Loans Past Due 90 days or more:
Acquisition and development
5
10
Residential mortgage
224
710
Consumer
44
4
Total loans past due 90 days or more
$
273
$
724
Total non-accrual and accruing loans past due 90 days or more
$
7,558
$
4,063
Restructured Loans (TDRs):
Performing
$
3,535
$
3,657
Non-accrual (included above)
290
301
Total TDRs
$
3,825
$
3,958
Other real estate owned
$
6,756
$
9,386
Impaired loans without a valuation allowance
$
8,918
$
6,060
Impaired loans with a valuation allowance
2,352
1,399
Total impaired loans
$
11,270
$
7,459
Valuation allowance related to impaired loans
$
250
$
57
Performing loans considered to be impaired (including performing troubled debt restructurings, or TDRs), as defined and identified by management, amounted to $7.6 million at June 30, 2021 and $4.1 million at December 31, 2020. 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.
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Table of Contents
Loans that have been modified in reliance on Section 4013 of the CARES Act and the guidance issued thereunder are not treated as TDRs. Information about these loans can be found in Notes 2 and 5 to the consolidated financial statements presented in Item 1 of Part I of this report.
The following table presents the details of impaired loans that are TDRs by class at June 30, 2021 and December 31, 2020:
June 30, 2021
December 31, 2020
Number of
Recorded
Number of
Recorded
(dollars in thousands)
Contracts
Investment
Contracts
Investment
Performing
Commercial real estate
Non owner-occupied
2
$
217
2
$
224
All other CRE
1
2,144
1
2,208
Acquisition and development
1-4 family residential construction
1
252
1
266
All other A&D
1
205
1
210
Commercial and industrial
—
—
—
—
Residential mortgage
Residential mortgage – term
7
717
7
749
Residential mortgage – home equity
—
—
—
—
Consumer
—
—
—
—
Total performing
12
$
3,535
12
$
3,657
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
2
290
2
301
Residential mortgage – home equity
—
—
—
—
Consumer
—
—
—
—
Total non-accrual
2
290
2
301
Total TDRs
14
$
3,825
14
$
3,958
The level of TDRs was $3.8 million at June 30, 2021 compared to $4.0 million at December 31, 2020, with a slight reduction due to payments made during the first six months of 2021. There were no new TDRs during the first six months of 2021.
Allowance and Provision for Loan Losses
The ALL is maintained to absorb probable incurred credit 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.
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The following table presents a summary of the activity in the ALL for the six months ended June 30:
(dollars in thousands)
2021
2020
Balance, January 1
$
16,486
$
12,537
Charge-offs:
Acquisition and development
(81)
(31)
Commercial and industrial
—
(232)
Residential mortgage
(82)
(98)
Consumer
(175)
(223)
Total charge-offs
(338)
(584)
Recoveries:
Commercial real estate
—
66
Acquisition and development
110
22
Commercial and industrial
38
16
Residential mortgage
29
48
Consumer
78
88
Total recoveries
255
240
Net credit charge-offs
(83)
(344)
Provision for loan losses
665
4,821
Balance at end of period
$
17,068
$
17,014
Allowance for loan losses to gross loans outstanding (as %)
1.49
%
1.43
%
Net credit charge-offs to average loans outstanding during the period, annualized (as %)
(0.01)
%
(0.06)
%
The ALL increased to $17.1 million at June 30, 2021 compared to $16.5 million at December 31, 2020. The ratio of the ALL to loans outstanding, including PPP loan balances, was 1.49% at June 30, 2021 compared to 1.43% at June 30, 2020 and 1.41% at December 31, 2020. The ALL to loans outstanding, on a non-GAAP basis, excluding PPP loan balances of $74.1 million, was 1.60% at June 30, 2021, and 1.55% at December 31, 2020, excluding PPP loan balances of $114.0 million. This increase in 5 basis points is primarily related to the decrease in loan balances, offset slightly by the increase in the reserves.
The ratio of net charge offs to average loans for the six months ended June 30, 2021 was an annualized 0.01%, compared to 0.06% for the six months ended June 30, 2020. The CRE portfolio did not have any charge offs or recoveries in the first six months of 2021, compared to an annualized net recovery rate of 0.04% as of June 30, 2020. The A&D loans had an annualized net recovery rate of 0.05% as of June 30, 2021, compared to a net charge-off rate of 0.01% as of June 30, 2020. The C&I portfolio had net recoveries to average loans of 0.03% as of June 30, 2021, compared to net charge-offs of 0.22% as of June 30, 2020. The residential mortgage ratios were a net charge-off rate of 0.03% as of June 30, 2021, compared to net charge-off rate of 0.02% as of June 30, 2020, and the consumer loan ratios were net charge-off rates of 0.42% and 0.75% as of June 30, 2021 and June 30, 2020, respectively. Our special assets team continues to aggressively collect on charged-off loans.
Management believes that the ALL at June 30, 2021 was adequate to provide for probable credit 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 June 30, 2021, the total amortized cost basis of the available-for-sale investment portfolio was $247.6 million, compared to a fair value of $242.0 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 $65.7 million, compared to a fair value of $75.6 million.
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The following table presents the composition of our securities portfolio at amortized cost and fair values at the dates indicated:
June 30, 2021
December 31, 2020
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
$
59,703
$
58,121
24%
$
75,856
$
76,433
34%
Residential mortgage-backed agencies
32,027
31,482
13%
22,999
22,899
10%
Commercial mortgage-backed agencies
54,361
54,190
22%
32,549
33,042
14%
Collateralized mortgage obligations
73,559
72,156
30%
70,372
70,637
31%
Obligations of state and political subdivisions
9,417
9,834
4%
10,144
10,614
5%
Collateralized debt obligations
18,579
16,230
7%
18,544
13,260
6%
Total available for sale
$
247,646
$
242,013
100%
$
230,464
$
226,885
100%
Securities Held to Maturity:
Residential mortgage-backed agencies
$
35,595
$
36,147
48%
$
34,597
$
35,732
46%
Commercial mortgage-backed agencies
9,747
10,144
13%
11,716
12,303
16%
Collateralized mortgage obligations
118
119
0%
1,348
1,406
2%
Obligations of state and political subdivisions
20,223
29,164
39%
20,602
28,171
36%
Total held to maturity
$
65,683
$
75,574
100%
$
68,263
$
77,612
100%
Total fair value of investment securities available-for-sale increased by $15.1 million since December 31, 2020. At June 30, 2021, the securities classified as available-for-sale included a net unrealized loss of $5.6 million, which represents the difference between the fair value and amortized cost of securities in the portfolio.
As discussed in Note 7 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 $225.8 million of the available-for-sale portfolio was valued using Level 2 pricing and had net unrealized losses of $3.3 million at June 30, 2021. The remaining $16.2 million of the securities available-for-sale represents the entire collateralized debt obligation (“CDO”) portfolio, which was valued using significant unobservable inputs (Level 3 assets). The $2.3 million in net unrealized losses associated with this portfolio relates to nine pooled trust preferred securities that comprise the CDO portfolio. Net unrealized losses of $1.4 million represent non-credit related OTTI charges on seven of the securities, while $0.9 million of unrealized losses relates to two securities which have had no credit related OTTI.
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The following table provides a summary of the trust preferred securities in the CDO portfolio and the credit status of these securities as of June 30, 2021:
Level 3 Investment Securities Available for Sale
(dollars in thousands)
Investment Description
First United Level 3 Investments
Security Credit Status
Deferrals/
Collateral
Number of
Defaults
Support
Performing
Fair
Unrealized
Lower
as % of
as % of
Issuers/
Amortized
Market
Gain/
Credit
Original
Original
Performing
Collateral
Performing
Total
Deal
Class
Cost
Value
(Loss)
Rating
Collateral
Collateral
Collateral
Support
Collateral
Issuers
Preferred Term Security XVIII*
C
$
1,894
$
1,443
$
(451)
C
676,565
14.82%
268,049
21,124
7.88%
40 / 56
Preferred Term Security XVIII
C
2,717
2,164
(553)
C
676,565
14.82%
268,049
21,124
7.88%
40 / 56
Preferred Term Security XIX*
C
1,843
1,776
(67)
C
700,535
6.57%
412,787
28,706
6.95%
47 / 52
Preferred Term Security XIX*
C
1,103
1,066
(37)
C
700,535
6.57%
412,787
28,706
6.95%
47 / 52
Preferred Term Security XIX*
C
2,556
2,487
(69)
C
700,535
6.57%
412,787
28,706
6.95%
47 / 52
Preferred Term Security XIX*
C
1,104
1,066
(38)
C
700,535
6.57%
412,787
28,706
6.95%
47 / 52
Preferred Term Security XXII*
C-1
1,594
1,407
(187)
C
1,386,600
10.31%
624,548
72,765
11.65%
58 / 72
Preferred Term Security XXII*
C-1
3,984
3,519
(465)
C
1,386,600
10.31%
624,548
72,765
11.65%
58 / 72
Preferred Term Security XXIII
C-1
1,784
1,302
(482)
C
1,467,000
13.97%
658,365
74,616
11.33%
71 / 83
Total Level 3 Securities Available for Sale
$
18,579
$
16,230
$
(2,349)
*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 6.57% to 14.82% 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 June 30, 2021 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 June 30, 2021, (b) an income valuation approach technique
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(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.
Management uses 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, 2020 and June 30, 2021.
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 six months of 2021. 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)
June 30, 2021
December 31, 2020
Non-interest bearing demand deposits:
Retail
$
497,736
34%
$
420,427
30%
Interest-bearing deposits:
Demand
207,820
14%
201,571
14%
Money Market:
Retail
322,525
22%
376,096
26%
Savings deposits
228,516
16%
196,046
14%
Time deposits less than $100,000:
Retail
80,690
6%
88,728
6%
Time deposits $100,000 or more:
Retail
118,824
8%
139,498
10%
Total Deposits
$
1,456,111
100%
$
1,422,366
100%
Total deposits at June 30, 2021 increased by $33.7 million when compared to deposits at December 31, 2020. During the first six months of 2021, non-interest-bearing deposits increased by $77.3 million, driven by retail and commercial account growth partially attributable to government stimulus programs, including the most recent PPP funding round. Traditional savings accounts increased by $32.5 million, as we continued to see significant growth in our Prime Saver product and total demand deposits increased by $6.2 million. Total money market accounts decreased by $53.6 million due primarily to management’s decision to move wealth management money market funds off balance sheet in the first quarter of 2021. We believe that these funds can be readily shifted back to in-house money market accounts should liquidity needs arise in the future. Time deposits decreased by $28.7 million, primarily in time deposits over $100,000, as we continued to reduce pricing on single-service relationships and municipal bids.
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Borrowed Funds
The following table presents the composition of our borrowings at the dates indicated:
(in thousands)
June 30,
2021
December 31,
2020
Securities sold under agreements to repurchase
$
49,406
$
49,160
Total short-term borrowings
49,406
49,160
FHLB advances
$
70,000
$
70,000
Junior subordinated debt
30,929
30,929
Total long-term borrowings
$
100,929
$
100,929
Total short-term borrowings increased slightly by $0.2 million during the first six months of 2021. This increase was due to increased cash balances from our existing accounts. Long-term borrowings remained constant during the first six months of 2021.
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, PNC Financial Services, Atlantic Community Bankers Bank, Community Bankers Bank and Zions National Bank).
2. Secured advances with the FHLB, 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. This program expired on July 31, 2021.
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.
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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 June 30, 2021, we were asset sensitive.
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.
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Based on the simulation analysis performed at June 30, 2021 and December 31, 2020, management estimated the following changes in net interest income, assuming the indicated rate changes:
(Dollars in thousands)
June 30,
2021
December 31,
2020
+400 basis points
$
6,342
$
5,124
+300 basis points
$
4,949
$
4,067
+200 basis points
$
3,455
$
2,897
+100 basis points
$
1,676
$
1,527
-100 basis points
$
(2,856)
$
(2,174)
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, 2020. Our NII simulation analysis as of December 31, 2020 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, 2020 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 June 30, 2021, the Bank had $130.0 million available through unsecured lines of credit with correspondent banks, $1.0 million available through a secured line of credit with the Fed Discount Window and approximately $122.2 million available through the FHLB. Management 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 First United 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 June 30, 2021, both the Bank and First United Corporation are considered to be well-capitalized.
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The following table presents our capital ratios as of the dates indicated:
June 30,
2021
December 31,
2020
Required for
Capital
Adequacy
Purposes
Required
to be Well
Capitalized
Total Capital (to risk-weighted assets)
Consolidated
15.80
%
16.08
%
8.00
%
10.00
%
First United Bank & Trust
14.92
%
15.50
%
8.00
%
10.00
%
Tier 1 Capital (to risk-weighted assets)
Consolidated
14.55
%
14.83
%
6.00
%
8.00
%
First United Bank & Trust
13.66
%
14.25
%
6.00
%
8.00
%
Common Equity Tier 1 Capital (to risk-weighted assets)
Consolidated
12.37
%
12.61
%
4.50
%
6.50
%
First United Bank & Trust
13.66
%
14.25
%
4.50
%
6.50
%
Tier 1 Capital (to average assets)
Consolidated
9.94
%
10.36
%
4.00
%
5.00
%
First United Bank & Trust
9.20
%
9.81
%
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 June 30, 2021 to December 31, 2020, short-term borrowings increased $0.2 million, primarily due to the increase in our Treasury Management overnight investment sweep accounts as we saw growth in balances from our existing municipality accounts.
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.
Commitments to extend credit in the form of consumer, commercial and business at the dates indicated were as follows:
(in thousands)
June 30,
2021
December 31,
2020
Residential Mortgage - home equity
$
63,200
$
59,615
Residential Mortgage - construction
18,768
12,220
Commercial
131,848
125,294
Consumer - personal credit lines
4,638
4,314
Standby letters of credit
16,685
17,675
Total
$
235,139
$
219,118
The increase of $16.0 million in commitments at June 30, 2021, when compared to December 31, 2020 was due to continued demand for consumer and commercial construction funding during the first six months of 2021. Management will continue to monitor these balances.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.