First United Corporation (FUNC) — Q1 2024 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2024; filed May 8, 2024. First United is a financial holding company operating community banking and trust and investment services businesses. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Financial performance and condition
- Earnings: Net income was $3.70 million, down 15.5% from $4.38 million in Q1 2023. Basic and diluted EPS were $0.56, versus $0.66 and $0.65, respectively. Adjusted net income, excluding $562,000 of accelerated depreciation, was $4.12 million; adjusted diluted EPS was $0.62 (both non-GAAP).
- Revenue and margin: Interest income increased to $21.90 million from $17.83 million, but interest expense rose to $8.09 million from $3.31 million. Net interest income fell 4.9% to $13.81 million. Net interest margin declined to 3.10% GAAP (3.12% fully taxable equivalent) from 3.48% (3.53% FTE); management said the margin would have been 3.21% excluding a $0.4 million interest reversal on newly non-accrual loans. Other operating income rose to $4.88 million from $4.39 million, including higher trust and brokerage income.
- Expenses and credit costs: Operating expenses were $12.88 million, up from $12.64 million. Credit loss expense was $0.95 million versus $0.54 million; income tax expense was $1.16 million versus $1.36 million. Return on average assets was 0.76% and return on average equity 9.07%, compared with 0.94% and 11.87%.
- Assets, loans and deposits: Total assets were $1.913 billion, up $7.1 million from year-end 2023. Gross loans were $1.412 billion, up $5.7 million; deposits were $1.563 billion, up $12.5 million. Cash and cash equivalents increased to $86.9 million from $49.8 million.
- Credit quality: Non-accrual loans rose to $16.0 million (1.13% of loans) from $4.0 million (0.28%). Two commercial and industrial relationships totaling $12.1 million moved to non-accrual, with a $0.4 million reversal of accrued interest and fees. The allowance for loan losses was $18.0 million, or 1.27% of gross loans, versus $17.5 million, or 1.24%, at year-end. Nonperforming assets were $20.5 million, 1.07% of assets, compared with $9.0 million, 0.47%.
- Liquidity and borrowings: Total borrowings were $150.4 million, down from $156.3 million. The company added $40 million of one-year Federal Reserve Bank Term Funding Program borrowing at 4.87%; a $40 million FHLB advance matured and was repaid. Management reported $479.6 million of net available liquidity sources, including $79.5 million excess cash and $192.6 million available FHLB capacity. The liquidity contingency plan was implemented during the quarter.
- Capital and securities: The Bank remained well capitalized; March 31 ratios included 14.17% total risk-based capital, 12.92% Tier 1 and common equity Tier 1, and 10.08% Tier 1 leverage. AFS securities had $95.6 million fair value versus $116.8 million amortized cost; HTM securities had $152.2 million fair value versus $183.2 million amortized cost. These differences reflect substantial unrealized losses, particularly in the HTM portfolio.
- Cash flow and dividends: Operating cash flow was $3.6 million, investing activities provided $28.3 million and financing activities provided $5.3 million. Cash increased $37.2 million during the quarter. The company declared a $0.20 per-share dividend, unchanged from Q1 2023.
Material changes versus the prior comparable period
- Net income declined by $0.7 million, primarily due to lower net interest income and higher credit loss expense. Deposit pricing pressure drove a 133-basis-point increase in average deposit costs, while loan yields and average loan balances increased.
- Wealth management income increased about $0.4 million, which management attributed to improving markets and growth in customer relationships.
- Non-accrual loans and nonperforming assets increased materially, largely due to the two commercial relationships noted above. Management said it was pursuing workout plans and anticipated normal collection processes, including possible return to accrual or foreclosure, over the next year.
- Branch closures in February 2024 resulted in $562,000 of accelerated depreciation expense. Management reported the related after-tax impact as approximately $0.4 million.
- Compared with Q1 2023, operating cash flow was broadly stable; investing cash flow shifted from an $8.8 million use to a $28.3 million source, reflecting securities maturities and paydowns. Financing cash flow decreased from $86.9 million to $5.3 million, as prior-year borrowing proceeds were not repeated.
Outlook, risks and other notable items
- The filing provides no specific earnings or financial guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Management described the company as asset sensitive. Its modeled net interest income changes range from an estimated increase of $1.47 million under a +100-basis-point scenario to a $1.58 million decrease under a -100-basis-point scenario; larger rate shocks show larger modeled effects. These are estimates subject to assumptions and limitations.
- Management identified credit estimates, borrower conditions, interest-rate movements, deposit pricing and liquidity demands as risks. It said it believed available liquidity was adequate for current and anticipated needs.
- Commercial real estate was 35% of loans. The filing states there were no loans secured by major-metropolitan office buildings or retail properties leased to major big-box tenants, and no significant change in CRE concentrations since year-end.
- No legal proceedings or material changes to previously disclosed risk factors were reported. Management concluded disclosure controls were effective at the reasonable-assurance level.
Important facts for investors to verify
- Track the status, repayment outlook and potential loss exposure of the two non-accrual commercial relationships, including changes in non-accrual balances and the allowance.
- Monitor net interest margin and funding costs, especially deposit repricing, wholesale borrowing use and the maturity or repayment of the $40 million BTFP borrowing.
- Review liquidity trends, uninsured deposits, and the company’s continued access to reported funding facilities; confirm how the contingency plan evolves.
- Assess the effect of unrealized securities losses and interest-rate changes on capital, liquidity and potential asset sales.
- Separate recurring earnings from the $562,000 branch-closure depreciation adjustment and confirm any further closure-related costs.
- Confirm future loan growth, credit quality, and whether management’s stated workout expectations for non-accrual credits are met.