First United Corporation (NASDAQ: FUNC) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Figures are unaudited; financial statement amounts below are in millions unless noted. First United is a bank holding company whose operations include community banking and trust and investment services.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Interest income | $19.97 | $14.73 | $37.80 | $28.88 |
| Net interest income | $14.17 | $13.97 | $28.69 | $27.31 |
| Net interest margin (GAAP) | 3.21% | 3.52% | 3.34% | 3.46% |
| Other operating income | $4.57 | $4.43 | $8.96 | $8.86 |
| Operating expenses | $12.51 | $10.63 | $25.15 | $21.21 |
| Net income | $4.41 | $5.43 | $8.79 | $11.14 |
| Diluted EPS | $0.66 | $0.82 | $1.31 | $1.68 |
- Q2 net income fell about 19% year over year; first-half net income fell about 21%. For the first half, return on average assets was 0.95% versus 1.26%, and return on average equity was 11.43% versus 16.32%.
- Net interest income increased, but funding costs rose sharply: first-half interest expense was $9.11 million versus $1.57 million. The filing reports first-half FTE net interest margin of 3.39% versus 3.40%; Q2 FTE margin was 3.26% versus 3.46%.
- At June 30, total assets were $1.928 billion, loans $1.350 billion, deposits $1.580 billion, and shareholders’ equity $155.2 million. Loans rose $70.5 million and deposits rose $9.2 million from December 31, 2022.
- Cash and cash equivalents were $88.6 million, up from $74.3 million at year-end 2022. First-half cash flows were $8.0 million from operations, negative $66.2 million from investing, and positive $72.3 million from financing.
- Total borrowings were $161.0 million, up from $95.5 million at year-end, including $80.0 million of new FHLB advances. Short-term borrowings were $50.1 million and long-term borrowings $110.9 million.
- The Bank’s June 30 regulatory capital ratios were 13.87% total capital, 12.64% Tier 1 and CET1, and 9.78% Tier 1 leverage; it remained classified as well capitalized.
Material changes and operating trends
- Higher loan yields and interest-earning asset balances lifted first-half interest income by $8.9 million, but interest expense increased $7.5 million. Rising deposit pricing, mix shifts into interest-bearing accounts, brokered deposits, and higher borrowing costs weighed on margin.
- First-half operating expenses increased $3.9 million. Salaries and benefits rose $2.4 million, including higher health claims, new hires, merit increases, and incentive compensation; miscellaneous costs also rose, including pension and check-fraud-related expenses.
- Loan balances grew across commercial real estate, acquisition and development, commercial and industrial, and residential mortgage portfolios. Management said residential production normalized as rates rose and began shifting some activity toward the secondary market to reduce funding needs.
- Nonaccrual loans decreased to $3.0 million from $3.5 million at year-end; nonperforming assets were $8.0 million, or 0.41% of assets. Loans past due 30 days or more were 0.18% of the portfolio. The allowance for credit losses on loans was $16.9 million, or 1.25% of gross loans.
- Available-for-sale securities had a $26.4 million net unrealized loss at June 30; held-to-maturity securities had a $31.7 million difference between amortized cost and fair value. No ACL was recorded on the AFS or HTM portfolio at quarter-end.
Outlook, risks and unusual items
- The filing provides no earnings or revenue guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Amid banking-market disruption and uncertainty about deposit growth, management activated its liquidity contingency plan and added brokered deposits and FHLB funding as a precaution. Reported available liquidity was $460.3 million net of amounts used, including cash, unpledged securities, credit lines and FHLB capacity.
- Uninsured deposits were $229.9 million, or 15% of deposits, versus 29% at year-end 2022. Management attributed deposit changes principally to competition, spending and customer activity, and said outflows were not directly related to 2023 market disruptions.
- Management described the company as asset-sensitive. Its model estimated that a 100-basis-point rate increase would raise net interest income by $0.7 million, while a 100-basis-point decrease would reduce it by $1.0 million; these are model estimates subject to assumptions and limitations.
- CECL was adopted January 1, 2023, increasing the loan allowance by about $2.1 million and the off-balance-sheet reserve by $0.9 million, with a $2.2 million after-tax reduction to retained earnings. Management cited sensitivity of credit-loss estimates to economic forecasts, borrower condition and other assumptions.
- Management performed a goodwill impairment analysis in light of banking-sector and stock-price pressures and concluded fair value exceeded carrying value at June 30; it said it would continue monitoring. No material changes to previously disclosed risk factors were reported. No legal proceedings were reported.
Most important facts for investors to verify
- Whether deposit pricing and mix shifts continue to pressure net interest margin and earnings.
- Liquidity resilience, funding costs and reliance on brokered deposits and FHLB advances, alongside uninsured-deposit levels.
- Loan growth and credit quality, particularly commercial real estate exposure, criticized loans, charge-offs and CECL reserve assumptions.
- The effect of unrealized securities losses and interest-rate movements on capital, liquidity and future earnings.
- Whether higher personnel, benefit, fraud-related and other operating costs persist, and whether goodwill valuation assumptions remain supportable.