First United Corporation (FUNC) — Q1 2023 Form 10-Q
Business context and reporting period: Unaudited results for the three months ended March 31, 2023, compared with Q1 2022 unless otherwise noted. First United is a Maryland financial holding company whose principal business is community banking and trust and investment services. Dollar amounts below are in millions unless stated otherwise.
Financial results and condition
- Earnings: Net income was $4.4 million, down from $5.7 million; diluted EPS was $0.65 versus $0.86. Return on average assets was 0.94% versus 1.31%, and return on average equity was 11.87% versus 16.49%.
- Revenue and margins: Net interest income was $14.5 million, up $1.2 million year over year. Fully taxable equivalent net interest margin rose to 3.53% from 3.40% (GAAP margin: 3.48% versus 3.34%). Total other operating income was $4.4 million, broadly flat. Higher loan yields and balances supported interest income, while sharply higher deposit and borrowing costs increased interest expense.
- Expenses and credit: Operating expenses rose to $12.6 million from $10.6 million, principally from compensation and employee benefits, which increased $1.3 million. Credit loss expense was $0.5 million, compared with a $0.4 million credit in Q1 2022. The loan allowance was $16.9 million, or 1.31% of gross loans.
- Cash flow: Operating cash flow was $3.5 million versus $3.1 million. Investing activities used $8.8 million; financing provided $86.9 million, including $80.0 million of new FHLB advances. Cash and cash equivalents increased $81.6 million to $155.9 million.
- Balance sheet and funding: Total assets were $1.94 billion, up $89.3 million from year-end 2022. Net loans were $1.27 billion and deposits were $1.59 billion. Short-term borrowings were $52.0 million and long-term borrowings $110.9 million, for total borrowings of $163.0 million. Shareholders’ equity was $152.9 million.
- Liquidity and capital: Reported net available liquidity sources totaled $511.1 million, including excess cash, unpledged securities and external facilities. The Bank remained “well capitalized”; its total risk-based capital ratio was 14.25% and Tier 1 leverage ratio was 10.00%. The report states that the CECL adoption adjustment did not materially affect capital ratios.
- Credit quality: Nonaccrual loans were $3.3 million, down from $3.5 million at year-end; nonperforming assets were $7.9 million, or 0.41% of assets. Loans past due 30 days or more and still accruing were 0.17% of the portfolio.
Material changes versus comparable periods
- Net income declined $1.3 million year over year despite higher net interest income; increased personnel and other operating costs and a swing to credit loss expense were principal factors.
- Deposit interest expense rose substantially as rates increased and balances shifted toward interest-bearing accounts. Noninterest-bearing deposits fell $38.1 million from year-end 2022; total deposits nevertheless increased $20.6 million, including $61.1 million of brokered deposits.
- Management added $80.0 million in FHLB advances and built cash balances under its contingency funding plan amid banking-sector market disruption and uncertainty around deposit growth.
- Loans increased $9.6 million from year-end, led by residential mortgages and acquisition-and-development lending. Nonperforming assets declined from $8.5 million at year-end.
Outlook, risks, contingencies and unusual items
- The filing gives no specific earnings or revenue guidance. Management said Q1 results are not necessarily indicative of full-year results.
- Management described deposit competition, inflation-related spending, rising rates and banking-industry liquidity concerns as relevant conditions. It said deposit outflows in late 2022 and January 2023 were driven by competition and spending, not directly by recent market disruptions.
- Interest-rate sensitivity modeling showed estimated net interest income increases of $2.0 million under a +100-basis-point scenario and $8.9 million under +400 basis points; declines of $2.2 million and $5.1 million were estimated under -100 and -200 basis-point scenarios, respectively. These are model estimates subject to assumptions, not guidance.
- Unrealized losses remained material in the securities portfolio: AFS securities had a $24.3 million amortized-cost-to-fair-value shortfall; HTM securities had a $28.5 million shortfall. The company reported no credit-loss allowance on AFS or HTM securities at quarter-end. Accumulated other comprehensive loss was $39.0 million.
- The company adopted CECL on January 1, 2023. Adoption increased the loan allowance by $2.1 million and the reserve for unfunded commitments by approximately $0.9 million, and reduced retained earnings by $2.2 million net of tax. Management’s credit-loss estimates rely on forecasts and judgments; actual losses may differ.
- Uninsured deposits were $465.4 million, or 29% of deposits. The filing identifies possible adverse effects from further banking-sector instability, including liquidity pressure, reduced market access, increased regulatory scrutiny, and higher insurance assessments or capital requirements.
- There were no legal proceedings reported, no loan modifications to borrowers experiencing financial difficulty during the quarter, and management reported effective disclosure controls with no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether deposit stability, deposit pricing and reliance on brokered funding change after quarter-end; track the 29% uninsured-deposit share and contingency liquidity capacity.
- Whether rising funding costs continue to outpace asset repricing and pressure net interest margin and earnings.
- How the securities portfolio’s unrealized losses, including HTM losses, evolve and whether liquidity needs could require securities sales.
- Whether credit quality and CECL reserves remain adequate as economic conditions and borrower performance change, particularly in commercial real estate and residential mortgage exposures.
- Whether the $80.0 million FHLB advances, other borrowing levels and regulatory capital ratios remain consistent with management’s liquidity and capital plans.