First United Corporation (NASDAQ: FUNC) — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are primarily with 2021. First United is a community bank holding company operating through First United Bank & Trust in Western Maryland and Northeastern West Virginia. The filing was signed March 24, 2023. The financial statements received an unqualified audit opinion; management reported effective disclosure controls and internal control over financial reporting.
Financial performance and position
- Profit: Net income was $25.0 million, up from $19.8 million; diluted EPS was $3.76 versus $2.95. Return on average assets was 1.39% and return on average equity was 18.19%.
- Net interest income and margin: GAAP net interest income was $57.6 million versus $52.5 million. On a fully taxable-equivalent basis, it rose 9.5% to $58.6 million; net interest margin increased to 3.56% from 3.28%.
- Revenue and expenses: Total other operating income, including net gains, was $18.1 million versus $20.7 million. Other operating expenses fell 9.7% to $43.1 million, largely because 2021 included a $3.3 million litigation settlement, a $2.4 million FHLB prepayment penalty and a $1.0 million charitable contribution. Salaries and benefits rose 9.4% to $24.1 million. Income tax expense was $8.1 million; the effective tax rate was 24.5%.
- Loans and credit: Gross loans grew $125.8 million to $1.279 billion; net loans were $1.265 billion. Commercial real estate loans rose $84.5 million and commercial and industrial loans $64.4 million; acquisition and development loans fell $57.5 million. The allowance for loan losses was $14.6 million, or 1.14% of loans, versus $16.0 million, or 1.38%. The provision was a $0.6 million credit; net charge-offs were $0.7 million. Non-accrual loans rose to $3.5 million from $2.5 million, and non-performing assets to $8.5 million from $7.2 million.
- Assets, deposits and equity: Total assets were $1.848 billion, up $118.3 million. Deposits increased $101.4 million to $1.571 billion, including growth in interest-bearing demand and money-market accounts; time deposits declined $42.7 million. Shareholders’ equity was $151.8 million, up from $141.9 million. Dividends declared were $4.2 million, or $0.63 per share.
- Cash flow: Operating activities provided $26.5 million; investing activities used $172.4 million, principally reflecting loan growth and securities purchases; financing activities provided $104.5 million, mainly from deposit growth. Cash and cash equivalents declined $41.4 million to $74.3 million.
- Debt and liquidity: Total borrowings were $95.5 million: $64.6 million short-term repurchase agreements and $30.9 million junior subordinated debt. At year-end, disclosed additional capacity included $195.3 million from FHLB, $140.0 million in correspondent lines and $9.6 million at the Federal Reserve Discount Window. These are available facilities, not cash on hand.
- Capital: The Corporation’s total risk-based capital ratio was 16.12%; the Bank’s was 14.37%. Both were categorized as well capitalized. The Bank’s CET1 ratio was 13.29% and leverage ratio 10.01%.
Material changes and notable items
- Net income improved mainly as net interest income increased and operating expenses declined from the elevated 2021 comparison. In 2022, higher interest income reflected investment balances and yields, loan growth, and the rising-rate environment; lower borrowing costs also contributed.
- Management transferred $139.0 million of securities from available-for-sale to held-to-maturity in February 2022. Available-for-sale securities had a $23.9 million gross unrealized loss at year-end; held-to-maturity securities had a $32.6 million fair-value shortfall to amortized cost. The transfer did not create an immediate gain or loss; an $8.4 million related unrealized loss remained in accumulated other comprehensive loss and is to be amortized over the securities’ remaining terms.
- Accumulated other comprehensive loss increased to $39.0 million from $27.3 million, largely reflecting securities valuation declines. This reduced reported equity but is distinct from the year’s net income.
- Management chose to retain more higher-rate residential mortgages rather than sell them, reducing mortgage-sale gains compared with 2021. Trust department income also declined, while service-charge and debit-card income increased.
Outlook, risks and contingencies
- Management anticipated increased net interest margin pressure in 2023 from higher deposit-pricing demands. The Bank was asset-sensitive at year-end, but modeled outcomes vary by rate scenario and depend on assumptions; the filing cautions that interest-rate estimates are not predictions.
- The company adopted the current expected credit loss (CECL) standard on January 1, 2023. Management expected a negative adoption impact but anticipated that the Corporation and Bank would remain well capitalized; the filing does not provide a clear quantified adoption amount.
- Principal risks include interest-rate and funding sensitivity, local economic and real-estate concentration, credit losses and allowance-estimation uncertainty, securities valuation and liquidity, competition, regulation, cyber and third-party service-provider disruptions, and climate-related effects on operations and borrowers.
- Management noted early-March 2023 failures of two financial institutions and anticipated that the FDIC could impose special assessments on banks to replenish the Deposit Insurance Fund. The amount and timing were not specified.
- Off-balance-sheet commitments at year-end included $268.2 million of loan commitments and standby letters of credit combined, including $14.3 million of standby letters. Management did not consider these arrangements likely to have a material effect, but they carry credit and potential funding exposure.
- The filing reports no legal proceedings and no share repurchases during the fourth quarter of 2022. Common dividends remain subject to regulatory, capital and debt-agreement restrictions; the TPS debentures prohibit dividends during any interest-deferral period.
Important facts for investors to verify
- How deposit pricing, deposit mix and liquidity evolve, and whether disclosed borrowing capacity remains accessible under stress.
- Whether 2023 CECL adoption affected the allowance, earnings and regulatory capital as management expected.
- Credit trends behind higher non-accrual loans and non-performing assets, including the residential real-estate loan identified as a key contributor, and the adequacy of the allowance as the loan portfolio grows.
- The practical liquidity and capital implications of securities unrealized losses, the held-to-maturity classification and any need to sell securities before recovery.
- Actual FDIC assessment costs following the 2023 bank failures, and the effect of any assessment on expenses and earnings.
- Dividend capacity, including Bank distributions to the parent and the terms governing the $30.9 million junior subordinated debt.