First United Corporation (FUNC) — Q3 2021 Form 10-Q
Business context and period. First United is a bank holding company whose principal subsidiary is First United Bank & Trust. This unaudited filing covers the quarter and nine months ended September 30, 2021; balance-sheet comparisons are to December 31, 2020. Amounts below are in millions unless otherwise stated.
Financial results and position
- Q3 earnings: Net income was $4.4 million, down from $5.0 million a year earlier; diluted EPS was $0.66 versus $0.70. Net interest income increased to $13.6 million from $11.9 million.
- Nine-month earnings: Net income was $12.2 million versus $9.3 million, and diluted EPS was $1.81 versus $1.32. Results included $3.3 million of litigation settlement expense and a $2.4 million FHLB prepayment penalty. Excluding these items and their tax effect, management reported non-GAAP adjusted net income of $16.6 million and adjusted EPS of $2.45.
- Revenue and margins: Nine-month net interest income was $38.6 million GAAP ($39.3 million fully taxable-equivalent, or FTE), up from $36.4 million ($37.1 million FTE). FTE net interest margin was 3.21% for nine months, down from 3.43%; Q3 FTE margin was 3.38%, up from 3.12%. Nine-month other income was $13.6 million versus $11.4 million.
- Expenses and credit costs: Nine-month operating expenses rose to $37.0 million from $33.0 million, including the settlement and prepayment costs. Loan-loss provision was $68,000 versus $5.0 million; the company recorded $352,000 in net recoveries, compared with $1.3 million in net charge-offs.
- Cash flow: For nine months, operating cash flow was $10.4 million, investing cash flow was positive $9.7 million, and financing cash flow was negative $34.6 million. Cash and cash equivalents ended at $134.9 million, down from $149.4 million at year-end 2020.
- Balance sheet and funding: Total assets were $1.709 billion, net loans $1.144 billion, deposits $1.444 billion, and shareholders’ equity $133.8 million. Deposits increased $22.1 million from year-end. Short-term borrowings were $72.4 million; long-term borrowings were $30.9 million, down from $100.9 million after repayment of $70 million in FHLB advances. The repayment incurred the $2.4 million penalty.
- Capital and liquidity: The company and Bank were reported as well-capitalized. Consolidated total capital, Tier 1, CET1, and leverage ratios were 15.51%, 14.26%, 12.15%, and 10.33%, respectively. Available funding included about $130 million in correspondent-bank lines, $189 million of FHLB borrowing capacity, and $1 million at the Federal Reserve Discount Window.
Material changes and management commentary
- YTD earnings benefited from lower funding costs, a $4.9 million reduction in loan-loss provision, and growth in trust, brokerage, and debit-card income. In Q3, higher net interest income and a provision credit were outweighed by operating costs, particularly the FHLB prepayment penalty.
- Loans decreased $5.9 million from year-end. Growth in residential mortgages and consumer loans—including purchased loan pools—was offset by PPP forgiveness and other portfolio runoff. PPP loans outstanding declined to $30.3 million from $114.0 million at December 31, 2020; $150 million of PPP principal was forgiven during the first nine months of 2021.
- Nonaccrual loans increased to $7.4 million from $3.3 million, primarily after two hospitality loans totaling about $4.0 million moved to nonaccrual. Allowance for loan losses was $16.9 million, or 1.46% of loans including PPP balances. Management considered the allowance adequate, while noting estimates may differ from actual losses.
- Management said the FHLB repayment should reduce funding costs in Q4 and future periods. It also anticipated further OREO reductions from pending sales and tax benefits from a new low-income housing investment beginning in 2022. The filing provides no formal earnings guidance.
Outlook, risks, contingencies, and unusual items
- COVID-19 and borrowers: Management described continuing uncertainty from the pandemic. As of October 15, 2021, 12 modified loans not treated as TDRs totaled $9.9 million and were scheduled to return to contractual terms in the next quarter. Lobbies were closed again during Q3 amid rising cases and reduced staffing.
- Credit and concentrations: Hospitality-related nonaccruals, commercial real estate and development exposures, and the quality of impaired loans warrant monitoring. Accruing loans past due 30 days or more were 0.20% of loans. The allowance methodology is based on estimates; CECL adoption was scheduled for January 1, 2023 and its impact was still being evaluated.
- Market and funding risks: Management identified interest-rate fluctuation as the primary market risk and reported the balance sheet was asset sensitive. Its model estimated that a 100-basis-point rate increase would raise net interest income by about $1.0 million, while a 100-basis-point decrease would reduce it by about $3.0 million; results depend on assumptions. CDO securities valued with significant unobservable inputs were $17.1 million, and the company noted limited market activity and valuation uncertainty.
- Legal and capital actions: The filing reports $3.3 million in settlement expense related to shareholder litigation, while the legal-proceedings section states “None.” The company repurchased 400,000 shares for $7.2 million; management said the buyback and holding-company funding needs affected capital ratios. No material change in risk factors was reported.
Important facts for investors to verify
- Reconcile the share counts: the balance sheet reports 6,617,941 shares outstanding at September 30, while the cover page reports 6,177,941 at October 31.
- Assess whether improved funding costs after the $70 million FHLB repayment offset its one-time penalty, and how margin trends develop after PPP fee income runs down.
- Review migration and repayment performance of the hospitality loans, the $9.9 million of COVID-modified loans, and the broader nonaccrual and impaired-loan portfolio.
- Check the assumptions and sensitivity of the $17.1 million Level 3 CDO valuation and the potential impact of interest-rate changes on earnings and securities values.
- Distinguish GAAP performance from management’s non-GAAP adjusted earnings, which exclude the settlement and FHLB prepayment costs.