FIRST UNITED CORP annual report, FY2023

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First United Corporation (NASDAQ: FUNC) — 2023 Form 10-K

Business context and reporting period

This is the annual report for the fiscal year ended December 31, 2023, compared with 2022—not a standalone fourth-quarter report. First United is a community bank holding company serving Western Maryland and Northeastern West Virginia, with 26 banking offices. Its principal businesses are community banking and trust and investment services.

Financial performance and condition

  • Earnings: GAAP net income was $15.1 million, down from $25.0 million in 2022; diluted EPS was $2.25 versus $3.76. Management’s non-GAAP net income was $18.8 million, excluding the securities-sale loss and branch-closure costs.
  • Revenue and margin: Interest income rose to $81.2 million from $62.4 million, but interest expense climbed to $24.3 million from $4.8 million. Net interest income fell to $56.9 million from $57.6 million; FTE net interest margin declined to 3.26% from 3.56%. Total other operating income was $14.5 million, including a $4.2 million loss on AFS securities; it was $18.1 million in 2022.
  • Expenses and taxes: Operating expenses increased 16.5% to $50.2 million, including higher compensation, FDIC premiums, technology, and branch-closure costs. Income before taxes was $19.5 million versus $33.2 million; income tax expense was $4.4 million versus $8.1 million.
  • Balance sheet: Total assets were $1.906 billion, up 3.1%. Net loans were $1.389 billion, with gross loans growing $127.2 million to $1.407 billion. Deposits declined $19.8 million to $1.551 billion; shareholders’ equity was $161.9 million.
  • Credit quality: The allowance for credit losses was $17.5 million, or 1.24% of loans, versus $14.6 million, or 1.14%, at year-end 2022. Net charge-offs were $0.9 million versus $0.7 million. Nonaccrual loans were $4.0 million; nonperforming assets were $9.0 million, or 0.47% of assets.
  • Cash flow: Operating cash flow was $22.5 million versus $26.5 million. Investing activities used $81.7 million, principally reflecting loan growth; financing activities provided $34.7 million. Cash and cash equivalents fell $24.6 million to $49.8 million.
  • Capital and liquidity: The Bank’s total risk-based capital ratio was 14.05% and its CET1 ratio was 12.81%; it remained classified as well capitalized. Reported unused liquidity sources totaled $457.7 million, including $140.0 million in correspondent lines, $145.4 million in FHLB capacity, and $69.5 million under the BTFP, in addition to cash and unpledged securities.

Material changes versus 2022

  • Net income declined by $10.0 million. The main pressures were higher funding costs, $7.1 million of additional operating expenses, a $1.6 million credit-loss provision versus a $0.6 million credit in 2022, and the securities-sale loss.
  • Deposit interest expense increased $16.0 million as deposit costs rose and balances shifted toward interest-bearing accounts. Long-term borrowing expense rose $3.5 million, following $80.0 million of FHLB advances obtained in early 2023.
  • Commercial real estate, commercial and industrial, and residential mortgage loans grew. In the second half of 2023, management shifted more residential mortgage production toward the secondary market.
  • Deposits became more fully insured or collateralized: uninsured and uncollateralized deposits were 14% of total deposits, compared with 21% a year earlier.
  • Shareholders’ equity increased to $161.9 million from $151.8 million; accumulated other comprehensive loss narrowed to $35.8 million from $39.0 million.

Outlook, commentary, risks, and unusual items

  • The filing gives no specific earnings, revenue, margin, or growth guidance. Management describes liquidity as adequate and reports no known demands or uncertainties expected to materially impair its ability to meet future capital needs.
  • Management attributed margin compression to industry-wide funding-cost pressure. It identifies interest rates, deposit competition and outflows, local economic conditions, real estate values, and borrower performance as important uncertainties.
  • In December 2023, the company sold AFS securities with $24.6 million book value for $20.4 million, recording a $4.2 million pretax loss, as part of a balance-sheet restructuring intended to enhance liquidity and support lending. The sold securities had a weighted-average book yield of about 1.3% and weighted-average life of about 6.65 years.
  • Four leased branches were announced for closure effective February 29, 2024. The company recorded $0.6 million of related accelerated depreciation and lease-termination expenses in 2023, net of tax about $0.5 million.
  • After year-end, the company borrowed $40.0 million under the BTFP in January 2024 at 4.87%, maturing in January 2025. The Federal Reserve scheduled the program to stop originating new loans on March 11, 2024.
  • Other material risks include unrealized securities losses and sensitivity to rates, reliance on wholesale and brokered funding, concentrated regional and real-estate lending, potential credit-loss estimate changes, cybersecurity and third-party service disruptions, and regulatory and FDIC assessment costs. The company says CRE concentrations were below specified heightened-risk guidance thresholds at year-end.
  • The independent auditor issued an unqualified opinion and identified the allowance for credit losses—particularly forecast and model assumptions under CECL—as a critical audit matter. Management concluded internal control over financial reporting was effective; the auditor did not provide an integrated internal-control audit opinion.

Important facts for investors to verify

  • Reconcile reported GAAP earnings with management’s non-GAAP adjustments, especially the securities loss and branch-closure expenses.
  • Review deposit retention, deposit pricing, brokered funding use, and the 2024 maturity of the $30.0 million brokered deposit balance.
  • Assess the AFS and HTM portfolio’s unrealized losses, valuation assumptions, and available collateral relative to borrowing capacity.
  • Monitor loan growth and credit performance, including CRE exposures, nonaccrual trends, charge-offs, and CECL assumptions.
  • Confirm the effect of branch closures and the mortgage-production shift on expenses, loan growth, and future fee income.
  • Check subsequent liquidity developments, including BTFP repayment planning and changes in available funding after the program’s scheduled end of new lending.