First United Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. First United is a Maryland financial holding company whose principal subsidiary is First United Bank & Trust. Unless stated otherwise, dollar amounts below are in millions.
Financial performance and position
- Second-quarter results: Net interest income was $13.97 million, provision for loan losses $0.62 million, and other operating income $4.43 million. Net income was $5.43 million, or $0.82 per diluted share, versus $4.40 million and $0.66 per share in Q2 2021. The filing does not present a consolidated “revenue” line; interest income plus other operating income was $19.16 million for the quarter.
- First-half results: Net income was $11.14 million, or $1.68 per diluted share, compared with $7.83 million and $1.15 per share in 2021. Net interest income increased to $27.31 million from $25.00 million; other operating income declined to $8.86 million from $10.09 million.
- Margins: GAAP net interest margin was 3.46% in Q2 and 3.40% for the first half, compared with 3.10% and 3.07% in the comparable 2021 periods. On a fully taxable equivalent basis, the margins were 3.52% and 3.46%, respectively.
- Cash flow: For the first half, operating cash flow was $10.46 million, investing cash outflow $129.84 million, and financing cash inflow $25.32 million. Cash and cash equivalents fell $94.07 million to $21.65 million. Investing outflows included $80.45 million of net loan growth and $52.46 million of HTM securities purchases.
- Balance sheet and funding: At June 30, assets were $1.75 billion, net loans $1.22 billion, deposits $1.48 billion, and shareholders’ equity $132.89 million. Total deposits rose $15.0 million from year-end, while short-term borrowings increased $12.2 million to $69.9 million. Long-term borrowings were $30.9 million.
- Capital and liquidity: The Bank remained “well capitalized,” with total risk-based capital of 14.64% and Tier 1 leverage of 10.40%. Management reported $111.1 million available under correspondent-bank lines and approximately $189.8 million through the FHLB.
Changes versus comparable periods
- Q2 net income increased about 23% year over year, supported by $1.21 million higher FTE net interest income and $0.4 million lower operating expenses. Lower mortgage-sale gains, lower investment gains, and higher loan-loss provision partly offset the improvement.
- First-half net income increased about 42%. Higher net interest income and the absence of the $3.3 million litigation settlement expense recorded in 2021 were key contributors. The filing’s adjusted comparison, excluding that settlement and its tax effect, shows first-half 2021 net income of $10.40 million versus $11.14 million in 2022.
- Gross loans grew $79.9 million from December 31, 2021, led by commercial real estate growth of $47.7 million and commercial and industrial growth of $44.6 million. The investment portfolio’s fair value composition changed substantially after a $139.0 million transfer from available-for-sale to held-to-maturity securities effective February 1, 2022.
- Accumulated other comprehensive loss widened to $45.92 million from $27.31 million at year-end, reflecting securities and pension-related losses. The pension position shifted from a $4.8 million asset to a $4.7 million liability, which management attributed to rising rates and market volatility.
Management commentary, outlook, and risks
- Management said it had not yet experienced significant deposit-pricing pressure but expected deposit rates to rise during the remainder of 2022 in response to Federal Reserve rate increases. The Bank described itself as asset sensitive; its model estimated a $0.49 million increase in net interest income under a +100-basis-point scenario and a $3.06 million decrease under a -100-basis-point scenario. These are model estimates subject to assumptions, not earnings guidance.
- Second-quarter deposits declined $23.2 million, primarily because a local municipality reduced money-market balances. Management planned to bring approximately $50 million of trust-department money-market accounts back onto the balance sheet in Q3. Increased overnight borrowing was also attributed to loan growth, lower deposits, and timing of an expected loan payoff.
- Credit metrics remained modest overall, but accruing loans past due 30 days or more increased to 0.37% from 0.31% at year-end. The substandard balance rose $6.3 million, primarily because one nursing-care relationship was downgraded; management said it remained current on contractual payments and was not considered impaired. The allowance was $15.74 million, or 1.28% of gross loans; non-accrual loans were $2.15 million.
- Available-for-sale securities had $16.9 million of net unrealized losses against $149.7 million amortized cost; held-to-maturity securities had $20.3 million of unrecognized losses against $240.6 million amortized cost. The securities transfer did not create a gain or loss at transfer; the related unrealized loss remains in accumulated other comprehensive loss and will be amortized as a yield adjustment.
- There were no new troubled debt restructurings or TDR payment defaults in the first half. Management was preparing for CECL adoption on January 1, 2023, but had not yet determined the standard’s potential financial impact. The filing reports no legal proceedings and no material change in risk factors from the prior Form 10-K. Management stated disclosure controls were effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether deposit pricing and deposit balances respond as expected to further rate changes, including the planned return of trust-department balances.
- Actual effects of the $139.0 million securities reclassification, continued unrealized losses, and pension-market sensitivity on equity and reported capital.
- Performance and collateral support for the nursing-care relationship downgraded to substandard, as well as trends in delinquencies, charge-offs, and the allowance.
- The eventual CECL transition impact and the assumptions behind management’s interest-rate sensitivity estimates.
- Whether loan growth can be funded without sustained reliance on higher-cost deposits or short-term borrowings.