First United Corporation — Q1 2022 Form 10-Q
Business context and reporting period. First United is a Maryland bank holding company whose principal subsidiary is First United Bank & Trust. This unaudited report covers the three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021 unless noted. Amounts below are in millions except per-share data and ratios.
Key financial metrics
| Metric | Q1 2022 | Comparable / change |
|---|---|---|
| Net income | $5.7 | $3.4 in Q1 2021; reported increase was mainly due to a $3.3 million litigation settlement expense in Q1 2021 |
| Adjusted net income (non-GAAP) | $5.7 | $6.0 in Q1 2021, excluding that settlement expense and its tax effect |
| Diluted EPS | $0.86 | $0.49 reported in Q1 2021; $0.86 adjusted in Q1 2021 |
| Net interest income | $13.3 GAAP; $13.6 fully taxable equivalent (FTE) | GAAP $12.2; FTE $12.5 in Q1 2021 |
| Net interest margin | 3.34% GAAP; 3.40% FTE | 3.05% GAAP; 3.11% FTE in Q1 2021 |
| Provision for loan losses | $0.4 credit | $0.1 expense in Q1 2021 |
| Operating cash flow | $3.1 provided | $7.9 provided in Q1 2021 |
| Total assets | $1,760.2 | $1,729.8 at year-end 2021 |
| Net loans / total deposits | $1,166.0 / $1,507.6 | Net loans $1,137.4 / deposits $1,469.4 at year-end 2021 |
| Cash and cash equivalents | $76.1 | $115.7 at year-end 2021; $193.0 at March 31, 2021 |
| Borrowings | $58.9 short-term; $30.9 long-term | $57.7 short-term; $30.9 long-term at year-end 2021 |
| Shareholders’ equity | $137.1 | $141.9 at year-end 2021 |
- FTE net interest income rose 8.9% year over year, chiefly as interest expense fell $1.0 million (56%). Lower deposit rates, reduced higher-cost time deposits, and repayment of $70 million of FHLB advances in 2021 contributed. Loan interest income declined $0.3 million, partly offset by higher investment income.
- Total other operating income was $4.4 million versus $4.9 million in Q1 2021, reflecting lower mortgage-sale gains as refinancing slowed. Other operating expenses were $10.6 million versus $12.5 million, which included the prior-year settlement charge; excluding that charge, core expenses increased $1.4 million, including higher salaries, equipment and data-processing costs.
- Net charge-offs were $0.2 million; the allowance for loan losses was $15.3 million, or 1.29% of loans, versus $16.0 million and 1.38% at year-end. Non-accrual loans were $2.3 million (0.20% of loans), and non-performing assets were $6.8 million (0.39% of assets).
- Deposits increased $38.2 million and gross loans increased $27.7 million during the quarter. Investing activities used $81.1 million, including $62.3 million net purchases of investment securities; financing activities provided $38.4 million. Cash and cash equivalents declined $39.6 million.
- The Bank reported regulatory capital ratios of 14.77% total capital, 13.59% Tier 1 and common equity Tier 1, and 10.14% Tier 1 capital to average assets; it remained “well capitalized.” Management disclosed $130.0 million available under correspondent credit lines and approximately $187.5 million available through the FHLB.
Material changes, outlook and risks
- Investment portfolio and equity: In February 2022, the Corporation transferred $139.0 million of securities from available-for-sale to held-to-maturity. The transfer was intended to limit further fair-value declines in a rising-rate environment. An associated $8.4 million unrealized loss remained in accumulated other comprehensive loss and will be amortized over the securities’ remaining lives. The portfolio’s market-value declines and pension-plan changes contributed to a $9.6 million quarterly other comprehensive loss; accumulated other comprehensive loss reached $36.9 million, versus $27.3 million at year-end.
- Credit quality: Substandard loans rose $6.3 million, mainly because one nursing-care relationship was downgraded from special mention. Management said it continued to perform to contract and was not considered impaired. Accruing loans past due 30 days or more declined to 0.19% from 0.31% at year-end.
- Interest-rate exposure: Management described the balance sheet as asset-sensitive. Its model estimated next-period net interest income changes of +$0.97 million under a 100-basis-point increase and -$3.50 million under a 100-basis-point decrease. These estimates depend on assumptions and are not guarantees.
- Management outlook: No earnings or revenue guidance was provided. Management anticipated further OREO reductions during 2022 if additional sale contracts close, and expected a new low-income housing tax-credit investment to provide tax benefits later in 2022 and in future years. Management said it believed liquidity and future capital resources were adequate.
- Other considerations: The $17.3 million CDO portfolio is valued using Level 3 inputs because its market is inactive; management reported no additional credit-related OTTI in Q1. The allowance is estimate-based, and actual credit losses may differ. CECL adoption was planned for January 1, 2023; the filing said the impact was still being evaluated.
- The filing reported no legal proceedings and no material changes to risk factors, while noting forward-looking statements are subject to risks that could cause actual results to differ.
Important facts for investors to verify
- Whether earnings trends remain sound after adjusting for the prior-year $3.3 million settlement, given adjusted Q1 net income declined from $6.0 million to $5.7 million.
- How rising rates, deposit pricing and funding mix affect net interest margin and the modeled interest-rate sensitivity.
- Whether securities valuation losses and accumulated other comprehensive loss stabilize, and the implications of the AFS-to-HTM transfer for liquidity and reported equity.
- Whether the nursing-care exposure, loan growth and net charge-offs lead to further changes in criticized loans, the allowance or provision expense.
- Whether forecast OREO sales occur, and the eventual impact and timing of CECL adoption on reserves and capital.