First United Corporation (FUNC) — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; unaudited. First United is a bank holding company whose primary business is First United Bank & Trust. Financial statement amounts below are in millions unless otherwise stated.
Financial performance and position
- Third-quarter results: Net interest income was $15.1 million, noninterest income $4.6 million, and net income $6.9 million, or $1.04 per diluted share. Net interest margin was 3.66% on a fully taxable equivalent basis.
- Nine-month results: Net interest income was $42.5 million and noninterest income $13.4 million; net income was $18.1 million, or $2.72 per diluted share. Fully taxable equivalent net interest margin was 3.53%. The filing does not present a single total-revenue measure.
- Assets and lending: Total assets were $1.804 billion at September 30, up $73.8 million from December 31, 2021. Gross loans rose $124.2 million to $1.278 billion; net loans were $1.262 billion. Commercial real estate and commercial-and-industrial loans grew $63.7 million and $88.0 million, respectively, while acquisition-and-development loans declined $45.0 million.
- Deposits and borrowings: Deposits totaled $1.511 billion, up $41.7 million from year-end. Short-term borrowings were $89.7 million, up $32.0 million; long-term borrowings were $30.9 million. The $20 million overnight borrowing related to a delayed customer funding receipt was repaid shortly after quarter-end.
- Liquidity and cash flow: Cash and cash equivalents were $30.8 million, down from $115.7 million at year-end. For the first nine months, operating cash flow was positive $18.7 million, investing cash flow negative $174.6 million (primarily reflecting $125.0 million of net loan growth and securities activity), and financing cash flow positive $70.9 million. Management reported adequate liquidity; available facilities included $110.0 million in unsecured correspondent lines, $7.4 million at the Fed Discount Window, and approximately $179.3 million at the FHLB.
- Credit and capital: Allowance for loan losses was $15.5 million, or 1.22% of gross loans, versus $16.0 million and 1.38% at year-end. Nonaccrual loans were $1.9 million; nonperforming assets were $7.2 million, or 0.40% of assets. The Bank’s total risk-based capital ratio was 14.49% and it remained well capitalized.
- Equity and comprehensive loss: Shareholders’ equity was $132.0 million, down from $141.9 million at year-end; accumulated other comprehensive loss widened to $52.8 million. Nine-month comprehensive loss was $7.4 million despite net income of $18.1 million, largely reflecting investment-securities and pension-related losses.
Changes versus comparable periods
- Q3 net income increased to $6.9 million from $4.4 million; diluted EPS rose to $1.04 from $0.66. Net interest income increased $1.5 million and expenses declined $2.7 million, with the comparison benefiting from the prior-year FHLB prepayment penalty.
- Nine-month net income rose to $18.1 million from $12.2 million. Net interest income increased $3.8 million, while operating expenses declined $5.0 million. The 2021 comparison included a $3.3 million litigation settlement expense and a $2.4 million FHLB prepayment penalty; 2021 loan interest also included $3.2 million of PPP forgiveness fees.
- Fully taxable equivalent net interest margin increased from 3.38% to 3.66% for Q3 and from 3.21% to 3.53% for the nine-month period. The increase reflected higher earning-asset yields and lower funding costs, including lower time-deposit balances and the prior-year repayment of $70 million of FHLB advances.
- Available-for-sale securities fell to $128.0 million from $286.8 million at year-end, while held-to-maturity securities rose to $238.4 million from $56.3 million. In February 2022, $139.0 million of securities were transferred to held-to-maturity; the related unrealized loss remained in accumulated other comprehensive loss.
Outlook, risks, and unusual items
- Management anticipated increased net interest margin pressure in Q4 2022 as deposit pricing demands rose. The Bank described itself as asset-sensitive; its rate simulation estimated higher net interest income under rising-rate scenarios and lower income under falling-rate scenarios. These are model estimates, not guidance.
- Credit quality indicators were generally modest, but criticized loans warrant attention: substandard balances increased $9.9 million, including a nursing-care relationship and an airline relationship. Management said both continued to perform to contractual terms and were not considered impaired. Accruing loans past due 30 days or more were 0.27% of loans.
- Investment-rate risk is significant: at September 30, available-for-sale securities had $23.9 million of net unrealized losses, and held-to-maturity securities had fair value $32.7 million below amortized cost. The portfolio includes Level 3 collateralized debt obligations valued using a discounted-cash-flow model.
- The pension plan moved from a $4.8 million asset at year-end to a $7.7 million liability at September 30, reflecting rate and market movements. The company made no pension contributions in the first nine months.
- CECL was scheduled for adoption January 1, 2023; management was validating data and models and had not determined the standard’s potential financial impact. Management also noted expected tax-credit benefits from a low-income-housing investment beginning in Q4 2022 and increasing in 2023 and beyond.
- The filing reports no legal proceedings and no material change in risk factors beyond those previously disclosed. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether deposit repricing and competition reduce margins, and how loan growth is funded after the temporary $20 million borrowing was repaid.
- Developments in the nursing-care and airline criticized relationships, commercial loan concentrations, and the adequacy of the loan-loss allowance.
- How securities losses, the held-to-maturity classification, and future interest-rate movements affect tangible equity, liquidity, and realized results.
- The eventual CECL day-one allowance adjustment and any related capital or earnings effects.
- Whether pension-plan funding status stabilizes and whether the anticipated tax-credit benefits materialize.