8-K: First United Corporation Reports Solid First Quarter 2024 Results Despite Margin Compression

First United Corporation announced a net income of $3.7 million for the first quarter of 2024, impacted by branch consolidation costs and a slight slowing of loan growth.

Summary

• First United Corporation reported a net income of $3.7 million, or $0.56 per diluted share, for the first quarter of 2024.
• This compares to $4.4 million, or $0.65 per diluted share, in the first quarter of 2023, and $1.8 million, or $0.26 per diluted share, in the fourth quarter of 2023.
• The net income for Q1 2024 includes $0.4 million in accelerated depreciation expenses related to branch closures.
• Total assets increased by $7.1 million to $1.9 billion compared to December 31, 2023.
• Gross loans increased by $5.7 million, with commercial and mortgage balances increasing, while consumer loans decreased.
• Deposits increased by $12.5 million, with shifts between different deposit types.
• The net interest margin was 3.12%, down from 3.53% in the first quarter of 2023.
• Non-interest income increased by $0.5 million compared to the first quarter of 2023, driven by wealth management income.
• Non-interest expense increased by $0.6 million compared to the fourth quarter of 2023 due to increased salaries and OREO expenses.
• Two large commercial relationships with combined loan balances of $12.1 million were moved to non-accrual status, impacting net interest income.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative. While there are some positive aspects like asset and deposit growth, the decrease in net income, margin compression, and increase in non-accrual loans raise concerns. The company is facing challenges but is actively managing them.

Positives

• Total assets increased by $7.1 million, indicating growth.
• Gross loans saw a $5.7 million increase, showing positive lending activity.
• Deposits increased by $12.5 million, reflecting customer confidence.
• Wealth management income increased by $0.4 million, demonstrating growth in this area.
• The company successfully managed core operating expenses.
• The book value of the Corporation's common stock increased to $24.89 per share.
• The company has a strong, stable low-cost core deposit franchise of 88% of the total deposit portfolio.
• The company has a diversified revenue stream driven by trust and brokerage fee income.
• The company has a strong capital position well above regulatory requirements.
• The company has a low net charge-off and stable asset quality.

Negatives

• Net income decreased by $0.7 million year-over-year, primarily due to a decrease in net interest income.
• The net interest margin decreased to 3.12% from 3.53% in the same quarter last year.
• Non-interest expense increased by $0.6 million compared to the previous quarter.
• Two large commercial relationships were moved to non-accrual status, impacting interest income.
• The provision for credit losses increased year-over-year due to increased qualitative risk factors.
• Net charge-offs increased to $0.5 million for the quarter.
• Non-accrual loans increased significantly to $16.0 million from $4.0 million at the end of the previous quarter.
• The efficiency ratio increased to 65.71% from 61.25% in the linked quarter.
• The company experienced a decrease in net interest income of $0.9 million compared to the first quarter of 2023.
• The company experienced a decrease in net interest income of $0.4 million compared to the fourth quarter of 2023.

Risks

• The slowing of loan growth could impact future revenue.
• The stabilization of the net interest margin at a lower level could affect profitability.
• The increase in non-accrual loans could lead to higher credit losses.
• The competitive deposit landscape could continue to put pressure on interest expenses.
• The company is exposed to interest rate risk, particularly in falling rate scenarios.
• The company is exposed to cyber security and fraud risks.
• The company is exposed to risks associated with the economic environment.
• The company is exposed to risks associated with loan concentrations.
• The company is exposed to risks associated with regulatory changes.
• The company is exposed to risks associated with the real estate market.

Future Outlook

The company is focused on managing deposit pricing, acquiring deposits through short-term CD promotions, and managing interest rate risk. The company is also focused on expanding non-interest income and improving efficiency through technology.

Management Comments

• The first quarter of 2024 was a solid quarter with stable net income impacted slightly by the slowing of loan growth, stabilization of the net interest margin and the final costs associated with the branch consolidation announced last quarter.
• We experienced positive growth in our wealth management income spurred by improving market conditions and growth in new relationships and we successfully managed our core operating expenses.
• Our associates remain committed to working with our customers as they adjust to the higher interest rate and inflationary cost environment.

Industry Context

The results reflect the challenges faced by regional banks in a higher interest rate environment, including margin compression and increased credit risk. The company's focus on wealth management and expense management aligns with industry trends to diversify revenue streams and improve efficiency.

Comparison to Industry Standards

• The net interest margin of 3.12% is below the average for many regional banks, which have been experiencing margin compression due to rising deposit costs.
• The increase in non-accrual loans to $16 million is a significant jump and may be higher than some peers, indicating potential credit quality issues.
• The company's efficiency ratio of 65.71% is higher than the target range of 53% 58%, suggesting room for improvement in operational efficiency.
• The company's return on average assets (ROAA) of 0.76% is below the long-term strategic target of 1.25% 1.60%, indicating a need to improve profitability.
• The company's return on average tangible common equity (ROATCE) of 10.11% is below the long-term strategic target of 13% 15%, indicating a need to improve profitability.
• The company's loan to deposit ratio of 90% is within the strategic target range of 85% 90%, indicating a healthy balance sheet.
• The company's capital ratios are well above regulatory requirements, indicating a strong capital position.
• The company's liquidity position is strong, with available borrowing capacity of $365 million.
• The company's focus on risk mitigation and managing concentrations is in line with industry best practices.
• The company's investment in FinTech funds is a forward-thinking approach to attracting and retaining clients.

Stakeholder Impact

• Shareholders may be concerned about the decrease in net income and margin compression.
• Employees may be affected by the branch closures and potential cost-cutting measures.
• Customers may experience changes in service due to branch closures and shifts in deposit products.
• Suppliers may be impacted by changes in the company's operations.
• Creditors may be concerned about the increase in non-accrual loans.

Next Steps

• The company will continue to manage deposit pricing and acquire deposits through short-term CD promotions.
• The company will focus on expanding non-interest income.
• The company will continue to manage interest rate risk.
• The company will continue to monitor and manage credit risk.
• The company will continue to improve efficiency through technology.

Key Dates

Keywords

financial results, net income, net interest margin, loan growth, deposits, asset quality, non-accrual loans, credit losses, wealth management, branch consolidation, operating expenses, interest rate risk, capital ratios, liquidity, commercial loans