FUNC First United Corporation

OAKLAND, Md., Oct. 21, 2024 /PRNewswire/ -- First United Corporation (the "Corporation, "we", "us", and "our") (NASDAQ: FUNC), a bank holding company and the parent company of First United Bank & Trust (the "Bank"), today announced financial results for the three- and nine-month periods ended September 30, 2024.  Consolidated net income was $5.8 million for the third quarter of 2024, or $0.89 per diluted share, compared to $4.5 million, or $0.67 per diluted share, for the third quarter of 2023 and $4.9 million, or $0.75 per diluted share, for the second quarter of 2024.  Year-to-date income was $14.4 million, or $2.19 per diluted share, compared to $13.3 million, or $1.98 per diluted share, for both of the nine-month periods ended September 30, 2024 and 2023.

According to Carissa Rodeheaver, Chairman, President and CEO, "Earnings for the third quarter were marked by stable net interest income, non-interest income and expenses.  Provision expense decreased as compared to prior quarters this year as we saw improvements in our asset quality contributing to our increased net income.  We continue to remain disciplined in our pricing despite competitive pressure as we build our balance sheet for current earnings and protect our long-term profitability.  Our team of dedicated associates worked diligently during the quarter to maintain, build and support high levels of production and to assist our customers with their financial needs in this volatile economic environment." 

Financial Highlights:

• Net interest margin, on a non-GAAP, fully tax equivalent ("FTE") basis, was 3.46% for the third quarter of 2024
• Loan production was strong, with $52.1 million in commercial loan originations and $19.9 million in residential mortgage originations
• Provision expense decreased in the third quarter due to continued strong asset quality and improvement in qualitative factors
• Deposits increased slightly due to seasonal fluctuations in municipal deposit balances, partially offset by runoff of retail certificates of deposit due to competitive pricing
• We repaid $15.0 million of higher cost brokered certificates of deposit
• Non-interest income, including net gains, increased slightly due to increases in gains on sales of residential mortgages and wealth management income
• Non-interest expense was stable for the quarter and continues to be a focus for management
• We obtained $90.0 million in new FHLB borrowings at a weighted average interest rate of 3.89%.  Portions of the proceeds from the borrowings were used to repay $41.4 million of principal and accrued interest of Bank Term Funding Program ("BTFP") borrowings and $40.0 million in FHLB borrowings that matured in September 2024
• We declared a cash dividend of $0.22 per common share in the third quarter, representing a 10% increase over the linked quarter

Income Statement Overview

On a GAAP basis, net income for the third quarter of 2024 was $5.8 million.  This compares to $4.9 million for the second quarter of 2024 and $4.5 million for the third quarter of 2023.

The $1.3 million increase in quarterly net income year over year was primarily driven by a $1.2 million increase in net interest income.  The increase in net interest income was related to the $3.0 million increase in interest on loans due to new loans being booked at higher rates and the repricing of adjustable-rate loans.   This increase was partially offset by the $0.9 million increase in interest paid on deposits due to continued competitive pricing pressures.  An increase of $0.4 million in interest expense on short-term borrowings related to the BTFP was offset by the $0.5 million reduction in interest expense on long-term borrowings related to the repayment of $80.0 million of FHLB advances in the first nine months of 2024.  Comparing the third quarter of 2024 to the same period in 2023, other activity was a $0.2 million increase in wealth management income due to improving market conditions and growth of new relationships and a decrease in operating expenses of $0.5 million driven by reductions in check fraud related expenses, occupancy and equipment, data processing, and marketing expenses, partially offset by increased salaries and benefits.  The provision for income tax was up $0.6 million when comparing the two quarters due to increased net income before tax.

Compared to the linked quarter, net income increased by $0.9 million due primarily to a $0.9 million decrease in provision for credit losses during the third quarter.  This decrease was driven by reduced net charge offs due to the $1.1 million charge off booked in the second quarter of 2024 and improvement in qualitative factors related to the reduction of non-accrual balances during the quarter, partially offset by strong loan growth during the third quarter.  Net interest income and operating expenses were stable and operating income increased by $0.2 million compared to the linked quarter.

Year-to-date net income for the first nine months of 2024 was $14.4 million compared to $13.3 million for the same period in 2023.   The increased net income was driven by a year-over-year increase of $1.6 million in net interest income driven by a $9.3 million increase in interest income primarily related to increased interest and fees on loans, partially offset by a $7.7 million increase in interest expense due to continued pricing pressure on deposits and our use of the BTFP.  This increase was partially offset by a $1.2 million increase in provision for credit losses driven by net charge-offs of $1.1 million in the commercial and industrial portfolio related to one non-accrual credit where collateral was sold through a liquidation auction at depressed prices.  Operating income increased $0.9 million, primarily as the result of increased wealth management income.  Operating expenses decreased by $0.4 million and was driven by reductions in professional services, pension benefits expense, a $0.5 million reduction in check fraud expense, and other miscellaneous expenses partially offset by a $0.4 million increase in salaries and benefits.

Net Interest Income and Net Interest Margin

Net interest income, on a non-GAAP, FTE basis, increased by $1.2 million for the third quarter of 2024 when compared to the third quarter of 2023.  This increase was driven by a $2.0 million increase in interest income.   Interest income on loans increased by $3.0 million due to the increase in average balances of $69.7 million and a 58 basis point increase in the overall yield on the loan portfolio as new loans were booked at higher rates as well as adjustable-rate loans repricing in correlation to the elevated rate environment.   Investment income decreased by $0.3 million due to a decrease of $63.2 million in average balances related to the balance sheet restructuring of our investment portfolio in the fourth quarter of 2023 and the maturity of $37.5 million in U.S. Treasury bonds in the first four months of 2024.  The overall yield on the investment portfolio increased by 14 basis points primarily driven by the increased rate on the trust preferred portfolio and the maturity and sale of lower rate investments.   Average cash balances declined $42.0 million as cash from the investment portfolio and on balance sheet liquidity was shifted to fund higher yielding loans.  Interest expense increased by $0.8 million year over year due to an increase of 9 basis points on interest paid on deposit accounts.   The average deposit balances decreased by $7.4 million when compared to the third quarter of 2023 due primarily to the decrease of $13.1 million in retail time deposits, a $60.2 million decrease in brokered time deposits and a $32.3 million decrease in savings accounts, which was mostly offset by an increase of $96.6 million in money market accounts and a slight increase of $1.6 million in interest-bearing demand deposits.  

Comparing the third quarter of 2024 to the second quarter of 2024, net interest income, on a non-GAAP, FTE basis, remained stable.  Interest income increased by $0.1 million during the quarter.  Interest income on loans increased by $0.8 million related to the overall increase of 9 basis points in yield and $18.2 million in average balances during the third quarter.  This was partially offset by a $0.6 million decrease in interest income on cash balances related to a decreased yield of 88 basis points and decreased balances of $33.3 million during the quarter as cash was used to fund loan growth.  Interest expense increased by $0.2 million, driven primarily by the $0.2 increase in deposit expense related to the increase in average balances of $21.6 million in money market accounts, which was partially offset by the $15.8 million decrease in average balances of brokered certificates of deposit related to the maturity and repayment of a $15.0 million brokered certificate of deposit ("CD") in August 2024.

Comparing the nine months ended September 30, 2024 to the nine months ended September 30, 2023, net interest income, on a non-GAAP, FTE basis, increased by $1.2 million.  Interest income increased by $8.9 million.   Average loan balances increased by $98.3 million and the overall yield increased by 61 basis points in correlation with the elevated rate environment as new loans were booked at higher rates as well as the repricing of adjustable-rate loans.  Interest expense on deposits increased by $6.5 million while the average deposit balances increased by $24.7 million, driven by increases of $77.7 million in money market balances and $13.7 million in retail time deposits, partially offset by decreases in savings balances of $44.1 million and brokered time deposits of $26.0 million.  Interest expense on short-term borrowings increased by $1.3 million due to the Bank's utilization of the BTFP program since January 2024.  The increased interest expense resulted in an overall increase of 75 basis points on the cost of interest-bearing liabilities.  The net interest margin for the nine months ended September 30, 2024 was 3.34% compared to 3.30% for the nine months ended September 30, 2023.

Non-Interest Income

Other operating income, including net gains, for the third quarter of 2024 increased by $0.2 million when compared to the same period of 2023.  The increase was driven by an increase of $0.2 million in trust and brokerage income due to improving market conditions, increased annuity sales and growth in new and existing customer relationships.  Gains on sales of mortgages declined slightly when comparing the third quarter of 2024 to the same period of 2023 primarily due to reduced activity in the elevated interest rate environment.  Service charge income and debit card income remained stable.

On a linked quarter basis, other operating income, including net gains, increased by $0.2 million.  This increase was primarily attributable to a $0.1 million increase in gains on sales of mortgage loans due to increased activity in the third quarter and a $0.1 million cash incentive received in connection with check fees collected.

Other operating income for the nine months ended September 30, 2024 increased by $0.9 million when compared to the same period of 2023.  This increase was primarily due to the $1.0 million increase in trust and brokerage income due to improving market conditions, increased annuity sales and growth in new and existing customer relationships.  Service charge and debit card income were both stable when comparing the first nine months of 2024 to the same period of 2023.

Non-Interest Expense

Non-interest expenses decreased by $0.5 million in the third quarter of 2024 when compared to the third quarter of 2023.  The decrease was related to a $0.2 million decrease in occupancy, equipment and data processing expenses, a $0.3 million decrease in check fraud related expenses as well as decreases in other miscellaneous expenses such as marketing, contributions, net other real estate owned ("OREO") expenses, and pension benefit expenses.  These decreases were partially offset by a $0.2 million increase in salaries and benefits related to increased executive and employee incentive accruals, 401(k) plan expense and wellness costs offset by overall reduced salaries and wages.

Non-interest expense was stable when compared to the linked quarter.  Decreases in salaries and benefits, data processing, FDIC assessments, marketing, debit card, schools and seminars, and investor relations expenses were offset by slight increases in professional services, occupancy, OREO expenses due to a gain booked in the second quarter of 2024, and contract labor.

For the nine months ended September 30, 2024, non-interest expenses decreased by $0.4 million when compared to the nine months ended September 30, 2023.  The decrease was primarily attributable to a $0.5 million decrease in check fraud expenses and decreases in professional services, equipment, net OREO expense, line rentals, pension benefit expenses, and other miscellaneous expenses such as marketing, contributions, contract labor, and investor relations.  These decreases were partially offset by increased occupancy, data processing expenses and salaries and benefits related to increased incentives, 401K expense, wellness expense and loan origination costs, offset by reductions in life and health insurance costs.

The effective income tax rates as a percentage of income for the nine months ended September 30, 2024 and September 30, 2023 were 24.6% and 23.6%, respectively. 

Balance Sheet Overview

Total assets at September 30, 2024 were $1.9 billion, representing a $10.3 million increase since December 31, 2023.  During the first nine months of 2024, cash and interest-bearing deposits in other banks increased by $12.6 million.  The investment portfolio decreased by $44.3 million due to the maturities of $37.5 million of U.S. Treasury bonds during the year and normal principal amortization of our mortgage-backed securities ("MBS") portfolio.  Cash from the investment maturities was shifted to gross loans which increased by $41.2 million and other real estate OREO decreased by $1.6 million due to sales of properties.  Pension assets increased by $5.1 million due to increased market values.  Deferred tax assets decreased by $1.8 million due to the increased fair values of available for sale securities and pension assets compared to December 31, 2023.

Total liabilities at September 30, 2024 were $1.7 billion, representing a $1.8 million decrease since December 31, 2023.  Total deposits decreased by $10.6 million when compared to December 31, 2023 related to decreases in savings deposits of $14.8 million, non-interest-bearing demand deposits of $8.2 million, retail time deposits of $23.7 million and the repayment of $30.0 million in brokered certificates of deposits, partially offset by increases in interest-bearing demand deposits of $31.6 million and money markets of $34.6 million.  Short-term borrowings increased by $4.8 million since December 31, 2023, which were comprised of $29.0 million in overnight borrowings from the Federal Reserve offset by a shift of approximately $22.0 million in overnight investment sweep balances to FDIC insured accounts as a result of management's strategy to release pledging of investment securities for municipalities to provide additional liquidity.  Long-term borrowings increased by $10.0 million in the first nine months of 2024 when compared to December 31, 2023.  Maturities of FHLB advances of $40.0 million in March and $40.0 million in September were fully repaid.  During the third quarter and after the Fed announcement to reduce rates by 50 basis points, management made the strategic decision to reduce funding costs and borrowed $90.0 million in three new FHLB advances with maturities of 12 and 18-months and a weighted average rate of 3.89%.  $41.1 million was utilized to prepay the principal and accrued interest of the BTFP borrowings at a rate of 4.87% that was scheduled to mature in January of 2025 and approximately $30.0 million was utilized to repay overnight borrowings related to the repayment of the September $40.0 million maturity.  The remainder is currently held in overnight cash investments.

Total available for sale and held to maturity securities totaled $267.2 million at September 30, 2024, representing a $44.3 million decrease when compared to December 31, 2023.   In the first nine months of 2024, $37.5 million in U.S. Treasury bonds matured and the proceeds were used to repay the $40.0 million maturing FHLB advance.  Additionally, there were $2.7 million of maturities in our municipal portfolio and $5.7 million of other principal amortizations in our MBS portfolio year to date that were used for loan funding. 

Outstanding loans of $1.4 billion at September 30, 2024 reflected growth of $24.9 million since June 30, 2024 and $41.2 million for the first nine months of 2024.

Since December 31, 2023, commercial real estate loans increased by $9.1 million, acquisition and development loans increased by $15.8 million, commercial and industrial loans increased by $3.4 million, residential mortgage loans increased $19.3 million, and consumer loans decreased by $6.5 million.

New commercial loan production for the three months ended September 30, 2024 was approximately $52.1 million.  The pipeline of commercial loans at September 30, 2024 was $19.5 million.  At September 30, 2024, unfunded, committed commercial construction loans totaled approximately $8.3 million.  Commercial amortization and payoffs were approximately $92.8 million through September 30, 2024, due primarily to pay-offs of short-term commercial loans as well as normal amortizations of the commercial loan portfolio.

New consumer mortgage loan production for the third quarter of 2024 was approximately $19.9 million, with most of this production comprised of mortgages to be held on balance sheet.  The pipeline of in-house, portfolio loans as of September 30, 2024 was $12.8 million.  The residential mortgage production level increased in the third quarter of 2024 due to the seasonality of this line of business, particularly construction lending.  Unfunded commitments related to residential construction loans totaled $11.9 million at September 30, 2024.  

Total deposits at September 30, 2024 decreased by $10.6 million when compared to December 31, 2023.  

Interest-bearing demand deposits increased by $31.6 million year-to-date, primarily related to the shift of approximately $22.0 million in overnight investment sweep balances into FDIC insured accounts due to management's strategy to release pledging of investment securities for municipalities to provide additional liquidity as well as seasonal fluctuations in municipal deposit balances compared to December 2023.  Money market accounts increased by $34.6 million due primarily to the expansion of current relationships and new relationships during the first nine months.  Traditional savings accounts decreased by $14.8 million and time deposits decreased by $53.7 million.  The decrease in time deposits was due to a decrease of $23.7 million in retail CDs related to maturities of a nine-month special CD promotion in 2023 and the maturity and repayment of $30.0 million in brokered CDs during the year.  The Bank has worked closely with customers as these CDs mature to transition them to other deposit and wealth management products offered by the Bank.

Short-term borrowings increased by $4.8 million compared to December 31, 2023, which were comprised of $29.0 million in overnight borrowings from the Federal Reserve offset by a shift of approximately $22.0 million in overnight investment sweep balances into FDIC insured accounts due to management's strategy to release pledging of investment securities for municipalities to provide additional liquidity.  Long-term borrowings increased by $10.0 million in the first nine months of 2024 when compared to December 31, 2023.  Maturities of FHLB advances of $40.0 million in March and $40.0 million in September were fully repaid.  During the third quarter and after the Fed announcement to reduce rates by 50 basis points, management made the strategic decision to reduce funding costs and borrowed $90.0 million in three new FHLB advances with maturities of 12 and 18-months and a weighted average rate of 3.89%.  $41.1 million was utilized to prepay the principal and accrued interest of the BTFP borrowing at a rate of 4.87% that was scheduled to mature in January of 2025 and approximately $30.0 million was utilized to repay overnight borrowings related to the repayment of the September $40.0 million maturity.   The remainder is currently held in overnight cash investments.

The book value of the Corporation's common stock was $26.90 per basic share at September 30, 2024 compared to $24.38 per share at December 31, 2023.  At September 30, 2024, there were 6,468,625 of basic outstanding shares and 6,482,648 of diluted outstanding shares of common stock.  During the first nine months of 2024, the Company purchased and retired 201,800 shares of First United Corporation stock as part of its previously announced stock repurchase plan at an average price of $19.99 per share. The increase in the book value at September 30, 2024 was due to the undistributed net income of $10.3 million for the first nine months of 2024.

Asset Quality

The allowance for credit losses ("ACL") was $18.0 million at September 30, 2024 compared to $17.1 million recorded at September 30, 2023 and $17.5 million at December 31, 2023.  The provision for credit losses was $0.3 million for the quarter ended September 30, 2024 compared to $0.3 million for the quarter ended September 30, 2023 and $1.2 million for the second quarter of 2024.  The increased provision expense recorded year to date in 2024 was primarily related to $1.1 million in net charge-offs related to one non-accrual commercial loan relationship, partially offset by improving qualitative risk factors of our loan portfolio.  Net charge-offs of $0.1 million were recorded for the quarter ended September 30, 2024 and September 30, 2023. The ratio of the ACL to loans outstanding was 1.24% at September 30, 2024, September 30, 2023 and December 31, 2023.

The ratio of year-to-date net charge offs to average loans was 0.18% for the nine-month period ended September 30, 2024, and 0.07% for the nine-month period ended September 30, 2023.  The commercial and industrial portfolio had net charge offs of 0.53% for the nine-month period ended September 30, 2024 compared to a net charge offs of 0.07% for the nine-month period ended September 30, 2023.  This shift was due primarily to charge offs of equipment loan balances on one non-accrual commercial relationship during 2024.  The consumer portfolio had net charge offs of 2.04% for the nine-month period ended September 30, 2024 compared to net charge offs of 1.15% for the nine-month period ended September 30, 2023.  The increase in net charge offs in consumer loans in 2024 was primarily driven by approximately $0.4 million in charge offs of overdrawn demand deposit balances during the first quarter of 2024 and student loan accounts in the second quarter.  Details of the ratios, by loan type, are shown below.  Our special assets team continues to actively collect on charged-off loans, resulting in overall low net charge-off ratios.

Non-accrual loans totaled $8.1 million at September 30, 2024 compared to $4.0 million at December 31, 2023.  The increase in non-accrual balances at September 30, 2024 was related to two commercial and industrial loan relationships totaling $12.1 million that were moved to non-accrual during the first quarter of 2024.  Subsequent to being moved to non-accrual, one of the borrowers sold a piece of collateral to reduce outstanding balances by approximately $5.5 million and the bank recognized approximately $1.1 million in net charge-offs and $3.0 million in principal reductions on the other commercial and industrial credit from the liquidation of collateral at depressed prices.

Non-accrual loans that have been subject to partial charge-offs totaled $1.2 million at September 30, 2024 and $0.1 million at December 31, 2023.  Loans secured by 1-4 family residential real estate properties in the process of foreclosure totaled $1.6 million at September 30, 2024 and $1.8 million at December 31, 2023.  As a percentage of the loan portfolio, accruing loans past due 30 days or more was 0.37% at September 30, 2024 compared to 0.24% at December 31, 2023 and 0.27% as of September 30, 2023. 

ABOUT FIRST UNITED CORPORATION

First United Corporation is a Maryland corporation chartered in 1985 and a financial holding company registered with the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956, as amended, that elected financial holding company status in 2021.  The Corporation's primary business is serving as the parent company of the Bank, First United Statutory Trust I ("Trust I") and First United Statutory Trust II (together with Trust I, "the Trusts"), both Connecticut statutory business trusts.  The Trusts were formed for the purpose of selling trust preferred securities that qualified as Tier 1 capital.  The Bank has two consumer finance company subsidiaries- Oak First Loan Center, Inc., a West Virginia corporation, and OakFirst Loan Center, LLC, a Maryland limited liability company – and two subsidiaries that it uses to hold real estate acquired through foreclosure or by deed in lieu of foreclosure – First OREO Trust, a Maryland statutory trust, and FUBT OREO I, LLC, a Maryland limited liability company.  In addition, the Bank owns 99.9% of the limited partnership interests in Liberty Mews Limited Partnership, a Maryland limited partnership formed for the purpose of acquiring, developing and operating low-income housing units in Garrett County, Maryland, and a 99.9% non-voting membership interest in MCC FUBT Fund, LLC, an Ohio limited liability company formed for the purpose of acquiring, developing and operating low-income housing units in Allegany County, Maryland.   The Corporation's website is www.mybank.com.

FORWARD-LOOKING STATEMENTS

This press release contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.  Forward-looking statements do not represent historical facts, but are statements about management's beliefs, plans and objectives about the future, as well as its assumptions and judgments concerning such beliefs, plans and objectives.  These statements are evidenced by terms such as "anticipate," "estimate," "should," "expect," "believe," "intend," and similar expressions.  Although these statements reflect management's good faith beliefs and projections, they are not guarantees of future performance and they may not prove true.  The beliefs, plans and objectives on which forward-looking statements are based involve risks and uncertainties that could cause actual results to differ materially from those addressed in the forward-looking statements.  For a discussion of these risks and uncertainties, see the section of the periodic reports that First United Corporation files with the Securities and Exchange Commission entitled "Risk Factors". In addition, investors should understand that the Corporation is required under generally accepted accounting principles to evaluate subsequent events through the filing of the consolidated financial statements included in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2024 and the impact that any such events have on our critical accounting assumptions and estimates made as of September 30, 2024, which could require us to make adjustments to the amounts reflected in this press release.