FUNC First United Corporation

OAKLAND, Md., April 23, 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-month period ended March 31, 2024.  Consolidated net income was $3.7 million for the first quarter of 2024, or $0.56 per diluted share, compared to $4.4 million, or $0.65 per diluted share, for the first quarter of 2023 and $1.8 million, or $0.26 per diluted share, for the fourth quarter of 2023.

According to Carissa Rodeheaver, Chairman, President and CEO, "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."

First Quarter Financial Highlights:

• Total assets at March 31, 2024 increased by $7.1 million, or 0.4%, when compared to December 31, 2023.  Significant changes during the first quarter included:
  • Cash balances increased by $37.2 million.
  • Investment securities decreased by $32.8 million due primarily to the maturity of $30.0 million of held-to-maturity ("HTM") U.S. Treasury Bonds during the quarter.
  • Gross loans increased by $5.7 million as:
    • commercial balances increased by $5.6 million;
    • mortgage balances increased by $2.1 million; and
    • consumer loans decreased by $2.1 million.
  • Deposits increased by $12.5 million as:
    • non-interest-bearing deposits decreased by $4.9 million;
    • interest-bearing demand deposits increased by $26.9 million;
    • savings and money market accounts increased by $4.9 million; and
    • time deposits decreased by $14.4 million.
  • Short-term borrowings increased by $34.1 million as the Bank borrowed $40.0 million from the Federal Reserve's Bank Term Funding Program ("BTFP") in January 2024, which was partially offset by a decrease of $5.9 million in other short-term borrowings due to fluctuations in municipal customer balances in overnight investment sweep products.   Long-term borrowings decreased by $40.0 million as a $40.0 million Federal Home Loan Bank ("FHLB") advance matured in March 2024 and was fully repaid.  
• For the first quarter of 2024, consolidated net income was $3.7 million, inclusive of $0.4 million, net of tax, of accelerated depreciation expenses related to the closure of four branches in February 2024.
  • Net interest margin, on a non-GAAP, fully tax equivalent ("FTE") basis, was 3.12% for the first quarter of 2024 compared to 3.53% for the first quarter of 2023 and 3.13% for the fourth quarter of 2023.
  • Non-interest income, excluding net gains and losses, remained stable in the first quarter of 2024 when compared to the fourth quarter of 2023 and increased by $0.5 million when compared to the first quarter of 2023 due primarily to increases in wealth management income.
  • Non-interest expense increased by $0.6 million when compared to the fourth quarter of 2023 due to increased salaries and benefits of $0.8 million and a $0.5 million increase in other real estate owned ("OREO") expenses.  The increase in salaries and benefits was related to increases in full-time salaries, incentive compensation, life and health insurance, and executive officer long-term and short-term expense, partially offset by a decrease in stock compensation expense and 401(k) plan expense.  OREO expense increased due to a credit to expense in the fourth quarter of 2023 from gain on sales.  The foregoing increases were offset primarily by reductions in occupancy associated with the accelerated lease expense in the fourth quarter of 2023 related to closure of four branches in the first quarter of 2024, as well as reductions in data processing, marketing and professional services expenses.  When compared to the first quarter of 2023, the increases were primarily due to accelerated depreciation expenses associated with the branch closures, partially offset by reduced salaries and benefits.

Income Statement Overview

On a GAAP basis, net income for the first quarter of 2024 was $3.7 million, inclusive of $0.4 million, net of tax, accelerated depreciation expenses related to branch closures.  This compares to $4.4 million for the first quarter of 2023 and $1.8 million, inclusive of a $3.3 million, net of tax, loss on the sale of securities and $0.5 million, net of tax, accelerated depreciation and lease termination expenses related to the branch closures, for the fourth quarter of 2023. 

The $0.7 million decrease in net income year over year was primarily driven by a $0.7 million decrease in net interest income and a $0.4 million increase in provision for credit losses.  Two large commercial relationships with combined loan balances of $12.1 million were moved to non-accrual status during the first quarter of 2024, which resulted in a reversal of $0.4 million in accrued interest income and fees during the quarter.  Additionally, interest expense increased at a slightly faster pace than interest income comparing year over year.  The provision for credit loss also increased year over year due to increased qualitative risk factors associated with the non-accrual loan balances.  Management is actively managing these credits, which we anticipate will lead to normal collection procedures such as returning the credits to accrual or moving loans through the foreclosure process over the next year.  Other activity comparing the first quarter of 2024 to the same period in 2023 was a $0.4 million increase in wealth management income year over year due to improving market conditions and growth of new relationships and an increase in operating expenses of $0.2 million.  The provision for income tax expense was down $0.2 million when comparing the two quarters due to decreased net income before tax.

Compared to the linked quarter, net income increased by $1.9 million due primarily to $4.2 million in recognized losses from the restructuring of the investment portfolio.  This was partially offset by the $0.4 million decrease in net interest income and the $0.5 million increase in provision expense when compared to the prior quarter.  Comparing the linked quarters, interest income was impacted by the $0.4 million reversal of accrued interest, and provision expense increased by $0.1 million due to increased qualitative factors associated with the increase in non-accrual loans described above.  Operating expenses increased by $0.6 million due primarily to increased salary and employee benefits and net OREO expenses offset by decreases in occupancy marketing and professional services.

Net Interest Income and Net Interest Margin

Net interest income, on a non-GAAP, FTE basis, decreased by $0.9 million for the first quarter of 2024 when compared to the first quarter of 2023.  This decrease was driven by an increase of $4.8 million in interest expense due to an increase of 133 basis points on interest paid on deposit accounts.  The average balances decreased by $39.4 million when compared to the first quarter of 2023 due primarily to the increased deposit pricing pressures that began in the first quarter of 2023 as a result of the bank failures in March 2023 and liquidity fears in the market.  Interest income increased by $3.9 million.   Interest income on loans increased by $3.8 million due to the increase of 59 basis points in 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 rising rate environment and an increase in average balances of $128.3 million.   Investment income decreased by $0.4 million due to a decrease of $64.4 million in average balances related to the balance sheet restructuring of our investment portfolio in the fourth quarter of 2023 and the maturity of $30.0 million of U.S. Treasury bonds.  The net interest margin for the three months ended March 31, 2024 was 3.12% compared to 3.53% for the three months ended March 31, 2023.  Excluding the reversal of $0.4 million of interest and fees on loans related to the movement of $12.1 million of loans to non-accrual, the net interest margin would have been 3.21%. 

Comparing the first quarter of 2024 to the fourth quarter of 2023, net interest income, on a non-GAAP, FTE basis, decreased by $0.4 million.   This decrease was driven by a decrease of $0.3 million in interest income and an increase of $0.1 million in interest expense.  Interest income on loans decreased by $0.1 million related to the reversal of $0.4 million in accrued interest and loan fees related to the non-accrual loans in the first quarter of 2024 offset by an overall increase of 1 basis point in the yield and an increase of $9.5 million in average loan balances.  Interest expense on deposits decreased by $0.2 million due to a decrease in average deposit balances of $98.7 million during the quarter.  Interest expense on short-term borrowings increased by $0.4 million due to the Corporation's decision to borrow $40.0 million from the BTFP in the first quarter of 2024.

Non-Interest Income

Other operating income, including net gains/(losses), for the first quarter of 2024 increased by $0.5 million when compared to the same period of 2023.  The growth was driven by an increase of $0.4 million in wealth management income due to improving market conditions and growth in new and existing customer relationships.

On a linked quarter basis, other operating income, including net losses, increased by $4.3 million due primarily to the $4.2 million in losses related to the sale of available-for-sale ("AFS") securities in the fourth quarter of 2023 related to the Corporation's balance sheet restructuring.   Additionally, debit card income decreased by $0.2 million when compared to the previous quarter.   These decreases were partially offset by a $0.2 million increase in wealth management income.

Non-Interest Expense

Operating expenses increased by $0.2 million in the first quarter of 2024 when compared to the first quarter of 2023.  The increase was largely driven by a $0.3 million increase in equipment and occupancy expense due to the accelerated depreciation expenses recognized in the first quarter of 2024 in conjunction with the announced branch closures in February 2024.   This increase was partially offset by a $0.1 million decrease in salaries and employee benefits year over year due to unusually high health insurance premiums recognized in the first quarter of 2023 offset by higher salaries and benefits associated with normal merit increases effective April 1, 2023.  

Non-interest expense increased by $0.6 million when compared to the linked quarter due to increased salaries and benefits of $0.8 million and increased OREO expense of $0.5 million.  The increase in salaries and benefits was related to increases in full-time salaries, incentive compensation, life and health insurance, and executive officer long-term and short-term expense, partially offset by decreases in stock compensation expense and 401(k) plan expense.  OREO expense increased due to a credit to expense in the fourth quarter of 2023 from gain on sales.  These increases were offset by reductions in occupancy, data processing, marketing and professional service expenses. 

The effective income tax rates as a percentage of income for the three-month periods ended March 31, 2024 and March 31, 2023 were 23.9% and 23.6%, respectively. 

Balance Sheet Overview

Total assets at March 31, 2024 were $1.9 billion, representing a $7.1 million increase since December 31, 2023.  During the first quarter of 2024, cash and interest-bearing deposits in other banks increased by $37.2 million.  The investment portfolio decreased by $32.8 million due to the maturities of $30.0 million of U.S. Treasury bonds during the quarter and normal principal amortization. Gross loans increased by $5.7 million.  Other assets, including deferred taxes, premises and equipment, and accrued interest receivable, remained stable.

Total liabilities at March 31, 2024 were $1.7 billion, representing a $3.5 million increase since December 31, 2023.  Total deposits increased by $12.5 million when compared to December 31, 2023.  The increase in deposits was primarily attributable to the shift of $10.0 million in overnight investment sweep balances to the IntraFi Cash Service ("ICS") product, as a result of management's strategy to release pledging of investment securities for municipalities to increase available liquidity.  Short term borrowings increased by $34.1 million since December 31, 2023 due primarily to the Bank's utilization of the BTFP to obtain $40.0 million in borrowings during January 2024 at a rate of 4.87% with a one-year maturity.  There are no prepayment penalties associated with early payments on the BTFP.  Long-term borrowings decreased by $40.0 million in the first quarter of 2024 when compared to December 31, 2023 due to the repayment of $40.0 million in FHLB borrowings. 

Total AFS and HTM securities totaled $278.7 million at March 31, 2024, representing a $32.8 million decrease when compared to December 31, 2023.   In the first quarter of 2024, $30.0 million in U.S. Treasury bonds matured and were reinvested into cash at the Federal Reserve in anticipation of the $40.0 million maturing FHLB advance.  Additionally, there were $2.5 million of other principal amortizations in the portfolio during the quarter.   

Outstanding loans of $1.4 billion at March 31, 2024 reflected growth of $5.7 million for the first quarter of 2024.  Since December 31, 2023, commercial real estate loans decreased by $0.9 million and acquisition and development loans increased by $6.4 million. Commercial and industrial loans increased by $0.1 million.  Residential mortgage loans increased $2.1 million, offset by a decline of $2.1 million in the consumer loan portfolio related to new production offset by monthly amortization.   

New commercial loan production for the three months ended March 31, 2024 was approximately $28.3 million.  The pipeline of commercial loans as of March 31, 2024 was $30.9 million.  At March 31, 2024, unfunded, committed commercial construction loans totaled approximately $8.2 million. Commercial amortization and payoffs were approximately $35.5 million through March 31, 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 first quarter of 2024 was approximately $11.2 million, with most of this production comprised of in-house mortgages.  The pipeline of in-house, portfolio loans as of March 31, 2024 was $9.8 million.  The residential mortgage production level declined in the first quarter of 2024 due to the higher interest rates and seasonality of this line of business.  Unfunded commitments related to residential construction loans totaled $13.9 million at March 31, 2024.   Management has chosen to shift activity to the secondary market in the first quarter of 2024 to preserve liquidity.

Total deposits at March 31, 2024 increased by $12.5 million when compared to December 31, 2023.  During the quarter, non-interest-bearing deposits decreased by $4.9 million.  Interest-bearing demand deposits increased by $26.9 million, primarily related to the shift of $10.0 million in overnight investment sweep balances into the ICS product to maintain FDIC insurance due to management's strategy to release pledging of investment securities for municipalities to increase available liquidity.  Money market accounts increased by $7.3 million due primarily to the expansion of current relationships and new relationships during the quarter.  Traditional savings accounts decreased by $2.4 million and time deposits decreased by $14.4 million.  The decrease in time deposits was primarily due to the maturing of a nine-month CD product that was offered by the Bank in 2023 at higher rates.  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 $34.1 million as the Bank borrowed $40.0 million from the BTFP in January 2024, which was partially offset by a decrease of $5.9 million in other short-term borrowings due to fluctuations in municipal customer balances in overnight investment sweep products.  Long-term borrowings decreased by $40.0 million as a $40.0 million FHLB advance matured in March 2024 and was fully repaid.

The book value of the Corporation's common stock was $24.89 per share at March 31, 2024 compared to $24.38 per share at December 31, 2023.  At March 31, 2024, there were 6,648,645 of basic outstanding shares and 6,657,239 of diluted outstanding shares of common stock.  The increase in the book value at March 31, 2024 was due to the undistributed net income of $2.4 million for the first quarter of 2024.

Asset Quality

The allowance for credit losses ("ACL") was $18.0 million at March 31, 2024 compared to $16.9 million recorded at March 31, 2023 and $17.5 million at December 31, 2023.  The provision for credit losses was $0.9 million for the quarter ended March 31, 2024 compared to $0.5 million for the quarter ended March 31, 2023 and $0.4 million for the fourth quarter of 2023.  The increased provision expense recorded in 2024 was primarily related to increases in qualitative risk factors of our commercial and industrial portfolio, as two large relationships moved to non-accrual status during the quarter.  Net charge-offs of $0.5 million were recorded for the quarter ended March 31, 2024 compared to net charge-offs of $0.2 million for the quarter ended March 31, 2023. The ratio of the ACL to loans outstanding was 1.27% at March 31, 2024 compared to 1.24% at December 31, 2023 and 1.31% at March 31, 2023. 

The ratio of net charge offs to average loans was 0.13% for the quarter ended March 31, 2024, and 0.08% for the quarter ended March 31, 2023.  The commercial and industrial portfolio had net charge offs of 0.12% for the quarter ended March 31, 2024 compared to a net recovery of 0.01% for the quarter ended March 31, 2023.  This shift was due to charge offs of equipment loan balances on two commercial relationships during the first quarter of 2024.  The increase in net charge offs in consumer loans in the first quarter of 2024 was primarily driven by approximately $0.3 million in charge offs of overdrawn demand deposit balances during the 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 $16.0 million at March 31, 2024 compared to $4.0 million at December 31, 2023.  The increase in non-accrual balances at March 31, 2024 was related to two commercial and industrial loan relationships that were moved to non-accrual during the first quarter.  Management believes that these loans are marked appropriately, and our credit department is actively working with these borrowers on work-out plans.

Non-accrual loans that have been subject to partial charge-offs totaled $0.1 million at both March 31, 2024 and December 31, 2023.  Loans secured by 1-4 family residential real estate properties in the process of foreclosure totaled $1.8 million at both March 31, 2024 and December 31, 2023.  As a percentage of the loan portfolio, accruing loans past due 30 days or more was 0.40% at March 31, 2024 compared to 0.24% at December 31, 2023 and 0.17% as of March 31, 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 ("Trust II" and 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 "MCC Fund").   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 March 31, 2024 and the impact that any such events have on our critical accounting assumptions and estimates made as of March 31, 2024, which could require us to make adjustments to the amounts reflected in this press release.