First united corporation announces second quarter 2023 earnings

OAKLAND, Md., July 24, 2023 /PRNewswire/ -- First United Corporation (NASDAQ: FUNC), a bank holding company and the parent company of First United Bank & Trust (the "Bank"), today announced earnings results for the three- and six-month periods ended June 30, 2023.  Consolidated net income was $4.4 million for the second quarter of 2023, or $0.66 per share (basic and diluted), compared to $5.4 million, or $0.82 per share (basic and diluted), for the second quarter of 2022 and $4.4 million, or $0.66 per basic share and $0.65 per diluted share, for the first quarter of 2023.  Year to date income was $8.8 million, or $1.32 per basic share $1.31 per diluted share, compared to $11.1 million, or $1.68 per share (basic and diluted) for the same period of 2022. 

According to Carissa Rodeheaver, President and CEO, "Despite the challenging and competitive environment, net income for the second quarter remained stable as we saw improved fee income and were able to hold expenses.  The net interest margin declined as we expected, driven by the increased expense of our deposit portfolio.  We experienced strong loan growth in both the consumer and commercial portfolios although we expect growth to slow as we head into the second half of the year.   Asset quality, capital and available liquidity remain strong."

Second Quarter Financial Highlights:

• Total assets at June 30, 2023 decreased by $9.0 million, or 0.5%, when compared to March 31, 2023 and increased by $80.2 million, or 4.3%, when compared to December 31, 2022. Significant changes during the second quarter included:
• Cash balances decreased by $67.3 million when compared to March 31, 2023 and increased $14.2 million when compared to December 31, 2022. The year-to-date increase in cash was related to management's strategic decision to obtain $80.0 million in Federal Home Loans Bank ("FHLB") borrowings and $61.1 million in brokered deposits in the first quarter, offset by strong loan growth in the second quarter.
• Investment securities decreased by $6.2 million when compared to March 31, 2023 and by $10.7 million when compared to December 31, 2022, due primarily to the normal principal amortization in 2023.
• Gross loans increased by $61.0 million when compared to March 31, 2023 and by $70.5 million when compared to December 31, 2022, as:
• commercial balances increased by $39.9 million during the second quarter and by $37.3 million when compared to December 31, 2022,
• residential mortgage balances increased by $19.4 million during the second quarter and by $31.1 million when compared to December 31, 2022; and
• consumer loans increased by $1.7 million during the second quarter and by $2.1 million when compared to December 31, 2022.
• Deposits decreased by $11.3 million when compared to March 31, 2023 and increased by $9.2 million when compared to December 31, 2022 due to the addition of $61.1 million in brokered deposits, which was partially offset by decreases in other deposit balances due to customer spending habits and two large commercial customers utilizing $39.5 million in cash in the second quarter of 2023.
• The ratio of the allowance for credit losses ("ACL") to loans outstanding was 1.25% at June 30, 2023 as compared to 1.31% at March 31, 2023 and to an allowance for loan loss ("ALL") of 1.14% at December 31, 2022.
• On January 1, 2023, the Company adopted Accounting Standards Codification ("ASC") 326 – Financial Instruments, Credit Losses (CECL) and increased the ACL by $2.9 million for the Day 1 adjustment, which included $2.0 million to the ACL and $0.9 million related to life-of-loan reserve on unfunded loan commitments. For periods prior to adoption of CECL, the Company recognized ALL based on an incurred loss model.
• Total provision expense related to credit losses was $0.4 million for the second quarter of 2023 as compared to provision expense of $0.5 million for the first quarter of 2022 and $0.6 million for the second quarter of 2022.
• Consolidated net income was $4.4 million for the second quarter of 2023.
• Net interest margin, on a non-GAAP, fully tax equivalent ("FTE") basis, was 3.39% for the second quarter of 2023 compared to 3.53% for the first quarter of 2023 and 3.46% for the second quarter of 2022.
• Non-interest income increased by $0.2 million in the second quarter of 2023 when compared to the first quarter of 2023, due to increases in service charges, debit card income, wealth management and gains on sales of mortgages.

Operating expenses decreased by $0.1 million quarter over quarter in 2023 driven by a $0.4 million decrease in salaries and benefits, a $0.1 million decrease in occupancy and equipment and $0.1 million decline in net expenses attributable to other real estate owned ("OREO"). These decreases were offset by increases of $0.1 million in FDIC assessments, $0.1 million in investor relations expenses and $0.3 million in other expenses. 

Income Statement Overview

Consolidated net income was $4.4 million for the second quarter of 2023 compared to $5.4 million for the second quarter of 2022 and $4.4 million for the first quarter of 2023. Basic and diluted net income was $0.66 per share for the second quarter of 2023, compared to basic and diluted net income per share of $0.82 for the second quarter of 2022.  For the first quarter of 2023, basic net income was $0.66 per share and diluted net income was $0.65 per share. 

The decrease in net income year-over-year was primarily driven by a $1.1 million increase in salaries and employee benefits due to an increase in health insurance costs related to unusually high claims, as well as increased salary expense for new hires, merit increases effective April 1, 2023, increased incentive compensation, and decreases in deferred loan costs due to decrease in loan reductions.  Data processing expenses increased by $0.1 million, FDIC premiums increased by $0.1 million and miscellaneous expenses increased by $0.7 million primarily attributable to increased pension plan of $0.3 million, check fraud related expenses of $0.2 million, and increases in membership dues and licenses, mortgage escrow, debit card expense, and miscellaneous loan fees, partially offset by decreases in personnel related expense and loan service fees.  An increase in net interest income of $0.2 million and a decrease in income tax expense of $0.3 million also partially offset the decrease.   The provision for credit losses was $0.4 million for the second quarter of 2023 compared to provision for loan loss of $0.6 million for the second quarter of 2022.

Compared to the linked quarter, net income was stable.  Net interest income for the three months ended June 30, 2023 decreased by $0.3 million and was driven by an increase in interest expense of $2.5 million, partially offset by an increase of $2.1 million in interest income.  Provision for credit losses decreased by $0.1 million due primarily to the continued strong credit quality of our loan portfolio and decreased historical loss factors, which was offset slightly by the strong loan growth and increases in other qualitative factors related to the uncertain economic environment.  Other operating income remained stable, including service charges, wealth management income, and debit card income.  Salaries and employee benefits decreased by $0.4 million primarily due to decreases in health insurance costs and incentive compensation.   Net other real estate owned  expenses decreased by $0.1 million related to gains on sales of OREO properties recognized in the second quarter of 2023.  Miscellaneous expenses increased by $0.3 million due to increases in FDIC assessments of $0.1 million, check fraud related expenses of $0.1 million, and investor relations costs of $0.1 million.

Year to date net income for the first six months of 2023 was $8.8 million compared to $11.1 million for the same period in 2022.  The year-over-year decrease was primarily driven by a $2.4 million in salaries and employee benefits year over year due primarily to increased salary expense of $1.1 million related to new hires and merit increases effective April 1, 2023, increased health insurance costs of $0.8 million associated with unusually high claims and increased incentive payouts of $0.2 million. Occupancy and equipment expense increased by $0.2 million, data processing expense increased by $0.3 million, and FDIC assessments increased by $0.1 million.  Other miscellaneous expenses, such as loan service fees, dues and licenses, check fraud expenses, employee benefit plan expense, and miscellaneous expenses increased by $1.1 million.  Provision for credit losses increased by $0.7 million when compared to prior year.  These increases were partially offset by an increase in net interest income of $1.4 million, gains on sales of mortgages of $0.1 million, service charges on deposit accounts of $0.1 million, and debit card income of $0.1 million.

Net Interest Income and Net Interest Margin

Net interest income, on a non-GAAP, FTE basis, increased by $0.2 million for the second quarter of 2023 when compared to the second quarter of 2022.  This increase was driven by an increase of $5.2 million in interest income from an overall increase in yield of 86 basis points on interest earning assets and an increase in average balances of $152.7 million.  Interest income on loans increased by $3.9 million due to the increase of 81 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 $117.1 million.  Investment income increased by $0.2 million.  The increase of $5.0 million in interest expense was driven by an increase of 142 basis points on interest paid on deposit accounts as well as an increase of $126.1 million in average balances of interest-bearing deposit accounts when compared to the same period of 2022.  Increased deposit pricing is a result of the continued pressure on deposits as well as a shift in the deposit portfolio mix from non-interest-bearing deposits to interest-bearing accounts including the Insured Cash Sweep ("ICS") product to ensure full FDIC insurance coverage. The net interest margin for the three months ended June 30, 2023 was 3.24% compared to 3.52% for the three months ended June 30, 2022. 

Comparing the second quarter of 2023 to the first quarter of 2023, net interest income, on a non-GAAP, FTE basis, decreased by $0.3 million   This decrease was driven by an increase of $2.1 million in interest income offset by a $2.5 million increase in interest expense.  Interest paid on long-term borrowings increased by $0.8 million due to $80.0 million in FHLB borrowings obtained during the first quarter and an increase of interest rates on variable rate trust preferred borrowings.  Interest expense on deposits increased by $1.7 million due to an increase in the average rate paid and an increase in average deposit balances of $31.2 million during the quarter. The increase in deposit balances was attributable to the addition of $61.1 million in brokered deposits late in the first quarter, offset by customary fluctuations in commercial and municipal deposits in the quarter and declines due to intense competition for deposits and increased customer utilization of cash. Interest income on loans increased by $1.3 million related to an overall increase of 21 basis points in yield.

Comparing the six months ended June 30, 2023 to the six months ended June 30, 2022, net interest income, on a non-GAAP, FTE basis, increased by $1.4 million.  Interest income increased by $8.9 million and interest expense increased by $7.5 million.  The yield on earning assets increased 79 basis points to 4.45% in 2023 compared to 3.66% in 2022 in correlation with the rising interest rate environment and new loans booked at higher rates.  Interest expense on deposits increased $6.2 million while the average balances increased $100.0 million and interest on long-term borrowings increased $1.4 million relating to $80.0 million in FHLB borrowings obtained during the first quarter of 2023 and an increase of interest rates on variable rate trust preferred borrowings.  The increased interest expense resulted in an overall increase of 122 basis points on interest bearing liabilities.  The net interest margin for the six months ended June 30, 2023 was 3.39% compared to 3.46% for the six months ended June 30, 2022. 

Non-Interest Income

Other operating income, including gains, for the second quarter of 2023 increased slightly by $0.1 million when compared to the same period of 2022.  Increases in service charges, debit card income, and gains on sales of mortgages were partially offset by decreases in wealth management income attributable to the decline in market values of assets under management.

On a linked quarter basis, other operating income, including gains on sales of mortgages, debit card income, service charges, and wealth management income, remained stable.

Other operating income for the six months ended June 30, 2023 remained stable when compared to the same period of 2022.  This increase was primarily due to the increase in gains on sales of residential mortgage loans of $0.1 million, service charges on deposit accounts of $0.1 million, and debit card income of $0.1 million, which was partially offset by decreases in wealth management income attributable to the decline in market values of assets under management.

Non-Interest Expense

Operating expenses increased by $1.9 million when comparing the second quarter of 2023 to the second quarter of 2022.  This increase was primarily driven by a $1.1 million increase in salaries and employee benefits due to an increase in health insurance costs related to unusually high claims, as well as increased salary expense for new hires, merit increases effective April 1, 2023, and increased incentive compensation.  Data processing expenses increased by $0.1 million, FDIC premiums increased by $0.1 million and miscellaneous expenses increased by $0.7 million primarily attributable to increased employee benefit plan costs of $0.3 million, check fraud related expenses of $0.2 million, and increases in membership dues and licenses, mortgage escrow interest expense, debit card expense, and miscellaneous loan fees, partially offset by decreases in personnel related expense and loan service fees. 

Comparing the second quarter of 2023 to the first quarter of 2023, operating expenses decreased by $0.1 million.  Salaries and employee benefits decreased by $0.4 million primarily due to decreases in health insurance costs, incentive compensation and reduced in loan costs.   Net OREO expenses decreased by $0.1 million related to gains on sales of OREO properties recognized in the second quarter.  Miscellaneous expenses increased by $0.3 million due to increases in FDIC assessments of $0.1 million, check fraud related expenses of $0.1 million, and investor relations costs of $0.1 million attributable to our annual shareholder meeting and proxy.

For the six months ended June 30, 2023, non-interest expenses increased by $3.9 million when compared to the six months ended June 30, 2022.   Salaries and employee benefits increased by $2.4 million year over year due primarily to increased salary expense of $1.1 million related to new hires and merit increases effective April 1, 2023, increased health insurance costs of $0.8 million associated with unusually high claims and increased incentive payouts of $0.2 million. Occupancy and equipment expense increased by $0.2 million, data processing expense increased by $0.3 million, and FDIC assessments increased by $0.1 million.  Other miscellaneous expenses, such as loan service fees, dues and licenses, check fraud expenses, employee benefit plan expense, and miscellaneous expenses increased by $1.1 million.

The effective income tax rates as a percentage of income for the six months ended June 30, 2023 and June 30, 2022 were 24.0% and 24.5%, respectively.  The decrease in the tax rate for the 2023 period was primarily related to a new low-income housing tax credit investment in 2022 that began generating tax credits during the fourth quarter of 2022.  This tax credit will continue through 2032.

Balance Sheet Overview

Total assets at June 30, 2023 were $1.9 billion, representing a $80.2 million increase since December 31, 2022.  During the first six months of 2023, cash and interest-bearing deposits in other banks increased by $14.2 million resulting from implementation of the contingency funding plan and obtaining $61.1 million of brokered certificates of deposit and $80.0 million in FHLB borrowings.  Implementing the contingency funding plan and the increase in on-balance sheet liquidity was a precautionary move given the market disruption associated with the volatile banking environment and the near-term uncertainties regarding growth in the deposit portfolio. The increase in cash obtained from contingency funding was partially offset by the funding of loan growth during 2023.  The investment portfolio decreased by $10.7 million associated with normal principal amortization and gross loans increased by $70.5 million.  Other assets, including deferred taxes, premises and equipment, and accrued interest receivable, increased by $4.0 million as pension assets increased by $0.6 million, equity investments increased by $0.7 million, and deferred tax assets increased by $1.2 million.

Total liabilities at June 30, 2023 were $1.8 billion, representing a $76.9 million increase since December 31, 2022.  Total deposits increased by $9.2 million since December 31, 2022.  The increase in deposits during the first six months was primarily attributable to $61.1 million in new brokered deposits, which was partially offset by a decrease of approximately $40.0 million in non-interest-bearing deposits due to a shift to interest bearing accounts, two large commercial customers having large deposit withdrawals totaling $39.5 million during 2023 to fund business activity, the effects of consumer and commercial spending and the competitive market for deposits.  Short term borrowings decreased by $14.5 million since December 31, 2022 due to municipalities utilizing cash in our treasury management product for normal spending.  Long term borrowings increased by $80.0 million in the first six months of 2023 when compared to December 31, 2022 due to the acquisition of $80.0 million in FHLB borrowings. The addition of brokered deposits and the FHLB borrowings was a precautionary move as described above.

Outstanding loans of $1.4 billion at June 30, 2023 reflected growth of $70.5 million for the first six months of 2023.  Since December 31, 2022, commercial real estate loans increased by $24.7 million and acquisition and development loans increased by $8.4 million. Commercial and industrial loans increased by $4.3 million since December 31, 2022.  Growth in the commercial portfolios was driven by increased activity with existing clients as well as cultivating new business relationships.  Residential mortgage loans increased $31.1 million related to management's strategic decision to book new mortgage loans at higher rates to our in-house portfolio. The consumer loan portfolio increased slightly by $2.1 million.   

New commercial loan production for the three months ended June 30, 2023 was approximately $67.6 million.  The pipeline of commercial loans as of June 30, 2023 was $22.5 million.  At June 30, 2023, unfunded, committed commercial construction loans totaled approximately $42.6 million. Commercial amortization and payoffs were approximately $99.3 million through June 30, 2023 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 second quarter of 2023 was approximately $32.3 million, with most of this production comprised of in-house mortgages.  The pipeline of in-house, portfolio loans as of June 30, 2023, was $6.2 million.  The residential mortgage production level normalized in the second quarter of 2023 due to the increasing interest rates that occurred throughout 2022 and 2023.  Unfunded commitments related to residential construction loans totaled $21.0 million at June 30, 2023.  Management began shifting activity towards the secondary market in the second quarter to reduce the need for additional funding.

Total deposits at June 30, 2023 increased by $9.2 million when compared to December 31, 2022.  During the first six months of 2023, non-interest-bearing deposits decreased by $40.0 million primarily due a shift in the deposit portfolio mix from non-interest-bearing deposits to interest-bearing accounts including the Insured Cash Sweep ("ICS") product to ensure full FDIC insurance coverage, consumer and commercial spending and the competitive deposit market.   Interest bearing demand deposits increased by $65.5 million and traditional savings and money market accounts decreased by $85.3 million, which is primarily related to consumer spending habits during 2023, businesses utilizing cash, and two large customers reducing deposits by $39.5 million for regular business purposes. Total time deposits increased by $103.0 million.  This increase in time deposits was primarily driven by management's decision to acquire $61.1 million in brokered deposits during the first quarter of 2023 due to the heightened uncertainty in the deposit market associated with the volatile banking environment as well as increased interest rates on a promotional nine-month CD product offered in 2023.

The book value of the Company's common stock was $23.12 per share at June 30, 2023 compared to $22.77 per share at December 31, 2022.  At June 30, 2023, there were 6,711,422 of basic outstanding shares and 6,724,734 of diluted outstanding shares of common stock.  The increase in the book value at June 30, 2023 was due to the undistributed net income of $6.1 million for the first six months of 2023, which was partially offset by a decrease in shareholders' equity of $2.2 million, net of tax, due to the adoption of ASC 326- CECL.

Asset Quality

On January 1, 2023, the Company adopted CECL, which replaced the incurred loss impairment model with an expected loss model.  As a result of the CECL adoption, the Company recorded a transition adjustment of $2.2 million, net of $0.7 million in tax, to retained earnings as of January 1, 2023 for the cumulative effect of the adoption of CECL.  The Company recorded a $2.0 million increase to the ACL related to loans and a $0.9 million increase to the allowance for credit losses on off balance sheet exposures.

For periods prior to the adoption of CECL, the Company recognized credit losses for loans that were collectively evaluated for impairment based on an incurred loss approach, which limited our measurement of credit losses to credit events that were estimated to have already occurred.  The ALL under the incurred model was a valuation allowance for probable incurred losses inherent in the loan portfolio.  Management made the determination by taking into consideration historical loan loss experience, diversification of the loan portfolio, amount of secured and unsecured loans, banking industry standards and averages, and general economic conditions.  Credit losses were charged against the ALL when the loan balance was confirmed uncollectible.  Subsequent recoveries, if any, were credited to the ALL.  Ultimate losses varied from current estimates.  The estimates were reviewed periodically and as adjustments became necessary, they were reported in earnings in the periods in which they become reasonably estimable.

The ACL was $16.9 million at June 30, 2023 compared to the ALL of $15.7 million recorded at June 30, 2022 and $14.6 million at December 31, 2022.  The provision for credit losses was $0.4 million for the quarter ended June 30, 2023, compared to provision expense of $0.6 million for the quarter ended June 30, 2022.  The provision expense recorded in the second quarter of 2023 was primarily related to strong loan growth and increases in qualitative risk factors related to the uncertainty of the economy, inflation levels, and rising interest rates, which was partially offset by the reduction of historical loss factors related to the strength of our overall portfolio.  Net charge-offs of $0.4 million were recorded for the quarter ended June 30, 2023 compared to net charge-offs of $0.2 million for the quarter ended June 30, 2022. The ratio of the ACL to loans outstanding was 1.25% at June 30, 2023 compared to 1.31% at March 31, 2023 and 1.14% at December 31, 2022. 

The ratio of year-to-date net charge offs to average loans for the six months ending June 30, 2023 was an annualized 0.10%, compared to net charge offs to average loans of 0.07% for 2022.  Details of the ratio, by loan type, are shown below.  Our special assets team continues to effectively collect on charged-off loans, resulting in ongoing overall low net charge-off ratios.

Non-accrual loans totaled $3.0 million at June 30, 2023 compared to $3.5 million at December 31, 2022.  The decrease in non-accrual balances at June 30, 2023 was primarily driven by principal reductions in the residential mortgage portfolio.  OREO balances increased by $0.1 million since December 31, 2022 due to the addition of a new OREO property during the second quarter, which was partially offset by sale of OREO held by the Bank at December 31, 2022.

Non-accrual loans that have been subject to partial charge-offs totaled $0.1 million at June 30, 2023 and $0.2 million at December 31, 2022.  Loans secured by 1-4 family residential real estate properties in the process of foreclosure totaled $1.8 million at June 30, 2023.  There were no loans subject to foreclosure at December 31, 2022.   As a percentage of the loan portfolio, accruing loans past due 30 days or more was 0.18% at June 30, 2023 compared to 0.17% at March 31, 2023 and 0.16% at December 31, 2022. 

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 (the "FRB") 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 First United Bank & Trust, a Maryland trust company (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 ("Limited Mews"), 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 June 30, 2023 and the impact that any such events have on our critical accounting assumptions and estimates made as of June 30, 2023, which could require us to make adjustments to the amounts reflected in this press release.

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SOURCE First United Corporation