FIRST UNITED CORPORATION ANNOUNCES FOURTH QUARTER 2022 EARNINGS

OAKLAND, Md., Feb. 9, 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 twelve-month periods ended December 31, 2022.  Consolidated net income was $7.0 million for the fourth quarter of 2022, or $1.04 per diluted share, compared to $7.5 million, or $1.14 per diluted share, for the fourth quarter of 2021 and $6.9 million, or $1.04 per diluted share, for the third quarter of 2022.  Consolidated net income was $25.0 million for the year ended December 31, 2022, or $3.76 per diluted share, compared to $19.8 million, or $2.95 per diluted share for the year ended December 31, 2021.

According to Carissa Rodeheaver, President and CEO, "2022 was a banner year for First United Corporation, resulting in our highest annual net income to date.  I attribute this to our dedicated and talented group of associates. Our lending team contributed tremendous loan growth, led by the commercial group, as we saw strong production throughout our market areas.  Deposit growth continued to be steady during 2022 as we added to our local municipal and non-profit account balances.  The rising interest rate environment and our ability to control deposit pricing early in the year contributed to 2022's increased net interest margin and the resulting growth in net interest income.  Our stable asset quality resulted in the final reduction of the allowance for loan losses, bringing it in line with pre-pandemic levels. While we expect 2023 will bring pricing challenges and require continued expense discipline, our team of associates is working proactively to protect the margin and to work closely with our customers as they navigate the current turbulent economic environment." 

Fourth Quarter Financial Highlights:

• Total assets at December 31, 2022 increased by $44.5 million, or 2.5%, when compared to September 30, 2022 and increased by $118.3 million, or 6.8%, when compared to December 31, 2021. Significant changes during the fourth quarter included:
• Cash balances increased by $43.6 million when compared to September 30, 2022 and decreased by $41.4 million when compared to December 31, 2021.  Growth in the fourth quarter was attributed to gaining deposit balances for new municipalities. 
• Investment securities decreased by $4.9 million when compared to September 30, 2022 and increased by $18.5 million when compared to December 31, 2021 as we deployed cash to investments early in the year.
• Gross loans increased by $1.6 million when compared to September 30, 2022 and by $125.8 million when compared to December 31, 2021 as
• commercial balances decreased by $15.3 million during the fourth quarter and increased by $91.5 million when compared to December 31, 2021,
• mortgage balances increased by $17.3 million during the fourth quarter and by $39.7 million when compared to December 31, 2021, and
• consumer loans decreased by $0.5 million during the fourth quarter and by $5.4 million when compared to December 31, 2021.
• Deposits increased by $59.6 million when compared to September 30, 2022 and by $101.4 million when compared to December 31, 2021
• The ratio of the allowance for loan losses ("ALL") to loans outstanding was 1.14% at December 31, 2022 as compared to 1.22% at September 30, 2022 and 1.38% at December 31, 2021.
• Total provision expense was a credit of $0.7 million for the fourth quarter of 2022 as compared to a credit of $0.9 million for the fourth quarter of 2021 and a credit of $0.1 million for the third quarter of 2022.
• Stable asset quality, stabilization of loans modified during the pandemic that maintained principal and interest payments, and low delinquency, offset slightly by increased qualitative factors related to the uncertain economic environment all contributed to the reduction in the ALL.
• Consolidated net income was $7.0 million for the fourth quarter of 2022.
• Net interest margin, on a non-GAAP, fully tax equivalent ("FTE") basis, was 3.63% for the fourth quarter of 2022 compared to 3.66% for the third quarter of 2022 and 3.49% for the fourth quarter of 2021.
• Core, non-interest income, on a non-GAAP basis, remained stable in the fourth quarter of 2022 when compared to the third quarter of 2022, driven by $0.1 million in gains on investments recognized in the third quarter and a $0.1 million decrease in other miscellaneous income from a fourth quarter incentive payment received on a negotiated check contract.  When comparing the fourth quarter of 2022 to the fourth quarter of 2021, non-interest income decreased by $1.9 million primarily due to a $1.4 million insurance reimbursement recognized as income in the fourth quarter of 2021, a decrease in commissions earned on trust and brokerage accounts of $0.2 million, and a decrease of $0.4 million in other miscellaneous income. 
• Non-interest expense, on a non-GAAP basis, increased by $1.3 million when comparing the fourth quarter of 2022 to the third quarter of 2022.  This increase was primarily driven by the reimbursement of $0.7 million of litigation expenses in the third quarter, a $0.2 million increase in audit, legal and consulting related expenses, $0.1 million increases in salaries and employee benefits, a $0.1 million increase in automated services, a $0.1 million increase in OREO related expenses and a $0.1 million adjustment for the valuation of Fintech partnerships.  When comparing the fourth quarter of 2022 to the fourth quarter of 2021, operating expenses increased by $0.4 million due primarily to a $0.4 million increase in salaries and employee benefits attributable to incentive payouts and $0.7 million increase in net OREO related expenses due to a gain on the sale of other real estate owned ("OREO") recognized in the fourth quarter of 2021.   These increases were partially offset by a $0.9 million decrease in contribution expense in 2022 compared to 2021 related to the funding of the First United Community Dreams Foundation.

Income Statement Overview

Consolidated net income was $7.0 million for the fourth quarter of 2022 compared to $7.5 million for the fourth quarter of 2021 and $6.9 million for the third quarter of 2022.  Basic net income was $1.05 per share and diluted net income was $1.04 per share for the fourth quarter, compared to basic and diluted net income per share of $1.14 for the fourth quarter of 2021 and $1.04 for the third quarter of 2022. 

The decrease in quarterly net income year-over-year was primarily driven by a $1.4 million insurance reimbursement received in the fourth quarter of 2021 that was offset by a $1.0 million contribution to our newly created First United Community Dreams Foundation.  Gains on sale of residential mortgages decreased by $0.1 million.   Salaries and employee benefits increased by $0.4 million due to the competitive employment landscape and increased performance pay, and net OREO expenses increased by $0.7 million primarily due to gains booked in the fourth of quarter of 2021.   These increases were partially offset by an increase in net interest income of $1.3 million.  

Compared to the linked quarter of 2022, net income was relatively flat.  Net interest income for the three months ended December 31, 2022 was stable.  Provision for credit losses was a credit of $0.7 million in the fourth quarter compared to a $0.1 million credit in the third quarter.  The decrease in provision expense was due primarily to continued improvement in qualitative factors related to the continued payment performance of modified loans, offset slightly by increasing qualitative factors related to the uncertain economic environment.  The credit to provision was offset quarter-over-quarter by the reimbursement of $0.7 million in litigation expenses during the third quarter.  Other expenses were slightly elevated when comparing the linked quarters.

Consolidated net income for the year ended December 31, 2022 was $25.0 million compared to $19.8 million in 2021.  The year-over-year increase was primarily due to a $5.1 million increase in net interest income resulting from a $4.2 million increase in interest income and a decrease in interest expense of $0.9 million. Net gains were down $1.1 million in 2022 when compared to 2021 as management made the strategic decision to book the higher rate mortgage loans in 2022 as opposed to selling them to the secondary market. Other income declined in 2022 due to a decrease of $0.4 million in trust and brokerage income and a decrease of $1.4 million due to an insurance reimbursement received in 2021.  These declines were slightly offset by an increase of $0.2 million in service charges and debit card income.  Provision expense was up $0.2 million as compared to 2021. Salaries and benefits increased by $2.1 million when compared to 2021 due to a lower reduction of loan origination costs of $1.0 million and a $1.1 million increase due to performance related pay and the competitive employment environment.  Other changes year-over-year included increased OREO expenses of $1.5 million in 2022 due to gains on sale of OREO booked during 2021, other net increases in expenses of $0.8 million and increased income taxes of $1.6 million. Non-interest expense decreased significantly due to our payment of $3.3 million in litigation settlement expenses during the first quarter of 2021 and a $2.4 million FHLB prepayment penalty for the early repayment of $70.0 million of Federal Home Loan Bank ("FHLB") advances recognized in the third quarter of 2021, a reduction of $2.4 million in professional and investor relations expenses primarily related to reimbursement of $0.7 in litigation expenses, a reduction of $0.4 million in investor relations costs and a $1.3 million reduction in legal fees.  Charitable contributions also declined by $0.9 million primarily due to the decision to make a $1.0 million contribution in 2021 to fund the newly created First United Community Dreams Foundation (the "Foundation").

Net Interest Income and Net Interest Margin

Net interest income, on a non-GAAP, FTE basis, increased by $1.3 million for the fourth quarter of 2022 when compared to the fourth quarter of 2021.  This increase was driven by an increase of $2.5 million in interest income from an overall increase in yield of 43 basis points on interest earning assets and an increase in average balances of $74.0 million.  Interest income on loans increased by $1.6 million due primarily to continued growth in our commercial loan portfolio, increased rates on new loans booked and adjustable-rate loans repricing related to the current rising rate environment.  Investment income increased by $0.7 million primarily due to an increase in average balances of $52.3 million and an increase of 46 basis points in yield related to the deployment of excess cash balances to purchase investment securities late in the fourth quarter of 2021 and early in the first quarter of 2022.  The increase of $1.2 million in interest expense was driven primarily by the increase of 41 basis points on interest paid on deposit accounts as well as an increase of $88.7 million of interest-bearing deposit accounts compared to 2021. 

Comparing the fourth quarter of 2022 to the third quarter of 2022, net interest income, on a non-GAAP, FTE basis, remained stable.  This was driven by a $1.2 million increase in interest income due to an increase in average earning assets of $17.8 million and an increase in the yield on earning assets of 24 basis points.  Interest income on loans increased by $1.0 million related to an increase in average balances of $41.3 million, driven primarily by strong commercial and consumer mortgage loan growth.  Interest expense increased by $1.1 million while average interest-bearing deposit balances increased by $63.3 million when comparing the fourth quarter of 2022 to the third quarter of 2022.  The net interest margin decreased slightly to 3.63% for the fourth quarter of 2022 compared to 3.66% for the third quarter of 2022.

Comparing the year ended December 31, 2022, to the year ended December 31, 2021, net interest income, on a non-GAAP, FTE basis, increased by $5.1 million.  Interest income increased by $4.2 million and interest expense decreased by $0.9 million.  The yield on earning assets increased 22 basis points to 3.85% in 2022 compared to 3.63% in 2021 in correlation with the rising interest rate environment and new loans booked at higher rates.  Interest expense on deposits decreased by $0.2 million while the average balance of deposits increased by $26.1 million and interest on long-term borrowings decreased by $0.7 million related to the prepayment of $70.0 million of FHLB advances in the third quarter of 2021.  The decreased interest expense resulted in an overall decrease of 7 basis points on the cost of interest-bearing liabilities.  We anticipate increased margin pressure in 2023 due to increasing deposit pricing demands in our market areas.  The net interest margin for the year ended December 31, 2022 was 3.56% compared to 3.28% for the year ended December 31, 2021. 

Non-Interest Income

Other operating income, including gains, for the fourth quarter of 2022 decreased by approximately $1.9 million when compared to the same period of 2021.  The decrease was primarily due to the one-time receipt of $1.4 million insurance reimbursement in 2021 and a decrease of gains on sales of residential mortgages of $0.1 million due to management's decision to book loans to the portfolio in light of the rising interest rate environment.  Other miscellaneous income increased by $0.4 million.  Trust department income decreased by $0.2 million as a result of market volatility and the impact of the rising rate environment on the value of assets under management. Assets under management in the trust department were $1.4 billion at December 31, 2022 and 2021.

On a linked quarter basis, other operating income, including gains, decreased by $0.2 million.  This decrease was primarily due to one-time recognition of $0.1 million from a gain in investments and a $0.1 million increase in miscellaneous income due to an incentive received during the third quarter related to a negotiated check contract in the third quarter of 2021.

Non-interest income, including gains, for the year ended December 31, 2022, decreased by approximately $2.7 million when compared to 2021.  This decrease was partially due to a $1.4 million insurance reimbursement that was received in 2021 and a decrease in net gains from the sale of residential mortgage loans of $1.1 million as refinance activity has slowed considerably and due to management's strategic decision to book new mortgage loans at higher rates to our in-house portfolio.  These decreases were partially offset by a net increase in service charge, debit card and other income of $0.2 million.

Non-Interest Expense

Operating expenses increased by $0.4 million when comparing the fourth quarter of 2022 to the fourth quarter of 2021.  This increase was driven largely by an increase of $0.7 million in net OREO expenses due to a gain on sale of an OREO property recognized in 2021 as well as a $0.4 million increase in salaries and employee benefits.  These increases were partially offset by a decrease of $0.9 million in charitable contribution expense when compared to 2021 due to the funding of the Foundation at the end of 2021.  

Comparing the fourth quarter of 2022 to the third quarter of 2022, operating expenses increased by $1.3 million.  Legal and professional fees increased by $0.9 million, which was in large part attributable to cash receipt of an insurance reimbursement related to litigation expenses that was recognized in the third quarter, while salaries and employee benefits increased by approximately $0.1 million primarily related to bonus employee compensation recognized in the fourth quarter of 2022.

For the year ended December 31, 2022, non-interest expenses decreased by $4.6 million compared to the year ended December 31, 2021.  Salaries and benefits increased by $2.1 million compared to 2021 due to a lower reduction of loan origination costs of $1.0 million and a $1.1 million increase due to performance related pay and the competitive employment environment.  Other changes year-over-year included increased OREO expenses of $1.5 million in 2022 due to gains on sale of OREO booked during 2021 and other net increases in expenses of $.8 million. Non-interest expense decreased significantly due to our payment of $3.3 million in litigation settlement expenses during the first quarter of 2021 and a $2.4 million FHLB prepayment penalty for the early repayment of $70.0 million of FHLB advances recognized in the third quarter of 2021, a reduction of $2.4 million in professional and investor relations expenses primarily related to reimbursement of $0.7 in litigation expenses, a reduction of $0.4 million in investor relations costs and a $1.3 million reduction in legal fees.  Charitable contributions also declined by $0.9 million primarily due to the funding of the Foundation at the end of 2021.

The effective income tax rates as a percentage of income for the years ended December 31, 2022 and December 31, 2021 were 24.5% and 24.9%, respectively.  The slight decrease in the tax rate for the year ended December 31, 2022 when compared to the year ended December 31, 2021 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.

Balance Sheet Overview

Total assets at December 31, 2022 were $1.8 billion, representing a $44.5 million increase since September 30, 2022 and a $118.3 million increase since December 31, 2021.  During the fourth quarter of 2022, cash and interest-bearing deposits in other banks increased by $43.6 million, the investment portfolio decreased by $4.9 million and gross loans increased by $1.6 million.  Other assets, including deferred taxes, premises and equipment and accrued interest receivable, also increased by $3.4 million. 

Total liabilities at December 31, 2022 were $1.7 billion, representing a $24.8 million increase since September 30, 2022 and a $108.4 million increase since December 31, 2021.  Total deposits increased by $59.6 million since September 30, 2022 and by $101.4 million since December 31, 2021.  The increase in deposits during the fourth quarter was primarily attributable to a new deposit product marketed to municipalities that brought in approximately $34.0 million of new interest-bearing deposits during the quarter as well as new deposit funding from local government entities of approximately $30.0 million.  Short term borrowings decreased by $25.2 million from September 30, 2022, primarily driven by $20.0 million of overnight borrowings at the end of the third quarter, and increased by $6.9 million from December 31, 2021.  These increases were related to an increase in our overnight investment Treasury product of $12.0 million during the fourth quarter, which was offset slightly by run-off of term deposits. 

Outstanding gross loans of $1.3 billion at December 31, 2022 reflected growth of $125.8 million for the year and growth of $1.6 million for the fourth quarter of 2022.  Since December 31, 2021, commercial real estate loans increased by $84.5 million and acquisition and development loans decreased by $57.5 million due primarily to the payoff of one large credit early in the third quarter.  Commercial and industrial loans increased by $64.4 million for the year, primarily in new floor plan business, new commercial clients and continued expansion of existing client relationships.  Residential mortgage loans increased $39.7 million related to management's strategic decision to book new mortgage loans at higher rates to our in-house portfolio. The consumer loan portfolio decreased by $5.4 million due to amortization and payoffs of the existing portfolio slightly offset by new production.

New commercial loan production for the three months ended December 31, 2022 was approximately $53.3 million.  At December 31, 2022, unfunded, committed commercial construction loans totaled approximately $27.8 million. Commercial amortization and payoffs were approximately $282.7 million through December 31, 2022.

New consumer mortgage loan production for the fourth quarter of 2022 was approximately $26.2 million with most of this production comprised of in-house mortgages.  The pipeline of in-house, portfolio loans as of December 31, 2022, consisted of $7.5 million.  The residential mortgage production level slowed in the fourth quarter of 2022 due to the increasing interest rates that occurred in 2022.

Total deposits at December 31, 2022 increased by $101.4 million when compared to deposits at December 31, 2021.  Non-interest-bearing deposits increased by $5.0 million.   Interest bearing demand deposits increased by $99.5 million and traditional savings accounts increased by $14.1 million.  The increase in interest bearing demand deposits was attributable to an increase in municipality funding into a higher yielding indexed product.  Money market balances increased by $25.4 million.  Time deposits decreased by $42.7 million related to maturing balances moving to more liquid accounts, or brokerage investment accounts, due to the rising deposit rates as well as municipal funds moving to higher yielding State funding alternatives.

The book value of the Company's common stock was $22.77 per share at December 31, 2022 compared to $19.83 per share at September 30, 2022.  At December 31, 2022, there were 6,666,428 of basic outstanding shares and 6,692,039 of diluted outstanding shares of common stock.  The increase in the book value at December 31, 2022 was due to the increase in common equity driven by the decrease in accumulated other comprehensive loss ("AOCL") from September to December.  The decrease in AOCL was primarily attributable to the increase in the discount rate of the underlying assets in the pension plan.

Asset Quality

The ALL decreased to $14.6 million at December 31, 2022 from the $16.0 million recorded at December 31, 2021.  The provision for loan losses was a credit of $0.7 million for the quarter ended December 31, 2022 compared to a credit of $0.9 million for the quarter ended December 31, 2021.  The credit to provision expense recorded in the fourth quarter of 2022 was primarily attributable to the continuation of payments of loans modified during the COVID-19 pandemic.  Net charge-offs of $0.2 million were recorded for the quarter ended December 31, 2022 compared to net charge-offs of $0.1 million for the quarter ended December 31, 2021. The ratio of the ALL to loans outstanding was 1.14% at December 31, 2022 compared to 1.22% at September 30, 2022 and 1.38% at December 31, 2021. 

The ratio of year-to-date net charge offs to average loans for the year ending December 31, 2022 was 0.06%, compared to net recoveries to average loans of 0.2% for 2021.  The increase in charge offs in the consumer portfolio is related to unsecured consumer loans.  Details of the ratio, 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 $3.5 million at December 31, 2022 compared to $2.5 million at December 31, 2021.  The increase in non-accrual balances at December 31, 2022 was primarily related to a $1.5 million residential mortgage loan that was placed into non-accrual status during the fourth quarter of 2022.  This addition to non-accrual loans was partially offset by $0.3 million of principal pay-downs of other non-accrual loans and the movement of a $0.2 million in acquisition and development loan to OREO.  OREO balances remained stable when compared to December 31, 2021.

Non-accrual loans that have been subject to partial charge-offs totaled $0.2 million at December 31, 2022 and $0.5 million at December 31, 2021.  There were no loans secured by 1-4 family residential real estate properties in the process of foreclosure at December 31, 2022, compared to $0.2 million in such loans at December 31, 2021.   As a percentage of the loan portfolio, accruing loans past due 30 days or more decreased to 0.16% compared to 0.27% at September 30, 2022 and 0.31% as of December 31, 2022. 

ABOUT FIRST UNITED CORPORATION

First United Corporation is the parent company of First United Bank & Trust, a Maryland trust company with commercial banking powers, and two statutory trusts that were used as financing vehicles.  The Bank has four wholly-owned subsidiaries: OakFirst Loan Center, Inc., a West Virginia finance company; OakFirst Loan Center, LLC, a Maryland finance company; First OREO Trust, a Maryland statutory trust that holds and services real estate acquired by the Bank through foreclosure or by deed in lieu of foreclosure; and FUBT OREO I, LLC, a Maryland company that likewise holds and services real estate acquired by the Bank through foreclosure or by deed in lieu of foreclosure.  The Bank also owns 99.9% of the limited partnership interests in Liberty Mews Limited Partnership, a Maryland limited partnership, and a 99.9% non-voting interest in MCC FUBT Fund, LLC, an Ohio limited liability company, both of which were formed for the purpose of acquiring, developing and operating low-income housing units.  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 Annual Report on Form 10-K for the quarter ended December 31, 2022 and the impact that any such events have on our critical accounting assumptions and estimates made as of December 31, 2022, which could require us to make adjustments to the amounts reflected in this press release.