FIRST UNITED CORPORATION ANNOUNCES SECOND QUARTER 2022 EARNINGS

OAKLAND, Md., July 25, 2022 /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, 2022.  Consolidated net income was $5.4 million for the second quarter of 2022, or $0.82 per diluted share, compared to $4.4 million, or $0.66 per diluted share, for the second quarter of 2021 and $5.7 million, or $0.86 per diluted share, for the first quarter of 2022.  Year to date income was $11.1 million as of June 30, 2022, or $1.68 per diluted share, compared to $7.8 million, or $1.15 per diluted share for the same period of 2021.

According to Carissa Rodeheaver, President and CEO, "the rising interest rate environment has been the catalyst to our increasing net interest margin as we have seen rising loan yields and have maintained our deposit pricing.  Income from our wealth department has declined, despite strong production, resulting from lower asset values related to the declining stock market and lower bond values.  Our efficiency ratio continues to positively reflect our utilization of technology and our intense focus on expenses. We also increased our provision expense this quarter given our strong loan growth and the volatile economy.  Overall, we continue to be pleased with our strong financial results and attribute that to the dedication and hard work of our employees." 

• Total assets at June 30, 2022 decreased by $7.9 million, or 0.5%, when compared to March 31, 2022 and increased by $22.6 million, or 1.3%, when compared to December 31, 2021. Significant changes during the second quarter included:
• Cash balances decreased by $54.5 million when compared to first quarter of 2022 and $94.1 million when compared to December 31, 2021, as loan balances grew
• Investment securities decreased $11.8 million when compared to first quarter of 2022 and increased $30.4 million when compared to December 31, 2021
• Gross loans increased $52.2 million when compared to first quarter of 2022 and $79.9 million when compared to December 31, 2021
• Commercial growth of $44.6 million and $80.4 million
• Mortgage balances increased $6.6 million and $1.6 million
• Consumer loans increased $1.0 million and decreased $2.0 million
• Deposits decreased $23.2 million when compared to first quarter of 2022 and increased $15.0 million when compared to December 31, 2021
• Decline in interest bearing deposits driven by reductions in time deposits and municipal money market balances
• The ratio of the allowance for loan losses ("ALL") to loans outstanding was 1.28% at June 30, 2022 as compared to 1.29% at March 31, 2022 and 1.38% at December 31, 2021
• Total provision expense of $0.6 million for both the second quarters of 2022 and 2021 as compared to a credit of $0.4 million for the first quarter of 2022
• Continued strong asset quality, stabilization of modified loans that have returned to principal and interest payments, low delinquency offset by increased qualitative factors due to the unstable economy related to interest rate increases, inflation, an uncertain supply chain
• Consolidated net income was $5.4 million for the second quarter of 2022
• Net interest margin, on a non-GAAP, fully tax equivalent ("FTE") basis, was 3.52% for the second quarter of 2022 compared to 3.40% for the first quarter of 2022 and 3.15% for the second quarter of 2021
• Core, non-interest income, on a non-GAAP basis, was stable in the second quarter of 2022 when compared to the first quarter of 2022.  Comparing the second quarter of 2022 to the second quarter of 2021, core non-interest income, on a non-GAAP basis, decreased, which was driven primarily by reduced gains on sales of mortgage loans and sales of investment securities during the second quarter of 2021.  These reductions were partially offset by increases in service charge income and debit card income in the second quarter of 2022
• Core, non-interest expense, on a non-GAAP basis, remained stable when comparing the second quarter of 2022 to the first quarter of 2022.  When comparing the second quarter of 2022 to the second quarter of 2021, operating expenses decreased relating to reduced salaries and benefits, professional services, telephone, and investor relations expenses offset by increases in equipment and occupancy expenses, OREO expenses and other miscellaneous expenses   

Consolidated net income was $5.4 million for the second quarter of 2022 compared to $4.4 million for the second quarter of 2021 and $5.7 million for the first quarter of 2022.  Basic and diluted net income per share for the second quarter of 2022 were both $0.82, compared to basic and diluted net income per share of $0.66 for the second quarter of 2021 and $0.86 for the first quarter of 2022. 

The increase in net income year over year was driven by an increase in net interest income of $1.2 million and reduced operating expenses of $0.4 million, offset by an increase in provision expense of $0.1 million, reduced other operating income, and a decrease of $0.3 million in gains from sales of mortgages.  Additionally, we experienced a decrease in gains from sales of available for sale investments and recognized an expense of $0.2 million in OREO related expenses in the second quarter 2022 compared to a gain on sale of OREO of $0.2 million in the second quarter of 2021.  The OREO expenses were attributable to one development project as we continue to work with the participation group to market and sell the commercial parcels.

Compared to the linked quarter of 2022, net interest income increased by $0.6 million.  This increase was offset by a $0.6 million provision for loan loss in the second quarter compared to a $0.4 million credit in the first quarter.  The increase in provision expense was due primarily to loan growth and changes in qualitative factors applied to the allowance for loan loss calculation during the second quarter of 2022, particularly related to the current economic outlook.

Year to date income for the first six months of 2022 was $11.1 million compared to $7.8 million for the same period in 2021.  The year over year increase was primarily driven by a $2.3 million increase in net interest income; of which, $1.9 million resulted from the decrease in interest expense as costs of funds fell by approximately 55%.  Additionally, comparative year-to-date income increased due to the $3.3 million in litigation settlement expense recognized in 2021.

Net Interest Income and Net Interest Margin

Net interest income, on a non-GAAP, FTE basis, increased by $1.2 million for the second quarter 2022 when compared to the second quarter of 2021.  This increase was driven by an increase of $0.3 million in interest income related to an overall increase of 15 basis points on interest earning assets despite a decline in average balances of $33.8 million. Interest income on loans decreased $0.2 million due primarily to a reduction of fees related to Paycheck Protection Program loan forgiveness recognized during 2021.  Investment income increased $0.6 million due to an increase in average balances 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 reduction of $1.1 million in interest expense resulted from the lowering of deposit rates throughout 2021, the decline of $73.3 million of average balances in the higher cost CD portfolio and the prepayment of $70.0 million of Federal Home Loan Bank ("FHLB") advances in 2021. The net interest margin for the second quarter of 2022 was 3.52%, compared to 3.15% for the second quarter of 2021. 

Comparing the second quarter of 2022 to the first quarter of 2022, net interest income, on a non-GAAP, FTE basis, increased by $0.6 million. This increase was driven by a $0.6 million increase in interest income, resulting in an increase in the yield on earning assets of 11 basis points while maintaining stable average balances.  Interest income on loans increased $0.4 million related to an increase in average balances of $31.8 million, driven by strong commercial loan growth.  Interest expense remained stable while average balances declined $4.4 million when comparing the second quarter of 2022 to the first quarter of 2022.  Comparing the second quarter of 2022 to the first quarter of 2022, net interest margin increased to 3.52% for the second quarter compared to 3.40% in the first quarter.

Comparing the six months ended June 30, 2022 to the six months ended June 30, 2021, net interest income, on a non-GAAP, FTE basis, increased by $2.3 million.  Interest income increased by $0.4 million and interest expense decreased by $1.9 million.  2021 interest income included $2.0 in fees related to PPP loan forgiveness recognized during the first half of 2021.  The yield on earning assets increased 10 basis points to 3.66% in 2022 compared to 3.56% in 2021 in correlation with the rising interest rate environment and new loans booked at higher rates.  Interest expense on deposits decreased $1.3 million while the average balances decreased $10.2 million and interest on long-term borrowings decreased $0.7 million relating 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 32 basis points on interest bearing liabilities.  To date, we have not experienced significant pressure on deposit pricing, but we expect to experience increasing rates the remainder of this year given the recent moves by the Federal Reserve.  The net interest margin for the six months ended June 30, 2022 was 3.46% compared to 3.13% for the six months ended June 30, 2021. 

Non-Interest Income

Other operating income, including gains, for the second quarter of 2022 decreased by approximately $0.3 million when compared with the same period of 2021.  Gains on sales of mortgage loans decreased by approximately $0.3 million related to the diminished refinance activity due to the rising interest rate environment and management's strategic decision to book new mortgage loans at higher rates to our in-house portfolio. Net gains on sales of investments decreased by approximately $0.2 million, which was partially offset by the increase of service charges on deposit accounts by approximately $0.1 million.

On a linked quarter basis, other operating income remained stable.  Slight increases in service charges and brokerage commissions were offset by decreases in gains on sales of residential mortgage loans and other miscellaneous income.

Non-interest income for the six months ended June 30, 2022 decreased by approximately $0.8 million when compared to the same period of 2021.  This decrease was primarily due to the decrease in net gains on sales of residential mortgage loans of $0.8 million as refinance activity has slowed considerably in correlation with rising mortgage interest rates and due to management's strategic decision to book new mortgage loans at higher rates to our in-house portfolio. 

Non-Interest Expense

Core operating expenses decreased by $0.4 million when comparing the second quarter of 2022 to the second quarter of 2021.  This decrease was driven by a decrease in legal and professional fees of approximately $0.9 million and investor relations expense of approximately $0.2 million, which were partially offset by an increase in salaries and employee benefits of approximately $0.3 million and net OREO expenses of approximately $0.4 million.  The increase in OREO expenses was driven by expenses attributable to one development project as we continue to work with the participation group to market and sell the commercial parcels and gains on sales of properties in 2021 that resulted in a net credit.

Comparing the second quarter of 2022 to the linked first quarter of 2022, operating expenses remained stable.  Salaries and employee benefits decreased by approximately $0.2 million primarily due to a larger portion of salaries being recorded as deferred loan fees resulting from increased loan production during the second quarter of 2022.  This decrease was offset by increases in OREO expenses of $0.1 million and miscellaneous expenses of $0.1 million.  

For the six months ended June 30, 2022, non-interest expenses decreased by $2.3 million in 2022 compared to the six months ended June 30, 2021.   This decrease was attributable to the one-time litigation settlement expense of $3.3 million, and $1.2 million in legal expenses that were recognized in 2021 along with a $0.2 million reduction in telephone expense and a $0.2 million decline in investor relations costs. These decreases were partially offset by year-over-year increases in salaries and employee benefits of $1.2 million, which is partially related to the reduction of employee wages associated with deferred loan costs and increases of $0.3 million in equipment expenses, $0.9 million in OREO expenses and $0.2 million in miscellaneous other expenses. 

The effective income tax rates as a percentage of income for the six months ended June 30, 2022 and June 30, 2021 were 24.5% and 25.2%, respectively.  The reduced tax rate for the six months ended June 30, 2022 when compared to the six months ended June 30, 2021 was related to an increased benefit at the holding company related to the fair value costs associated with the executive long term incentive plan payouts, and state tax treatment of the litigation settlement expenses. The new low-income housing tax credit investment in 2021 is expected to begin generating tax credits in 2022 and should provide increased tax credits beginning in 2023 and beyond for the term of the tax credit.

Total assets at June 30, 2022 were $1.8 billion, representing a $7.9 million decrease since March 31, 2022 and a $22.6 million increase since December 31, 2021.  During the second quarter of 2022, cash and interest-bearing deposits in other banks decreased by $54.5 million, the investment portfolio decreased by $11.8 million and gross loans increased by $52.2 million.  Other assets including deferred taxes, premises and equipment and accrued interest receivable also increased collectively by $6.6 million. 

Total liabilities at June 30, 2022 were $1.6 billion, representing a $3.7 million decrease since March 31, 2022 and a $31.6 million increase since December 31, 2021.  Total deposits decreased by $23.2 million since March 31, 2022 and increased by $15.0 million since December 31, 2021.  The decline in deposits during the second quarter is primarily attributable to reduced money market balances associated with one local municipality.  Short term borrowings increased $12.2 million since December 31, 2021, driven by $18.9 million in overnight borrowings, which were offset by a decrease in other short-term borrowings of $7.9 million during the quarter.  The increase in overnight borrowings at June 30, 2022 was primarily driven by the strong loan growth coupled with the decline in deposit balances during the second quarter and the timing difference associated with an expected loan pay-off.  Management plans to bring approximately $50.0 million in trust department money market accounts which had been placed off-balance sheet in 2021, back on-balance sheet in the third quarter.

Outstanding gross loans of $1.2 billion at June 30, 2022 reflected growth of $79.9 million for the first six months of 2022 and growth of $52.2 million for the second quarter of 2022.  Since December 31, 2021, commercial real estate loans increased by $47.7 million, acquisition and development loans decreased by $12.0 million and commercial and industrial loans increased by $44.6 million year-to-date.  The growth in the commercial real estate and commercial and industrial portfolios is a result of expansion of relationships with existing clients as well as new commercial clients.   Residential mortgage loans increased $1.6 million related to the diminished refinance activity due to the rising interest rate environment and management's strategic decision to book new mortgage loans at higher rates to our in-house portfolio. The consumer loan portfolio decreased by $2.0 million due to amortization of the existing portfolio offsetting new production.

New commercial loan production for the three months ended June 30, 2022 was approximately $103.4 million.  At June 30, 2022, unfunded, committed commercial construction loans totaled approximately $34.9 million. Commercial amortization and payoffs were approximately $47.7 million through June 30, 2022.

New consumer mortgage loan production for the second quarter of 2022 was approximately $15.1 million with most of this production being comprised of in-house mortgages.  The pipeline in-house, portfolio loans as of June 30, 2022 consisted of $13.5 million.  Production levels have slowed for residential mortgages as compared to the second quarter of 2021 because of the increasing interest rates for the first six months of 2022.

Total deposits at June 30, 2022 increased $15.0 million when compared to deposits at December 31, 2021.  Non-interest-bearing deposits increased $26.1 million primarily related to the new commercial business gained during 2022.  Interest bearing demand deposits increased $71.4 million.  Traditional savings accounts increased $15.6 million.  Money market balances decreased $69.8 million driven by one local municipality opting to move their funds to a state-sponsored deposit account that offers a higher yield as well as a movement of balances to the trust department for higher rates, while maintaining the customer relationship.  Time deposits decreased $28.3 million related to maturing time deposits moving into other deposit products.

Book value per share of the Company's common stock was $19.97 at June 30, 2022, compared to $20.65 per share at March 31, 2022.  At June 30, 2022, there were 6,656,395 of basic outstanding shares and 6,666,790 of diluted outstanding shares of common stock.  The decrease in the book value at June 30, 2022 was due to the decline in common equity driven by the increase in accumulated other comprehensive loss from March to June as well as the increase in outstanding shares of common stock related to the director grant issued in the second quarter of 2022.

The ALL decreased to $15.7 million at June 30, 2022 compared to $16.0 million at December 31, 2021.  The provision for loan losses was an expense of $0.6 million for the quarter ended June 30, 2022 compared to an expense of $0.6 million for the quarter ended June 30, 2021.  The expense to provision expense recorded in the second quarter of 2022 was attributable primarily to loan portfolio growth during the quarter and changes in the qualitative factors, particularly related to the current economic outlook.  Net charge-offs of $179,000 were recorded for the quarter ended June 30, 2022, compared to net charge offs of $67,000 for 2021. The ratio of the ALL to loans outstanding was 1.28% at June 30, 2022, compared to 1.29% at March 31, 2022 and 1.38% at December 31, 2021. 

The ratio of year-to-date net charge offs to average loans for the six months ending June 30, 2022 was an annualized 0.07%, compared to net charge offs to average loans of 0.01% for 2021.  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 $2.1 million at June 30, 2022 compared to $2.5 million at December 31, 2021.  The  decrease in non-accrual balances at June 30, 2022 was primarily related to $0.2 million of principal pay-downs of residential mortgage and home equity loans. 

Non-accrual loans that have been subject to partial charge-offs totaled $1.3 million at June 30, 2022 and $0.5 million at December 31, 2021.  Loans secured by 1-4 family residential real estate properties in the process of foreclosure totaled $0.1 million at June 30, 2022 and $0.2 million at December 31, 2021.   As a percentage of the loan portfolio, accruing loans past due 30 days or more increased to 0.37% compared to 0.19% at March 31, 2022 and 0.31% as of December 31, 2022. 

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.

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, 2022 and the impact that any such events have on our critical accounting assumptions and estimates made as of June 30, 2022, which could require us to make adjustments to the amounts reflected in this press release.

SOURCE First United Corporation