FUNC

Business Context and Reporting Period

Company: First United Corporation (FUNC)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2024
Business Overview: A Maryland financial holding company operating primarily through First United Bank & Trust. The company operates in two segments: Community Banking and Trust and Investment Services. It is classified as a "Smaller Reporting Company" and "Non-Accelerated Filer."

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability: Q2 2024 net income increased by $0.5 million (11.3%) compared to Q2 2023, driven primarily by a $1.1 million increase in net interest income. This was partially offset by a $0.8 million increase in provision for credit losses.
• Interest Income/Expense: Interest income on loans rose $3.4 million year-over-year due to higher loan yields (up 64 bps) and increased loan balances. Interest expense on deposits increased $2.0 million due to competitive pricing pressures.
• Provision for Credit Losses: The provision expense for Q2 2024 was $1.2 million, compared to $0.4 million in Q2 2023. The increase was driven by a $1.1 million charge-off related to a single non-accrual commercial and industrial loan.
• Asset Composition: Total assets decreased $37.3 million from year-end 2023. The investment portfolio decreased $44.3 million due to maturities and amortization. Gross loans increased $16.3 million.
• Liabilities: Total deposits decreased $13.9 million from year-end 2023. Short-term borrowings increased $17.1 million due to a $40.0 million draw on the Federal Reserve's Bank Term Funding Program (BTFP), partially offset by a reduction in other short-term borrowings.

Guidance, Outlook, and Risks

• Outlook: Management maintains an asset-sensitive interest rate risk position. The loan pipeline remains robust with $64.9 million in commercial loans and $19.4 million in residential portfolio loans as of June 30, 2024.
• Capital: The Bank remains "well capitalized" under regulatory frameworks. Total Capital ratio was 14.41% and Tier 1 Capital ratio was 13.16% as of June 30, 2024.
• Liquidity: Management has implemented a Liquidity Contingency Plan. Total available liquidity sources (internal and external) totaled $524.5 million, with $441.6 million in net availability.
• Risks:
  • Credit Risk: Non-accrual loans increased to $9.4 million (0.66% of total loans) from $4.0 million at year-end 2023, primarily due to two commercial and industrial relationships moved to non-accrual in Q1.
  • Interest Rate Risk: Rising rates have increased funding costs, though loan yields have repriced favorably. Management monitors sensitivity to rate changes via simulation models.
  • Investment Portfolio: Significant unrealized losses exist in the Available-for-Sale (AFS) portfolio ($22.8 million) and Held-to-Maturity (HTM) portfolio ($31.4 million) due to interest rate movements.
• Unusual Items: Q1 2024 included $0.4 million (net of tax) in accelerated depreciation expense related to branch closures, which is excluded from non-GAAP adjusted metrics.

Investor Verification Checklist

• Non-Accrual Concentration: Verify the status and collateral coverage of the two commercial and industrial loans moved to non-accrual in Q1, which drove the increase in provision expense.
• Investment Portfolio Valuation: Review the magnitude of unrealized losses in the AFS and HTM portfolios ($54.2 million combined) and management's intent to hold these securities to maturity.
• Deposit Stability: Assess the impact of the $13.9 million deposit outflow year-over-year and the reliance on the BTFP ($40 million) for liquidity management.
• Non-GAAP Adjustments: Confirm the reconciliation of GAAP to non-GAAP earnings, specifically the exclusion of accelerated depreciation from branch closures in Q1.
• Loan Growth Quality: Evaluate the composition of the $16.3 million loan growth, specifically the increase in Commercial Real Estate and Acquisition/Development loans.