Executive Summary / Key Takeaways

• First United Corporation, a community-focused financial holding company, delivered strong Q1 2025 results with consolidated net income increasing significantly to $5.80 million, up from $3.70 million in Q1 2024, primarily driven by robust net interest income growth and expense control.
• Net interest income saw a $2.20 million increase year-over-year, fueled by higher loan yields from new originations and adjustable-rate repricing, alongside stable interest expense despite increased funding balances.
• The company's balance sheet reflects strategic shifts, including a $48.70 million increase in deposits (partially from brokered CDs used to repay overnight borrowings) and a slight decrease in gross loans, while maintaining a "well capitalized" regulatory status.
• FUNC's competitive positioning relies on its established branch network and specialized Wealth Management services ($1.7 billion in assets under management), differentiating it from larger, more technologically advanced regional and national banks, though it faces challenges related to scale and digital adoption speed compared to peers.
• While management guidance for 2025 was not included in the latest filing, analyst consensus estimates project solid EPS growth for the year, suggesting continued operational improvement building on the strong first quarter performance.

Setting the Scene: A Community Bank's Foundation and Strategy

First United Corporation, established in Maryland in 1985, operates as a financial holding company primarily through its subsidiary, First United Bank & Trust. At its core, FUNC is a community bank serving consumer, business, and not-for-profit customers across its geographic footprint, which includes Maryland and West Virginia. The company's strategy is rooted in providing a broad range of financial products and services through its Community Banking segment, complemented by specialized offerings via its Wealth Management segment.

The Community Banking segment represents the traditional banking operations, encompassing loan and deposit products. This segment also includes the parent company's income and assets, reflecting its central role in the corporate structure. The Wealth Management segment focuses on corporate trustee services, trust and estate administration, IRA administration, and custody services, generating fee-based revenue from its substantial $1.7 billion in assets under management. This dual-segment structure allows FUNC to cater to diverse financial needs within its local markets, aiming to build deep customer relationships.

Within the competitive landscape, FUNC operates alongside a mix of larger regional banks like M&T Bank (MTB) and PNC Financial Services (PNC), smaller regional players such as First National Corporation (FXNC), and national institutions like Truist Financial (TFC), as well as indirect competitors like digital banks and fintech firms. FUNC's competitive advantages are primarily derived from its established physical presence through its branch network and its focus on personalized service, particularly in its Wealth Management offerings. These factors foster local loyalty and differentiate it in community-centric markets.

However, compared to larger peers, FUNC faces inherent disadvantages related to scale, which can impact operating costs and the pace of technological adoption. While the company utilizes data processing and other technologies in its operations, specific technological differentiators or significant R&D initiatives aimed at developing proprietary technology were not detailed. This contrasts with larger competitors who often leverage advanced digital platforms to enhance efficiency and customer acquisition, potentially posing a challenge for FUNC in competing for digitally-savvy customers or achieving similar levels of operational leverage through technology. FUNC's strategic response appears to be centered on leveraging its existing strengths in relationship banking and specialized services while managing costs and adapting to market conditions.

Performance Analysis: A Strong Start to 2025

First United Corporation commenced 2025 with a notable improvement in profitability. Consolidated net income for the first quarter reached $5.80 million, a significant increase from $3.70 million reported in the same period of 2024. This 57% year-over-year growth in net income was primarily attributed to a substantial increase in net interest income and effective expense management.

Net interest income, the core driver of the bank's revenue, rose by $2.20 million, reaching $16.02 million in Q1 2025 compared to $13.81 million in Q1 2024. This expansion was largely a result of higher interest income, which increased by $2.16 million to $24.06 million. The growth in interest income was predominantly driven by the loan portfolio, where interest and fees on loans increased by $2.50 million. This reflected the impact of new loans originated at higher prevailing interest rates during 2024, the upward repricing of adjustable-rate loans within the portfolio, and a $75.30 million increase in average loan balances. Despite an increase of $141.10 million in average deposit balances, total interest expense remained relatively stable year-over-year, decreasing slightly by $0.04 million to $8.05 million. This stability was influenced by reductions in the rate environment offsetting the cost of increased funding.

The provision for credit losses also contributed positively to the bottom line, decreasing by $0.30 million to $0.66 million in Q1 2025 compared to $0.95 million in Q1 2024. This decrease was primarily linked to a lower volume of commercial loan balances moving to non-accrual status in the recent quarter compared to the first quarter of the prior year.

Other operating income remained stable at $4.91 million in Q1 2025. Within this, the Wealth Management segment showed a modest increase of $0.10 million in income, driven by higher market values and growth in customer relationships. However, this gain was offset by a decrease in brokerage commissions, reflecting slower annuity sales during the period.

Operating expenses saw a favorable decrease of $0.30 million, totaling $12.58 million in Q1 2025 compared to $12.88 million in Q1 2024. The most significant factor in this reduction was a $0.60 million decrease in equipment and occupancy expense. This decrease was primarily due to accelerated depreciation expenses recognized in the first quarter of 2024 related to branch closures, which did not recur at the same level in 2025. Partially offsetting this reduction were increases in salaries and employee benefits ($0.20 million, driven by higher incentive pay and health insurance claims) and data processing expenses ($0.20 million). Other miscellaneous expenses saw a $0.10 million decrease, helped by reduced net periodic pension costs and lower check fraud-related costs.

Overall, the strong growth in net interest income, coupled with lower credit loss provision and controlled operating expenses (particularly benefiting from the non-recurrence of prior-year accelerated depreciation), drove the significant improvement in net income for the first quarter of 2025.

Financial Condition: Balance Sheet Dynamics and Liquidity

First United Corporation's balance sheet at March 31, 2025, reflected a slight increase in total assets, rising by $6.70 million to $1.98 billion since December 31, 2024. This modest growth was influenced by several factors. Cash and interest-bearing deposits with other banks increased by $6.10 million, and the investment portfolio grew by $5.20 million as the company purchased bonds to capture yield ahead of anticipated long-term rate declines. Gross loans, however, experienced a slight decrease of $0.90 million, as amortization and payoffs modestly outpaced new loan production during the quarter. Pension assets also decreased by $1.80 million due to decreased market values.

On the liabilities side, total liabilities increased by $2.30 million to $1.80 billion. The most significant movement was a $48.70 million increase in total deposits, reaching $1.62 billion. This increase was primarily driven by the strategic purchase of $50.00 million in new brokered certificates of deposit in January 2025. These brokered CDs, obtained at an average rate of 4.24%, were specifically used to fully repay $50.00 million in overnight borrowings outstanding at the end of 2024. Beyond this, savings and money market accounts saw an increase of $18.70 million, reflecting growth in both existing and new customer relationships. Conversely, non-interest-bearing checking deposits decreased by $4.30 million and interest-bearing checking deposits (including ICS products) decreased by $17.90 million. These decreases were attributed to seasonal fluctuations in municipal and commercial account balances and increased spending by businesses and consumers influenced by inflation. Retail time deposits saw a modest increase of $2.20 million.

Short-term borrowings decreased substantially by $45.10 million, falling to $20.34 million, primarily due to the repayment of the $50.00 million in overnight borrowings. This decrease was partially offset by increases in balances of the overnight investment sweep product. Long-term borrowings remained unchanged at $120.93 million.

Asset quality metrics showed some improvement. Non-accrual loans decreased from $4.90 million at December 31, 2024, to $4.00 million at March 31, 2025, primarily due to principal reductions. Accruing loans past due 30 days or more increased slightly to 0.42% of the loan portfolio from 0.32% at the end of 2024. The Allowance for Credit Losses (ACL) stood at $18.47 million at March 31, 2025, compared to $18.17 million at December 31, 2024. The ACL methodology incorporates specific analysis for impaired loans, quantitative analysis using discounted cash flows and economic forecasts (unemployment, CPI, Housing Affordability Index, Gross State Product), and qualitative adjustments based on management's review of risks and economic conditions. Stress testing indicates a potential range of outcomes for reserves, highlighting the inherent subjectivity in the estimate.

Liquidity management is a key focus for FUNC. The company actively monitors its position, utilizing core deposits, investment cash flows, and external funding sources like unsecured Fed Funds lines, secured FHLB advances, and the Federal Reserve Discount Window. As of March 31, 2025, FUNC reported significant available liquidity, including $62.42 million in excess cash, $31.04 million in unpledged securities, $87.28 million from the Federal Reserve discount window, $140.00 million in correspondent unsecured lines, and $237.89 million in net FHLB availability. Management believes these resources are sufficient to meet future capital requirements. The Bank maintains a strong capital position, classified as "well capitalized" under regulatory requirements with a Total Capital ratio of 14.83% and a Common Equity Tier 1 Capital ratio of 13.58% at March 31, 2025.

Risks and Outlook

While the first quarter performance was strong, First United Corporation faces ongoing risks inherent in the banking industry. Interest rate risk remains a primary concern, stemming from mismatches in the repricing characteristics of assets and liabilities. Although the company was slightly more asset sensitive at March 31, 2025, compared to the end of 2024, simulation analysis suggests potential impacts on net interest income under various rate scenarios, though these currently remain within policy limits. Changes in economic conditions, including unemployment and inflation, can impact loan demand, credit quality, and deposit stability. The ACL is sensitive to these forecasts and actual outcomes may differ from estimates.

Competition is another persistent factor. While FUNC leverages its community focus and branch network, it competes with larger institutions that benefit from greater scale, broader product offerings, and potentially more advanced technological capabilities. The lack of specific details on FUNC's technological differentiators suggests this could be an area where larger peers with significant digital investments may hold an advantage, particularly in attracting and retaining certain customer segments.

Regarding the outlook, management guidance for the full year 2025 was not included in the provided 10-Q filing. However, external analyst consensus estimates, as reported in recent news, project 2025 earnings per share (EPS) ranging from $3.50 to $3.75. These estimates imply continued profitability and growth throughout the year, building upon the momentum seen in the first quarter. The projected EPS growth rate, cited as potentially between 9.03% and 16.82% year-over-year based on these estimates, suggests analysts anticipate ongoing strength in net interest income and potentially further improvements in efficiency or credit quality. The company's strategy of focusing on relationship-driven growth in its community markets and leveraging its Wealth Management segment's fee income will be critical in achieving these potential outcomes.

Conclusion

First United Corporation's first quarter 2025 results demonstrate a solid start to the year, marked by strong net interest income growth and effective cost management. The company's core strategy as a community bank, emphasizing local relationships and a comprehensive suite of services including a significant Wealth Management operation, appears to be yielding positive results in the current environment. While FUNC operates in a competitive landscape dominated by larger, more technologically advanced institutions, its established presence and focus on personalized service provide a degree of differentiation.

The financial condition remains sound, with a well-capitalized bank subsidiary and ample liquidity sources to support operations and growth initiatives. Although specific technological advantages were not detailed, the company's operational focus on loan production and deposit gathering, coupled with disciplined expense control, underpins its performance. Looking ahead, analyst consensus estimates point towards continued earnings growth, suggesting a positive trajectory for 2025. Investors will be watching for sustained net interest margin performance, continued loan and deposit growth, and the company's ability to manage credit quality and operating expenses in a dynamic economic and competitive environment.