First United Corporation (NASDAQ:FUNC) is a bank holding company headquartered in Oakland, Maryland, serving customers across the Mid-Atlantic region. With a history dating back to 1900, the company has established itself as a trusted financial institution, providing a comprehensive suite of commercial and retail banking services, wealth management, and trust solutions. As the parent company of First United Bank & Trust, FUNC has weathered economic cycles, adapted to industry changes, and maintained a strong focus on shareholder value, making it an intriguing prospect for income-oriented investors.
Business Overview and History
First United Corporation was founded in 1985 and serves as the parent company of First United Bank & Trust, a Maryland trust company with commercial banking powers. The company elected financial holding company status in 2021, allowing it to expand its business activities beyond traditional banking services. In addition to its primary banking subsidiary, FUNC operates two consumer finance company subsidiaries - OakFirst Loan Center, Inc. and OakFirst Loan Center, LLC - as well as two subsidiaries that hold real estate acquired through foreclosure - First OREO Trust and FUBT OREO I, LLC.
One of the key milestones in FUNC's history was the acquisition of several smaller community banks in the 1990s and early 2000s, which enabled the company to expand its footprint and customer base in the Maryland market. However, the 2008 financial crisis posed significant challenges, requiring the company to navigate a difficult economic environment and manage credit quality issues in its loan portfolio.
To address these challenges, FUNC took steps to strengthen its balance sheet and credit risk management practices, including increasing its allowance for credit losses, reducing exposure to higher-risk loan segments, and improving underwriting standards. The company also leveraged its diverse revenue streams, such as wealth management and trust services, to help offset pressure on its net interest margin.
Despite these headwinds, FUNC has demonstrated resilience and a commitment to serving its local communities. The company has maintained a strong capital position, allowing it to continue investing in technology, talent, and new business initiatives to drive long-term growth. Through prudent risk management and a focus on relationship-based banking, FUNC has navigated past challenges and established itself as a trusted financial institution in its markets.
First United Corporation operates in two primary business segments: Community Banking and Trust and Investment Services. The Community Banking segment, conducted through First United Bank & Trust, is the core of FUNC's business, delivering a broad range of financial products and services to consumer, business, and not-for-profit customers. The Trust and Investment Services segment offers corporate trustee services, trust and estate administration, IRA administration, and custody services.
Financial Performance and Ratios
Financials
First United Corporation has demonstrated a track record of solid financial performance, even in the face of economic headwinds. For the year ended December 31, 2024, the company reported net income of $20.6 million, or $3.15 per diluted share, compared to $15.1 million, or $2.25 per diluted share, in the prior year. This represents a year-over-year increase of 36.3% in net income and a 40.0% increase in diluted earnings per share.
The company's return on average assets (ROAA) for 2024 was 1.09%, while its return on average equity (ROAE) stood at 12.74%. These metrics demonstrate FUNC's ability to efficiently utilize its assets and capital to generate strong profitability. Additionally, the company's net interest margin, a key measure of the spread between interest earned on assets and interest paid on liabilities, was 3.32% in 2024, up from 3.26% in the previous year.
FUNC's balance sheet remains well-capitalized, with a total risk-based capital ratio of 14.53% as of September 30, 2024, well above the regulatory minimum of 10.0% required for well-capitalized institutions. The company's Tier 1 capital ratio of 13.28% and Common Equity Tier 1 capital ratio of 13.28% also reflect a robust capital position, providing a solid foundation for growth and weathering potential economic downturns.
For the most recent quarter, First United Corporation reported revenue of $20.27 million and net income of $5.77 million. The Community Banking segment generated income before income taxes and intercompany fees of $15.05 million for the nine-month period ended September 30, 2024, accounting for the majority of the Corporation's total income before income taxes of $19.08 million. The Trust and Investment Services segment contributed $4.03 million in income before income taxes and intercompany fees for the same period.
Liquidity
In terms of liquidity, FUNC maintained a healthy cash position of $62.39 million at the end of the third quarter of 2024, providing ample liquidity to fund operations and support strategic initiatives. The company's total deposits were $1.54 billion as of September 30, 2024, a slight decrease of $10.6 million compared to December 31, 2023. The deposit base consisted of 27% non-interest-bearing demand deposits, 25% interest-bearing demand deposits, 27% money market accounts, 12% savings deposits, and 9% time deposits.
Borrowed funds, including short-term borrowings and long-term FHLB advances and junior subordinated debt, totaled $171.13 million at the end of the third quarter. This diversified funding mix provides FUNC with flexibility in managing its liquidity and interest rate risk.
Loan Portfolio and Credit Quality
First United Corporation's loan portfolio is well-diversified across several key segments. As of September 30, 2024, the portfolio composition was as follows: commercial real estate (34.7% of total loans), residential mortgage (35.8%), commercial and industrial (19.2%), acquisition and development (6.4%), and consumer (3.8%).
The company maintains a strong focus on credit quality, with an allowance for credit losses (ACL) of $18.01 million, or 1.24% of gross loans, at the end of the third quarter of 2024. Net charge-offs for the first nine months of 2024 were $1.88 million, primarily due to a $1.10 million charge-off in the commercial and industrial portfolio related to one non-accrual credit.
Dividend History and Shareholder Returns
One of the key attributes that sets First United Corporation apart is its commitment to rewarding shareholders through a consistent dividend. The company has maintained an uninterrupted dividend payout since going public in 1985, underscoring its financial stability and management's focus on generating shareholder value.
In 2024, FUNC paid a total of $0.88 per share in dividends, representing a dividend yield of 2.8% based on the company's current stock price. This payout ratio of 27.9% suggests that FUNC's dividend is well-supported by its earnings and cash flow, providing a solid foundation for future increases.
Over the past five years, FUNC has increased its annual dividend by an average of 4.2%, demonstrating the company's ability to consistently grow its payout to shareholders. This track record of dividend growth, coupled with the company's strong financial performance, makes FUNC an attractive option for income-oriented investors seeking a stable and growing dividend stream.
In addition to its dividend, FUNC has also rewarded shareholders through share repurchases. The company has authorized various buyback programs over the years, including a $10 million program announced in 2023, further underscoring management's commitment to enhancing shareholder value.
Outlook and Risks
Looking ahead, First United Corporation remains well-positioned to continue its growth trajectory. The company has outlined a strategic plan focused on organic expansion, targeted acquisitions, and diversification of its revenue streams. FUNC's investments in technology and digital banking capabilities are expected to improve the customer experience and drive efficiency gains.
However, as with any financial institution, FUNC is not without its risks. The company operates in a highly competitive and regulated industry, facing challenges from larger national banks, fintech disruptors, and evolving consumer preferences. Changes in interest rates, credit quality, and the broader economic environment can also impact FUNC's financial performance.
Additionally, the banking sector is subject to heightened regulatory scrutiny, and any changes in compliance requirements or enforcement actions could pose risks to FUNC's operations and profitability. Cybersecurity threats and data breaches are also constant concerns that the company must vigilantly address.
Despite these risks, FUNC's experienced management team, prudent risk management practices, and diversified business model have enabled the company to navigate industry challenges and deliver consistent shareholder returns. The company's focus on organic growth, selective acquisitions, and a strong dividend policy make it an interesting proposition for investors seeking a stable and income-generating investment in the financial services sector.
Conclusion
First United Corporation's long-standing history, solid financial performance, and commitment to shareholder returns make it a compelling investment opportunity. As a regional banking powerhouse with a diversified business model, FUNC has demonstrated the ability to adapt to industry changes and generate consistent earnings and cash flow.
The company's robust capital position, healthy liquidity, and uninterrupted dividend history provide a solid foundation for future growth and shareholder value creation. While the banking industry faces ongoing challenges, FUNC's experienced management team, prudent risk management, and strategic initiatives position the company well to navigate the landscape and continue delivering for its shareholders.
With its strong presence in the Community Banking and Trust and Investment Services segments, First United Corporation is well-equipped to capitalize on opportunities in its core markets while maintaining a focus on risk management and operational efficiency. As the company continues to invest in technology and expand its service offerings, it is poised to enhance its competitive position and drive long-term value for shareholders.