First United : CARISSA RODEHEAVER - Form 8-K

CARISSA RODEHEAVER

Slide 3: Management Presentation - Carissa Rodeheaver

Thank you, Brian. Good morning fellow shareholders, and welcome to First United's 2024 Shareholders' Meeting. I appreciate your attendance and your support over the last year.

Slide 4: Forward Looking Statements

Before we begin our presentation, I would like to direct your attention to the Forward-Looking statements disclosure, which is displayed on the screen for your review.

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Slide 5: Banking Industry Disruption

2023 was a year full of impactful industry, economic and regulatory events. The first half of the year was the culmination of a stream of steady and significant interest rate hikes as the Federal Reserve worked to fight inflation, raising rates 5.25% from March 2022 to July 2023. As we discussed at our meeting last year, the rising rates, deposit concentrations in technology and cryptocurrency, lack of liquidity and interest rate risk mismatches led to the closure of two of the nation's largest regional banks in March 2023. These closures caused heightened fear regarding the safety of deposits in the banking system. To calm these fears, the FDIC stepped in and insured 100% of the deposits at the failed banks and created the Bank Term Funding Program to provide additional access to liquidity for all qualifying banks. More bank disruption followed over the next few weeks as a couple of other banks were sold due to their impending problems. These events and the negative media coverage of the banking industry fueled customer fears and uncertainty well into 2023.

Slide 6: Precautionary Actions

Quickly following these industry events in the first quarter of 2023 and the resulting liquidity concerns for the industry, your management team took precautionary actions and increased liquidity on our balance sheet. Pricing challenges and the added liquidity resulted in net interest margin compression. However, when compared to peers, First United performed admirably in the face of these difficulties, and we ended 2023 with a net interest margin of 3.26%. This represented a decrease of only 0.30% in 2023. Our team remained vigilant and nimble throughout the year, focused on providing peace of mind, a safe and secure banking option, and the stability of a 123-year-old trusted community bank.

Why do I bring this up again? Because these events were impactful on the industry and our customers and made it necessary for us to shift our strategy and take precautionary actions to effectively manage through the uncertainty in the markets. As a result of the rising rates, deposit competition, utilization of FDIC insured funding products and the shift to interest bearing deposits, we experienced a higher cost of funding. The concern and fear caused by the bank failures led to our bank carrying higher levels of cash throughout the year. While this was prudent financial management, liquidity comes at a cost. We incurred costs on borrowings and earned lower returns on the cash than we could have earned on higher yielding loans both fueling the net interest margin compression.

On the loan front, the Bank continued to experience solid loan demand. However, given concerns over funding and credit quality, we became more selective in our loan portfolio and held to our pricing discipline to offset the higher funding costs and to prevent too much pressure on our net interest margin.

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Slide 7: Operational Costs, Technology and Strategic Actions

On the expense side the battle for talent continued, resulting in higher wages to retain our talented and experienced associates. We also experienced higher health insurance costs related to our employee benefit plans. Cybersecurity and protection of our customers remained a high priority as we continued to invest in technology and additional resources to prevent fraud. Even with these enhanced measures, fraud expense still escalated in 2023 for the industry as a whole and First United was no exception. In addition to fraud protection, we continued our strategic efforts to provide a better digital experience to our customers through enhanced products and technology options and to automate our operations and processes to provide a more efficient and seamless experience for our customers.

As customers' habits and preferences continue to shift to digital banking, utilizing mobile and online banking channels, we have seen diminishing usage of the traditional community office. As a result, we made the decision during the fourth quarter of 2023 to consolidate our retail branch network and announced the closure of four offices throughout our regions. This resulted in escalation of depreciation and lease expenses during the fourth quarter of 2023 and the first quarter of 2024. We experienced minimal account closures as a result but expect this to save approximately $1.0 million in expense annually.

We also performed a strategic balance sheet restructuring in December 2023, selling longer, low yielding securities at a loss and utilizing the proceeds from the sale to fund higher yielding loans. We recognized approximately $3.7 million in after-tax, non-core losses in the fourth quarter due to execution of this strategy, but we believe we will reap the rewards in future earnings.

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Slide 8: First United Corporation Remains Strong

The combination of a higher cost of funds, a contracting net interest margin, higher levels of liquidity, maintaining our allowance for potential credit quality issues and the higher expenses and loss associated with the strategic branch closures and securities sale resulted in lower earnings for 2023. But, despite these and the industry and economic challenges, our financial performance still compared favorably to our peers and your Company remains strong. We maintain elevated levels of liquidity, capital ratios in excess of regulatory requirements, a balanced interest rate risk position, diversified deposit and loan portfolios and we have continued to grow our diverse and expansive customer base, all leading to stable earnings year after year. The Board and management team have established a foundation of risk oversight and risk management that serve us well during periods of economic and market volatility like we have experienced over the past couple of years.

Now let's turn our attention to the financial results of 2023. Tonya Sturm, our Senior Vice President and Chief Financial Officer, will review the highlights of 2023 and the first quarter of 2024. We will then review our stock performance, our strong capital position, and our risk management practices. Finally, I will share our perspective on what lies ahead and the strategic direction of First United Corporation. I will now turn it over to Tonya.

TONYA STURM

Slide 9: Management Presentation- Tonya Sturm

Thank you, Carissa and good morning shareholders.

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Slide 10: 2023 Financial Highlights

Our balance sheet grew to $1.91 billion at December 31, 2023. Total assets increased by $57.7 million, or 3.1%, as compared to December 31, 2022, driven by strong commercial loan growth, offset by a reduction in cash and investment securities. For the year ended December 31, 2023, we reported non-GAAP net income of $18.8 million, exclusive of non-core expenses of $3.7 million, net of tax. This resulted in non-GAAP diluted earnings per share of $2.81. Including these non-core expenses, net income was $15.1 million or $2.25 diluted earnings per share. The non-core, after-tax expenses included $0.4 million in branch closure expenses and $3.3 million in securities losses related to the balance sheet restructure. Net income was driven by strong loan growth, tight margin control and steady wealth and debit card income offset by higher expenses as compared to 2022.

Net interest income on a non-GAAP, fully tax equivalent basis decreased by $1.0 million in 2023 as compared to 2022 driven by an increase in interest expense related to the competitive deposit environment and the increased liquidity that Carissa mentioned earlier. We were disciplined in our loan pricing to offset the increased interest expense and were able to achieve a 3.26% net interest margin for the year, a decline of only 30 basis points compared to where we ended 2022.

Increased expenses for the twelve months ended December 31, 2023 resulted from higher salaries and employee benefits related to new hires, the competitive environment for labor and normal merit increases. We also experienced higher health insurance costs associated with unusually high insurance claims. Occupancy and equipment expense increased due primarily to accelerated depreciation and lease termination expenses associated with the announced branch closures that occurred on February 29, 2024. During the year, we implemented new technology to improve the customer experience and to create process efficiencies. Fraud expenses escalated in 2023 resulting in the implementation of new technology to protect our customers and the Bank from cybersecurity and fraud losses. Due to the decline in net interest income and increased expenses, we experienced an increase in the efficiency ratio as compared to 2022, ending 2023 at 65.12% on a non-GAAP basis.

Provision for credit losses increased by $2.2 million when compared to prior year due to a credit in the allowance for 2022, increased loan growth during 2023 and qualitative factors associated with the implementation of the new accounting standard for the allowance for credit losses. Overall, our delinquency and loan charge-offs remained low and asset quality strong throughout 2023. Net losses on available-for-sale ("AFS") securities increased by $4.2 million, when compared to prior year due to the sale of securities in the fourth quarter of 2023.

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Slide 11: Diversified Fee Income

Our wealth department continued to grow in 2023 with trust and brokerage assets under management eclipsing $1.5 billion and accounting for 50% of the non-interest income mix. Our diversified revenue stream, not tied directly to interest rates, is especially important as we see volatility in the net interest margin. Debit card and service charge income together accounted for another 39% of our non-interest income mix.

Slide 12: First Quarter 2024 Financial Performance

Earnings for the first quarter of 2024, released on April 23, 2024, continued a steady trajectory. We reported non-GAAP earnings of $4.1 million, diluted earnings per share of $0.62, a 0.85% annualized return on average assets and 10.11% annualized return on average tangible common equity. Our net interest income remained stable, offset by the reversal of income on two loans that were moved to non-accrual status during the quarter. We also recorded a partial charge-off on one of these loans of approximately $0.3 million. This resulted in additional provision expense for the quarter. Both were commercial and industrial loans and, we believe they are appropriately marked at this time and are not indicative of other asset quality issues in the loan portfolio. The allowance for credit losses to loans outstanding was also stable as compared to the fourth quarter of 2023 landing at 1.27% on March 31, 2024. The net interest margin for the quarter was impacted by approximately nine basis points due to the income reversal, ending the quarter at 3.12%.

Assets increased by only $7.1 million as loan growth slowed compared to 2023, but we are seeing positive signs for future growth as our loan pipelines have increased during the quarter. We ended the quarter with higher levels of cash on balance sheet, generated from a Bank Term Funding Program loan of $40.0 million. This strategic move was in support of our desire to maintain higher levels of cash given the continued volatility in our economic, regulatory and political environments.

Our fee income continued to be a strong contributor to earnings during the first quarter, driven by our trust and brokerage services. Expenses leveled despite approximately $0.6 million in branch closure expenses related to the four branches we consolidated in February 2024. Our efficiency ratio was also stable as compared to year-end, closing the quarter at 65.71% on a non-GAAP basis. Management continues to be very focused on expenses and reducing this ratio.

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Slide 13: Generating Reliable Growth

To get a better look at core income before expense associated with the allowance for credit losses, we review our non-GAAP pre-provision net revenue. This amount represents our net income before tax, adjusted for any one-time items. In addition, we adjust the net income for any provision expense. After these adjustments, core income for 2023 was $25.9 million, representing a 20% decrease over 2022. As discussed earlier, the decrease was primarily related to the shrinking net interest margin and higher expenses incurred during the year. The first quarter of 2024 shows a stable non-GAAP pre-provision net revenue of $6.4 million even as we continue to maintain higher cash levels and the challenging economic and financial landscape. The non-GAAP diluted earnings per share represents similar results to the pre-provision net revenue performance.

Our loan portfolio grew by 10% in 2023 when compared to 2022. This robust loan growth was driven by strong commercial production. Mortgage production was impacted as the higher interest rate environment stifled refinancing activity. As we entered 2024, we felt the seasonality of slower loan growth of $5.7 million during the first quarter. However, both our commercial and mortgage pipelines were solid as we moved into the second quarter of this year.

As has been mentioned repeatedly today, the fierce competition for deposits, higher inflationary spending by both consumers and businesses and our desire to control deposit expense resulted in minimal deposit growth in 2023. We supplemented our retail deposits during the year with brokered deposits of which $30.0 million was outstanding at December 31, 2023. While deposit outflows have slowed, at the end of 2023, we created a team focused fully on maintaining our deposit base and identifying opportunities to grow low-cost deposits in our market areas.

Slide 14: Solid Profitability

As mentioned earlier, our core non-GAAP return on average assets was 0.96% and we provided our shareholders a 12.92% non-GAAP return on average tangible common equity in 2023. Both ratios declined as compared to 2022 due to the net interest margin compression and the higher expenses incurred during the year. Net income was fairly stable in the first quarter of 2024 when compared to the linked quarter in 2023 as we saw a leveling of the net interest margin and stable expenses. We continued to maintain higher cash liquidity and increased our credit loss provision to accommodate the slight increase in non-performing assets. Fee income from our wealth department was strong, offsetting the lower than anticipated net interest income. The result was a slightly lower non-GAAP return on average assets and return on average tangible common equity of 0.85% and 10.11%, respectively. While we believe the higher costs for deposits will continue throughout 2024, we are actively managing our loan pricing and operating expenses.

At this time, I will turn it back over to Carissa.

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Slide 15: Total Shareholder Return

Thank you, Tonya. Throughout 2023, your board of directors maintained the quarterly dividend at $0.20 per share. While banking stocks were significantly impacted by the disruption in the markets in 2023, our total shareholder return as of April 30, 2024, which includes both share price appreciation and reinvested dividends, outperformed the S&P Bank Index and our 2023 proxy peers over the one-, three- and five-year periods as shown in this chart. Our total shareholder return, including price changes and reinvested cash dividends, was 58.11% for one-year, 44.67% for three-years and 56.65% over five-years. Based on a closing price of $22.59 per share on April 30, 2024, the current dividend annualized results in a dividend yield of 3.54%.

Slide 16: Capital Management

During these volatile times in our economy, we continue to maintain our belief that risk drives strategy. Underlying all our strategic priorities is strong enterprise risk management, overseen by our qualified and capable board of directors. Our approach to capital is conservative. As can be seen on this slide, we continue to maintain strong capital ratios, well in excess of the regulatory well-capitalized levels, in order to protect against the risks posed by the current economic, regulatory and political environments and those that are inherent in our industry.

Slide 17: Tangible Capital Positions

As a result of our prudent capital management and positive earnings, as of March 31, 2024, our tangible book value per share has grown by 34% over the last five years and our tangible common equity ratio remains sound at 8.07%, despite the impact of rising interest rates and the resulting unrealized losses included in tangible equity. This strong capital position and increasing profitability has allowed us to successfully raise the dividend for our shareholders. When the markets and our operating environment settle, we will once again explore other investments of our capital to increase shareholder value.

Slide 18: Prudent Capital and Risk Management

Risk management has and always will underly all our strategic priorities. Our management team has actively managed the balance sheet concentrations, diversification and credit quality of our loan, deposit and investment portfolios, monitored our interest rate sensitivity and maintained a strong liquidity position. We conservatively added to our allowance for credit losses to protect against the impact of the rising rate environment on our borrowers. Monitoring fraud and cybersecurity risk are always top-of-mind as we are committed to providing a safe and secure banking platform for our customers, particularly in light of increased usage of technology. We actively stress test each of these areas of risk and utilize independent third parties to test and verify our systems and controls. This was more important than ever in 2023 to ease the minds of our depositors given the liquidity events and bank failures and sales that occurred early in the year. I hope that you take comfort in knowing that our management team and Board take enterprise risk management very seriously and it is a huge component of our culture.

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Slide 19: Strategic Pillars & Key Objectives

As we moved into 2024, we recognized that it was important for us to focus on what we do best. Providing core banking and wealth management services and financial products to our consumer and business customers. For this reason, our strategic plans and action items are a continuation of what we started in 2023 and that were somewhat disrupted given the market events early last year. Hiring and retaining knowledgeable and customer centric associates is always at the forefront of each of our plans. We know that as a community bank, our people will always be our differentiator and we will continue to hire and retain passionate, diverse talent who will foster collaboration and communication. We will leverage technology to enhance efficiency and user experience, aiming to broaden the utilization of our products and services. We also aim to strengthen our relationships with community-oriented business owners and broaden our outreach initiatives to increase our non-interest income as a percentage of overall revenue, reducing our reliance on the net interest margin. Along with continued focus on resource optimization, we will look to enhance market share and execute tactics to optimize our geographic presence.

Despite the everchanging circumstances we face, First United remains steadfast in our dedication to helping individuals and businesses navigate times of uncertainty. By continually fostering strong relationships and offering a comprehensive range of financial services for all aspects of financial well-being, we will work to support our customers in achieving their financial goals and objectives. We will continue to review our real estate and will work to optimize our retail network and to further penetrate our existing markets and expand into new markets. We are continuing to engage with new and existing investors to diversify the shareholder mix with the hopes of providing additional liquidity to our stock. And, we are always exploring all of our strategic options to grow our franchise and provide more value to you, our shareholders.

Slide 20: Investor Relations

Your senior management team and Board are routinely engaging with shareholders and prospective investors, as well as continuing our involvement in our local communities. If you have any questions, at any time, on any topic, feel free to reach out to one of our management team or directors. These engagements are invaluable to us, and we are using the constructive feedback provided to enhance our performance and our governance profile.

Slide 21: Our Dedicated Management Team

On behalf of the Board, I would like to thank the management team and all our associates for your dedication and strong commitment to our customers, communities and shareholders. We sincerely appreciate each of you for your dedication and loyalty to our Company.

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Slide 22: Board of Directors

As mentioned previously, our board of directors provides strong oversight and spends countless hours overseeing the strategies of the Bank, ensuring strong enterprise risk management and supporting management in setting targets and financial goals to build long-term shareholder value. I thank each of our Board members for their guidance and the leadership they provide to First United Corporation.

Slide 23: My Bank Mission

Our unwavering commitment is not just a testament to our resilience, but also a reflection of the positive influence that community banking has on our communities. We remain dedicated to our role as a community bank and understand the importance of strong leadership to drive growth, not just for our Company, but also for the economic prosperity of the communities we serve.

While it might be old-fashioned, we believe that community banks are, and always will be, the lifeblood of the communities they serve and the stability amidst the chaos of the economic, political, and regulatory environments. We also believe that our focus on delivering an uncommon commitment to service and customized financial solutions will continue to be the foundation of delivering a competitive long-term total return to you, our shareholders. We thank you, our investors, for your steadfast support of First United and we thank our passionate, loyal associates who remain devoted to delivering excellent service and being trusted financial advisors. Finally, we thank our customers who give their best for their businesses, their families, their communities, and their futures for their belief in community banking. We are proud to be a community owned bank. We are and always will be your bank, our bank, MYBANK!

Slide 24: Thank You

The Board, management team and associates thank you for your attendance today and your investment and confidence in First United Corporation!

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