Can First United Corporation (NASDAQ: FUNC) keep expanding core earnings despite OREO drag and rising deposit costs?

First United Corporation (NASDAQ: FUNC) reported full-year 2025 net income of $24.5 million, or $3.77 per diluted share, marking a 19 percent increase over the prior year. On a non-GAAP basis, which strips out losses tied to branch sales and real estate write-downs, earnings rose to $25.8 million, or $3.97 per share—a new record. However, quarterly performance dipped, with fourth-quarter net income falling sequentially to $5.8 million from $6.9 million in Q3, largely due to a $1.6 million write-down on a legacy loan property held in other real estate owned (OREO).

The bank’s ability to grow interest income while containing funding costs and managing credit quality helped boost its net interest margin to 3.67 percent, up from 3.38 percent in 2024. Total assets ended the year at $2.09 billion, with deposits growing 10 percent year-over-year to $1.74 billion—a critical buffer as long-term borrowing declined following the repayment of a $25 million Federal Home Loan Bank advance.

Despite solid topline growth, the earnings narrative is increasingly shaped by rising OREO expenses and commercial payoffs that offset robust new loan production. The next challenge will be sustaining margins as interest rates shift and legacy loan issues continue to surface.

How did First United Corporation achieve record non-GAAP earnings in 2025 despite fourth-quarter softness?

The standout headline from First United Corporation’s 2025 performance is the record $25.8 million in non-GAAP net income, largely driven by disciplined loan pricing, stable deposit costs, and prudent capital allocation. Commercial loan originations for the year surged to $247 million, a sizable increase from $189.5 million in 2024, while residential mortgage production reached $89 million.

The fourth quarter, however, reflected an operational drag stemming from a write-down on an OREO property tied to a 2013 legacy participation loan. This event alone knocked $1.2 million off quarterly net income, with total non-interest expense rising $2.8 million year over year. Without this impact, Q4 non-GAAP net income would have been $7.2 million, or $1.10 per share, up from $6.2 million a year earlier.

Management attributed its earnings resilience to upward repricing of adjustable-rate loans and measured deposit cost management, noting that interest income rose by $8.8 million year over year while interest expense increased by only $0.7 million, despite deposit growth of $160 million.

What is driving margin expansion and how sustainable is the 3.67% net interest margin?

First United’s full-year net interest margin (NIM) of 3.67% on a non-GAAP tax-equivalent basis represents a notable improvement over the 3.38% margin in 2024. Several levers contributed to this outperformance.

First, the bank benefited from the repricing of adjustable-rate commercial loans, which helped lift loan yields by 31 basis points. Second, average loan balances increased by $68.8 million, while deposit growth—especially in money market accounts and brokered CDs—enabled selective liability management.

Deposit costs rose modestly, but First United limited the damage. The rate paid on deposits declined by 3 basis points on average, even as it added $50 million in brokered time deposits early in the year. The subsequent maturity of those instruments in January 2026 could provide cost relief heading into the new year.

As liquidity remains strong and asset mix optimization continues, the bank anticipates using its elevated cash position to pay off debt and brokered deposits. This could help support NIM levels in early 2026, though potential interest rate cuts by the Federal Reserve may narrow spreads unless offset by continued balance sheet growth.

How did commercial lending and deposit growth interact in the fourth quarter?

Fourth-quarter commercial loan originations reached $108 million, while residential mortgage production stood at $25.3 million. However, the net effect on loan balances was muted due to high commercial payoffs, totaling $79.1 million, largely tied to client debt restructuring and business sales.

On the funding side, deposits grew $56.2 million quarter-over-quarter, with strength across savings, money market, and non-interest-bearing categories. Importantly, First United repaid a $25 million brokered CD in January 2026 and reduced short-term borrowings by $47.7 million during Q4. This capital rotation suggests strong internal liquidity and a proactive liability management strategy heading into 2026.

What were the key expense pressures and how are they being addressed?

Operating expenses rose sharply in Q4 due to a $1.6 million fair value markdown on an OREO asset and an associated $0.2 million in expenses, tied to a legacy loan participation. Personnel costs also increased due to merit-based raises and enhanced staffing in Morgantown, West Virginia—a growth market where the bank relocated a retail branch.

For full-year 2025, non-interest expense rose $3.8 million, with increases in professional services, data processing tied to new software agreements, and marketing expenses related to the bank’s 125th anniversary. However, First United offset some of these costs with reduced depreciation expense due to branch closures and lower insurance claims, hinting at longer-term structural efficiency.

The non-GAAP efficiency ratio improved to 58.2%, down from 61.3% in 2024, signaling improved operating leverage despite the OREO setback.

How did asset quality evolve and what are the emerging credit risks?

Credit quality remained solid, with non-performing loans and 90-day past due loans dropping to 0.31% of total loans, from 0.39% a year ago. The allowance for credit losses (ACL) increased to $19.5 million, up from $18.2 million, but remained flat at 1.28% of gross loans.

Charge-offs were minimal at 0.07% of average loans in 2025, improving from 0.16% in 2024. Notably, the commercial and industrial loan portfolio saw 0.33% net charge-offs, primarily due to one non-accrual relationship. Conversely, acquisition and development loans had net recoveries of 0.33%, thanks to collateral recoveries in legacy files.

The main red flag in 2025 came from a long-dormant participation loan that entered OREO years ago and required fresh markdowns due to a new letter of intent. While isolated, this episode underscores the lingering risks associated with older, syndicated exposures.

How is capital positioning evolving and what does it signal about future shareholder returns?

First United’s Tier 1 capital ratio rose to 15.36%, while its Common Equity Tier 1 capital reached 13.52%, providing ample regulatory headroom. Shareholder equity rose to $203.6 million, while book value per share increased to $31.33, up from $27.71 at the end of 2024. Tangible book value improved in parallel, suggesting high earnings retention and stable capital accretion.

The bank raised its quarterly dividend to $0.26 per share during Q3 2025, reinforcing confidence in sustained profitability. A payout ratio of approximately 25% leaves room for further hikes, contingent on capital planning and future asset growth.

What signals are management sending about 2026 strategic direction?

The recent appointment of Jason B. Rush as President and Chief Executive Officer marks a transition moment for First United Corporation as it looks beyond its 125th anniversary year. Outgoing chairperson Carissa L. Rodeheaver emphasized trust, innovation, and community as enduring pillars, but the operational lens is likely to sharpen around loan portfolio optimization, OREO exit strategies, and technology-driven efficiency gains.

Management’s commentary on reinvesting bond cash flows at higher rates and leveraging its balance sheet to reduce funding costs signals a continued focus on spread management. Additionally, branch optimization and market-specific expansions such as Morgantown point to a targeted growth strategy rather than broad-based geographic sprawl.

Key takeaways on First United Corporation’s 2025 financial results and 2026 outlook

• First United Corporation posted record non-GAAP net income of $25.8 million in 2025 despite Q4 softness.
• Fourth-quarter profit fell sequentially due to a $1.6 million OREO write-down, but underlying earnings remained strong.
• Net interest margin expanded to 3.67%, driven by loan repricing and stable deposit cost control.
• Commercial loan production hit $247 million for the year, but high payoff activity capped net loan growth.
• Deposit growth of $160 million supported funding flexibility, with $25 million in brokered CDs repaid in January 2026.
• Non-interest expenses rose due to real estate losses, merit raises, and expansion in growth markets.
• Credit metrics remain strong with low charge-offs and declining non-performing asset ratios.
• Book value rose to $31.33 per share, supported by earnings retention and disciplined capital management.
• Dividend raised to $0.26 per share, with room for continued increases based on payout ratio.
• CEO transition signals continuity in values but may accelerate focus on digital optimization and legacy asset cleanup.