Business context and reporting period
Union Bankshares, Inc., through its sole subsidiary, Union Bank, is a Vermont-based bank holding company. This unaudited Form 10-Q covers the three months ended March 31, 2023; balance-sheet comparisons are primarily with December 31, 2022. Unless noted, dollar amounts below are in millions.
Key financial results and position
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior balance date |
|---|---|---|
| Net interest income | $9.98 | $8.96, Q1 2022 |
| Net income | $2.98 | $2.48, Q1 2022 |
| Diluted EPS | $0.66 | $0.55, Q1 2022 |
| Total assets | $1,362.1 | $1,336.5, Dec. 31, 2022 |
| Total deposits | $1,226.0 | $1,201.9, Dec. 31, 2022 |
| Gross loans and loans held for sale | $975.3 | $959.3, Dec. 31, 2022 |
| Borrowed funds / subordinated notes | $45.1 / $16.2 | $50.0 / $16.2, Dec. 31, 2022 |
| Stockholders’ equity | $60.6 | $55.2, Dec. 31, 2022 |
Interest and dividend income was $13.04 million and interest expense was $3.07 million. Net interest margin was 3.14% versus 3.17% in Q1 2022; net interest spread was 2.84% versus 3.08%. The efficiency ratio was 70.46% versus 73.08%. Return on average assets was 0.89% versus 0.81%, and return on average equity was 20.90% versus 12.38% (annualized).
Cash provided by operating activities was $2.08 million, compared with $14.77 million in Q1 2022. Investing activities used $35.66 million and financing activities provided $17.51 million; cash and cash equivalents ended the quarter at $21.82 million, down from $37.89 million at year-end 2022.
Material changes versus comparable periods
- Net income rose $495,000, or 19.9%, year over year. Net interest income increased $1.01 million, while noninterest income rose $55,000; higher credit-loss expense, operating expense and taxes partly offset those gains.
- Interest income increased 34.1% year over year, reflecting higher average earning-asset balances and yields. Interest expense rose to $3.07 million from $763,000 as deposit costs increased and the bank used more brokered deposits and FHLB funding. Net interest margin edged down.
- Noninterest expense increased 5.6% to $8.75 million. The filing cites, among other factors, salary and benefit costs, FDIC assessments, occupancy and ATM/debit-card expenses.
- Loans grew $15.9 million from year-end; deposits grew $24.1 million overall. Time deposits increased $101.0 million, offset partly by lower noninterest-bearing and other interest-bearing deposits.
- Stockholders’ equity increased $5.4 million sequentially, helped by net income and a $3.9 million improvement in accumulated other comprehensive loss as securities fair values recovered. Accumulated other comprehensive loss remained $33.5 million.
Outlook, management commentary, risks and unusual items
- Management reported industry-wide banking volatility and said the company experienced minimal deposit outflow in Q1, primarily from seasonal municipal-account movements. Excluding purchased brokered deposits, deposits declined 4.4% from year-end. Management described liquidity and the balance sheet as robust and said it believed liquidity was sufficient for reasonable needs; no numerical earnings or margin guidance was provided.
- At March 31, estimated uninsured deposits were $350.9 million, or 28.6% of deposits. This included $26.6 million of municipal deposits collateralized by securities or FHLB letters of credit. Retail brokered deposits were $108.0 million at a weighted average rate of 4.64%; exchanged ICS deposits were $182.2 million. The company reported $95.3 million of unused FHLB borrowing capacity, subject to collateral and other conditions, and had not drawn on the Federal Reserve Bank Term Funding Program.
- Regulatory capital ratios included company Common Equity Tier 1 of 10.80% and total capital of 13.69%; Union Bank’s total capital ratio was 13.68%. The filing states both entities met applicable capital adequacy requirements and Union Bank exceeded “well capitalized” thresholds.
- Unrealized losses on available-for-sale securities remained significant: $43.5 million gross at quarter-end and $33.5 million net of tax in accumulated other comprehensive loss. Management attributed the market-value declines to higher interest rates, reported no credit-loss allowance on these securities, and warned that market or liquidity deterioration could affect values and realized results.
- The company adopted CECL on January 1, 2023. Adoption reduced the loan allowance by $1.495 million and established a $1.458 million liability for off-balance-sheet exposures, increasing retained earnings by $37,000. The quarter-end loan allowance was $6.934 million; the decline from year-end chiefly reflects the accounting transition and should not be read by itself as evidence of improved credit quality.
- Asset quality indicators included $2.35 million of nonperforming assets, or 0.17% of assets, and no gross loan charge-offs in Q1. One non-residential commercial real estate loan of $2.068 million was nonaccrual. The filing describes credit-loss estimates as judgmental and subject to economic, borrower, collateral and regulatory uncertainty.
- Two loans to borrowers experiencing financial difficulty were modified by interest-rate reductions, with combined balances of $865,000; neither was past due at quarter-end, and none of the modified loans defaulted during the quarter. Management said ordinary-course legal proceedings were not expected to have a material adverse effect. The filing reported no material change in previously disclosed risk factors.
- The board declared a regular $0.36-per-share dividend on April 19, 2023, payable May 4, 2023. The filing cautions that interim results are not necessarily indicative of full-year results and identifies interest rates, deposit levels, economic conditions, securities values, credit losses and operational risks, including cybersecurity and fraud, among factors that could affect results.
Most important facts for investors to verify
- Deposit composition and retention: distinguish total deposits from the reported 4.4% decline excluding purchased brokered deposits; monitor brokered funding costs, uninsured balances and deposit mix.
- Liquidity capacity and conditions: confirm current available borrowing capacity, collateral requirements and any subsequent use of contingent funding facilities.
- Interest-rate sensitivity: track deposit repricing, net interest margin and the market value or potential sale of the available-for-sale securities portfolio.
- Credit trends: review allowance assumptions under CECL, delinquencies, nonaccrual loans, commercial real estate exposures and future charge-offs.
- Capital and shareholder distributions: monitor regulatory ratios, the quarterly dividend and share repurchases alongside earnings and balance-sheet growth.