Business context and reporting period
Union Bankshares, Inc. (Nasdaq: UNB), the parent of Union Bank, filed this unaudited Form 10-Q for the quarter ended September 30, 2020. The Vermont- and New Hampshire-focused bank reported results amid the COVID-19 pandemic, related customer relief measures, and the Federal Reserve’s sharp rate cuts.
Financial performance and position
Amounts below are in millions except per-share data and ratios.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $8.2 | $7.6 | $23.5 | $22.5 |
| Provision for loan losses | $0.8 | $0.2 | $1.6 | $0.4 |
| Noninterest income | $5.5 | $2.7 | $11.0 | $7.4 |
| Noninterest expense | $8.0 | $7.0 | $22.3 | $20.3 |
| Net income | $4.1 | $2.7 | $9.0 | $7.9 |
| Earnings per share | $0.92 | $0.62 | $2.01 | $1.77 |
- Q3 net income rose 51.5%; nine-month net income increased to $9.0 million. Higher loan-sale gains and net interest income drove improvement, partly offset by increased credit provision and operating expenses.
- Net interest margin declined to 3.57% in Q3 from 4.06% a year earlier, and to 3.66% for the nine-month period from 4.06%. Management attributed pressure to lower asset yields, including low-yield PPP loans; lower funding costs provided a partial offset.
- At September 30, assets were $1.009 billion, up 15.6% from year-end 2019; deposits were $910.1 million, up 22.3%; gross loans including held-for-sale loans were $798.9 million, up 17.9%; and stockholders’ equity was $78.4 million, up from $71.8 million.
- Cash and cash equivalents were $64.5 million, versus $51.1 million at year-end. Borrowings declined to $9.5 million from $47.2 million, largely as deposit growth reduced reliance on wholesale funding. The bank reported $101.3 million of unused FHLB borrowing capacity, subject to collateral and other conditions.
- Nine-month cash flow was $11.7 million used in operations, $99.1 million used in investing, and $124.1 million provided by financing, resulting in a $13.3 million increase in cash and cash equivalents. The operating outflow included net mortgage-loan originations held for sale.
- Regulatory capital ratios at September 30 included total capital to risk-weighted assets of 13.65% for the company and 13.60% for Union Bank. Union exceeded the stated “well capitalized” thresholds.
Material changes and management commentary
- Q3 gains on sales of loans held for sale increased to $3.3 million from $0.8 million. Residential loan sales were approximately $89.8 million for the quarter; nine-month sales were approximately $187.5 million, versus $101.3 million in 2019. Management linked stronger mortgage activity to low rates and said loan sales help mitigate long-term interest-rate risk.
- The allowance for loan losses increased to $7.7 million from $6.1 million at year-end. Management increased economic qualitative reserve factors in response to COVID-19, without changing its methodology. Net charge-offs were low; management cautioned that future losses could exceed the allowance.
- The bank originated 718 PPP loans totaling $69.8 million. It had executed 406 COVID-related payment deferrals on $173.3 million of balances by June 30; by September 30, 75 deferrals covering $39.1 million remained in effect. These qualifying short-term modifications were not treated as troubled debt restructurings.
- Management said customer deposits had risen primarily from PPP proceeds and government assistance, an effect it expected could be temporary. It expected further reductions in average funding costs as deposit rates reset and said it had no current plans to offer time-deposit specials. The filing provides no specific earnings or revenue guidance.
- Noninterest expense increased 14.1% in Q3. Drivers included mortgage commissions, incentive-plan accruals, technology/equipment costs, and a one-time $192,000 employee holiday gift. A $66,000 penalty followed prepayment of FHLB advances during the first half of 2020.
- The company declared a regular $0.32-per-share dividend in October, payable November 6, 2020. Management warned that a deterioration in capital could constrain the parent’s ability to maintain dividends.
Risks, contingencies, and unusual items
- COVID-19 could worsen borrower repayment capacity, collateral values, fee income, credit losses, operations, liquidity, and earnings. Management highlighted exposure to regional tourism, restaurant, and other affected industries, as well as risks concerning PPP eligibility and forgiveness, cybercrime, and vendor disruption.
- Service fees declined as customers received stimulus funds and spending opportunities were limited; temporary fee waivers and accrued interest on deferred loans may also affect future income. The duration and financial impact were not clear in the filing.
- Nonperforming assets were $3.4 million, or 0.34% of assets, compared with $3.5 million and 0.40% at year-end 2019. Nonaccrual loans were $2.5 million; $39.1 million of loans remained under COVID-related deferral terms.
- Legal proceedings arising in the ordinary course were not expected by management to have a material adverse effect. The filing reported no material change to other risk factors beyond the added COVID-19 risks.
Important facts for investors to verify
- Whether COVID-related deferrals convert into delinquencies, nonaccrual loans, or credit losses, and whether the $7.7 million allowance remains adequate.
- How quickly PPP balances are forgiven or repaid, and the timing and amount of related fee recognition.
- Whether mortgage origination and sale gains remain elevated, and how loan growth and low rates affect net interest margin.
- Whether pandemic-related deposit growth persists or reverses, and the resulting impact on liquidity, funding costs, and dividend capacity.
- Whether increases in salaries, technology, and other operating costs are sustainable relative to recurring revenue, excluding unusually strong loan-sale gains.