Union Bankshares, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited consolidated results. Union Bank operates in Vermont and New Hampshire; the filing highlights the effects of COVID-19 and related government programs.
Financial results and position
| Metric | Q2 2020 / June 30, 2020 | Comparable period / prior date |
|---|---|---|
| Net interest income | $7.78 million | $7.51 million, Q2 2019 |
| Net income | $2.67 million; $0.60 per share | $2.53 million; $0.56 per share, Q2 2019 |
| Net income, six months | $4.86 million; $1.09 per share | $5.15 million; $1.15 per share, six months 2019 |
| Net interest margin | 3.55% Q2; 3.71% six months | 4.06% for both 2019 periods |
| Total assets | $917.1 million | $872.9 million, December 31, 2019 |
| Total deposits | $819.5 million | $744.0 million, December 31, 2019 |
| Borrowed funds | $9.5 million | $47.2 million, December 31, 2019 |
| Stockholders’ equity | $75.8 million | $71.8 million, December 31, 2019 |
- Q2 net income increased 5.5% year over year; six-month net income declined 5.6%.
- Q2 total noninterest income was $2.99 million, up 20.9%, helped by $1.23 million in gains on residential loan sales. Six-month noninterest income rose 17.1% to $5.51 million. Service fees fell, partly reflecting COVID-related fee waivers and customer activity.
- Provision for loan losses was $500,000 in Q2 and $800,000 for six months, versus $150,000 and $200,000, respectively, in 2019. The allowance was $6.89 million, or 0.99% of loans not held for sale.
- Six-month noninterest expense increased 7.2% to $14.28 million, including higher equipment and personnel costs. Q2 efficiency ratio was 65.28%, versus 67.43% a year earlier.
- Six-month operating cash flow was negative $27.1 million, versus positive $2.2 million in 2019. The filing’s cash-flow statement reflects increased mortgage-loan originations held for sale; investing cash flow was negative $22.4 million and financing cash flow positive $35.0 million. Cash and cash equivalents ended at $36.6 million.
- Capital ratios at June 30: company total capital to risk-weighted assets 13.44%; Union Bank 13.39%. Union Bank’s Tier 1 leverage ratio was 7.39% and it exceeded the stated “well capitalized” thresholds.
Material changes and management commentary
- Assets increased 5.1% from year-end 2019. Deposits rose $75.5 million, primarily amid PPP proceeds, government assistance payments, and reduced customer spending. Management cautioned that the deposit increase may be temporary.
- Total loans, including loans held for sale, increased 8.6% to $736.2 million. The portfolio included 668 PPP loans totaling $68.5 million; the company received $2.5 million in SBA origination fees, with $234,000 recognized in the first half. PPP loans carry a 1% contractual rate, and management expects significant forgiveness subject to program terms.
- Residential loan sales were $55.4 million in Q2 and $97.8 million in the first half, above 2019 levels, supporting gain-on-sale income and management’s strategy to reduce long-term interest-rate exposure.
- Management raised economic qualitative reserve factors by 15 basis points during the first half because of COVID-19 uncertainty. Nonperforming assets were $3.22 million, or 0.35% of assets, versus $3.50 million and 0.40% at year-end 2019.
- Borrowings fell primarily after repayment of FHLB advances; the company also prepaid $30 million in advances, incurring $66,000 in penalties. It retained access to multiple contingent funding sources, including $108.7 million of stated unused FHLB capacity, subject to collateral and other conditions.
- Management reported no quantified earnings guidance. It expected deposit and savings-product repricing to lower funding costs, while noting that low rates pressure asset yields and margins. A regular $0.32-per-share dividend was declared for payment in August 2020.
Risks, contingencies, and unusual items
- COVID-19 creates uncertainty around borrower repayment, credit losses, collateral values, fee income, net interest income, liquidity, and operations. Management specifically monitored tourism, hospitality, and restaurant exposure. It could not estimate the duration or full financial impact.
- As of June 30, 406 pandemic-related payment deferrals covered $173.3 million in loans, with $1.6 million of accrued interest. These qualifying short-term accommodations were not classified as troubled debt restructurings under the cited guidance.
- The company identified potential PPP-guarantee risk if SBA later determines loans fail program requirements, as well as cyber, fraud, vendor, and business-continuity risks. Branch lobbies reopened May 27; no material COVID-related operational or internal-control challenge had been identified by the filing date.
- Off-balance-sheet commitments totaled $257.6 million, including $123.9 million to originate loans and $130.3 million in unused lines. Many commitments may not be drawn; $73.0 million of loan commitments related to municipalities and school districts.
- Management reported no material expected liability from ordinary-course legal proceedings and no material change to previously disclosed risks other than COVID-19. It stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Investor verification priorities
- Track performance and credit quality of the $173.3 million in deferred loans as accommodations expire, including concentrations in tourism, hospitality, and restaurants.
- Verify PPP forgiveness, SBA fee recognition, and continued eligibility for the federal guarantee.
- Assess whether the $6.89 million loan-loss allowance remains adequate as economic conditions, delinquencies, and collateral values evolve.
- Monitor net interest margin, loan and deposit repricing, and whether elevated deposits persist after PPP funds and government assistance are spent.
- Reconcile negative operating cash flow with mortgage origination and sale volumes, and review liquidity capacity and significant loan commitments.
- Review the effect of ongoing expense investment and any future credit provisions on earnings, capital, and the $0.32 quarterly dividend.