Union Bankshares, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited consolidated results include Union Bank, the company’s sole subsidiary. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income | $9.62m | $9.67m | $19.59m | $18.63m |
| Net income | $2.70m | $2.93m | $5.68m | $5.41m |
| Diluted EPS | $0.60 | $0.65 | $1.26 | $1.20 |
| Net interest margin | 2.96% | 3.28% | 3.05% | 3.23% |
| Efficiency ratio | 73.78% | 69.48% | 72.11% | 71.21% |
- Q2 net income fell 7.9% year over year, mainly reflecting a $654,000 rise in noninterest expense and a $53,000 decrease in net interest income. Lower credit-loss expense, higher noninterest income, and lower income taxes partly offset those effects.
- First-half net income rose 4.9%, as higher net interest and noninterest income and lower taxes more than offset a $1.1 million increase in noninterest expense.
- For the six months, net interest income increased 5.2% as earning-asset yields rose, but funding costs rose faster. Interest expense increased to $7.25 million from $1.50 million; the average cost of funds increased to 1.43% from 0.36%.
- Noninterest expense increased 7.8% in Q2 and 6.7% for the first half. Drivers included compensation, employee benefits, FDIC assessments, professional fees, and other costs. First-half noninterest income increased 5.7%.
- Cash dividends were $0.36 per share for Q2 and $0.72 per share for the first half, compared with $0.35 and $0.70, respectively, in 2022.
Financial position, cash flow, and capital
- At June 30, total assets were $1.335 billion, broadly flat against December 31, 2022. Gross loans, including loans held for sale, were $938.7 million; deposits were $1.124 billion; borrowed funds were $120.5 million; subordinated notes were $16.2 million; and stockholders’ equity was $59.1 million.
- Since year-end, deposits declined $78.2 million, including decreases in noninterest-bearing and other interest-bearing deposits, partly offset by a $99.0 million increase in time deposits. Borrowed funds rose $70.5 million, primarily FHLB advances. The loan-to-deposit ratio was 83.54%, versus 74.50% in the prior-year comparison shown by the company.
- First-half cash flow: $5.7 million provided by operations, $3.1 million provided by investing activities, and $10.9 million used in financing activities. Cash and cash equivalents ended at $35.8 million, down $2.1 million from year-end.
- Estimated uninsured deposits were $354.0 million, or 31.5% of deposits. Funding sources included $50.0 million of purchased ICS deposits and $88.0 million of retail brokered deposits at June 30.
- Liquidity sources included $17.8 million of stated unused FHLB capacity, a $15.0 million federal funds line, and other deposit and borrowing facilities, subject to stated conditions and collateral. The company had not borrowed under the Federal Reserve Bank Term Funding Program. Management said liquidity was sufficient for reasonable needs.
- Company total capital to risk-weighted assets was 13.48%; Union Bank’s was 13.47%. The bank exceeded the stated “well capitalized” thresholds. Book value per share was $13.10, up from $12.25 at year-end.
Material changes and asset quality
- Loans declined $20.7 million from year-end, largely due to the seasonal municipal loan cycle, but were $116.9 million higher than at June 30, 2022. The company reported $53.3 million of new municipal loans in July 2023.
- The allowance for credit losses on loans was $6.78 million, or 0.72% of loans, compared with $8.34 million, or 0.87%, at year-end. The company adopted CECL on January 1, 2023; adoption reduced the loan allowance by $1.50 million, added a $1.46 million off-balance-sheet allowance, and increased retained earnings by $37,000.
- Nonperforming assets were $2.02 million, or 0.15% of assets, compared with $2.40 million and 0.18% at year-end. The filing reports $1.96 million of nonaccrual loans and $64,000 of loans at least 90 days past due and still accruing.
- Available-for-sale securities had a fair value of $267.5 million and gross unrealized losses of $46.8 million. Accumulated other comprehensive loss was $36.3 million, net of tax. Management reported no credit-loss allowance on the securities and attributed the value declines principally to interest rates.
Outlook, risks, and unusual items
- No specific earnings or full-year financial guidance was provided. Management expects the average cost of funds to increase in the next quarter as depositors seek higher rates and the company continues to use higher-cost wholesale funding. It described margin pressure from the inverted yield curve and rising deposit and funding costs.
- Management cited banking-sector volatility, deposit outflows and competition, interest-rate and securities-value changes, economic conditions, credit losses, cybersecurity and fraud, and regulatory developments as risks. The filing also warns that actual results may differ materially from forward-looking statements.
- Vermont experienced major flooding July 7–12, after quarter-end. About 20 customers had reported impacts at the time of filing; management was not aware of significant resulting loan losses. Two branch locations sustained water damage; repairs were insured and were not expected to have a significant financial impact.
- Credit commitments and related exposures totaled $288.4 million, including $97.7 million of commitments to originate loans and $188.3 million of unused lines. The increase in loan commitments largely reflected $53.3 million committed to municipalities and school districts for their fiscal year beginning July 1.
- Management said ordinary-course legal proceedings were not expected to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors. A $0.36-per-share dividend was declared July 19, payable August 3, 2023.
Key facts for investors to verify
- Whether deposit trends, brokered and purchased funding use, and borrowing costs continue to pressure net interest margin and earnings.
- How the $46.8 million gross unrealized securities losses and related liquidity considerations evolve as interest rates and funding needs change.
- Whether loan growth, municipal exposures, delinquency and nonaccrual trends, and the CECL allowance remain consistent with management’s credit-risk assumptions.
- The financial and credit effects of the July Vermont flooding as customer impacts and recovery costs become clearer.
- Whether expenses, including FDIC assessments, compensation, and fraud-related losses, remain elevated and how that affects the efficiency ratio.