Union Bankshares, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Union Bankshares is a bank holding company whose sole subsidiary is Union Bank. Financial statement amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $10.44 | $9.15 | $29.07 | $26.46 |
| Noninterest income | $2.47 | $4.20 | $6.69 | $9.96 |
| Net income | $3.76 | $3.93 | $9.17 | $9.79 |
| Diluted earnings per share | $0.83 | $0.87 | $2.03 | $2.17 |
| Net interest margin | 3.40% | 3.44% | 3.29% | 3.39% |
Quarterly net income declined 4.3% year over year; nine-month net income declined 6.3%. Higher net interest income was more than offset by lower noninterest income, particularly reduced gains from mortgage loan sales. No loan-loss provision was recorded in 2022 periods shown; the comparable 2021 nine-month provision was $0.225 million. Dividends were $0.35 per share for Q3 and $1.05 per share year to date.
Financial position, cash flow, and liquidity
- At September 30, total assets were $1.300 billion, gross loans including loans held for sale were $941.2 million, deposits were $1.196 billion, and stockholders’ equity was $49.7 million.
- Since December 31, 2021, total assets rose 7.9%, total deposits rose 9.3%, and total loans rose 17.5%. Noninterest-bearing deposits increased $72.6 million; time deposits increased $30.0 million.
- Nine-month operating cash flow was $22.7 million. Investing activities used $178.1 million, primarily reflecting $151.0 million of net loan growth and investment-security purchases. Financing activities provided $121.6 million. Cash and cash equivalents ended at $32.1 million, down from $65.9 million at year-end 2021.
- Borrowings included $25.0 million of FHLB advances at a 3.09% weighted average rate and $16.2 million of subordinated notes. The company reported $101.3 million of additional FHLB borrowing capacity, subject to collateral and other conditions.
- Estimated uninsured deposits were $405.0 million, or 33.9% of deposits. The company had $32.0 million of retail brokered deposits at quarter-end; these matured in October and were replaced with $33.0 million at 3.45% for three months.
- Regulatory capital ratios were 13.69% total capital to risk-weighted assets and 6.75% Tier 1 leverage at the company level. Union Bank’s total capital ratio was 13.65%; the filing says the bank exceeded “well capitalized” thresholds.
Material changes and asset quality
- Stockholders’ equity fell from $84.3 million at year-end 2021 to $49.7 million, primarily because accumulated other comprehensive loss widened by $39.4 million after-tax as available-for-sale securities declined in value. Book value per share fell to $11.06 from $18.67.
- Available-for-sale securities had a $51.8 million gross unrealized loss at September 30, compared with $4.3 million at year-end; management attributed the decline to market conditions and said no impairment was considered other-than-temporary. The filing reports no securities classified as held-to-maturity.
- Nonperforming assets were $1.7 million, or 0.13% of assets, versus $4.7 million and 0.39% at year-end 2021. The allowance for loan losses was $8.34 million, or 0.89% of total loans, versus 1.04% at year-end. The company recorded no provision in the first nine months and had net recoveries of $4,000.
- Real-estate-secured loans represented 85.7% of total loans. Management reported $1.3 million of performing substandard loans and noted their higher risk of becoming nonperforming.
Outlook, risks, and contingencies
- Management expected loan yields to improve as new loans were booked at higher rates, but also expected deposit funding costs to rise as customers responded to Federal Reserve rate increases. Mortgage refinancing activity had declined, while purchase activity was described as stable.
- Management cited inflation, energy prices, interest-rate increases and the possibility of recession as uncertainties. Other stated risks include deposit outflows and higher funding costs, loan defaults and allowance adequacy, securities-value declines, cybersecurity, fraud, operational disruption, and regulatory changes.
- Liquidity was described by management as sufficient for reasonable borrower, depositor, and creditor needs, though projections are subject to uncertainty. Off-balance-sheet commitments totaled $227.8 million, including $192.8 million of unused credit lines and $32.2 million of commitments to originate loans.
- The company is preparing to adopt CECL in fiscal 2023 and was conducting parallel calculations during 2022; the filing does not provide a clear quantified estimate of the adoption impact. Management stated that ordinary-course legal proceedings were not expected to materially adversely affect financial condition or results.
- A regular $0.35-per-share dividend was declared October 19, payable November 3, 2022. The filing provides no formal earnings or revenue guidance.
Key facts for investors to verify
- Whether unrealized securities losses, deposit pricing, and the resulting effects on equity, regulatory capital, and net interest margin continued to change after September 30.
- Whether deposits remained stable after the brokered deposits matured and were replaced, and how uninsured-deposit exposure and funding costs evolved.
- Whether rapid loan growth, commercial real estate concentrations, substandard credits, and the unchanged allowance remained consistent with subsequent credit performance.
- The eventual CECL transition impact and whether management’s expected improvement in loan yields offset rising funding costs and weaker mortgage-sale income.