Union Bankshares, Inc. (UNB) — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited consolidated results include Union Bank, the company’s wholly owned subsidiary. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest income | $9.15 | $10.44 | $28.74 | $29.07 |
| Net income | $2.53 | $3.76 | $8.21 | $9.17 |
| Diluted EPS | $0.55 | $0.83 | $1.81 | $2.03 |
| Noninterest income | $2.47 | $2.54 | $7.24 | $7.05 |
| Noninterest expense | $8.93 | $8.44 | $26.74 | $25.14 |
| Net interest margin | 2.76% | 3.40% | 2.95% | 3.29% |
- Q3 net income fell 32.6%; nine-month net income fell 10.5%. Q3 results reflected lower net interest income and higher operating expenses, partly offset by a $0.14 million net credit-loss benefit and lower income tax expense.
- Interest income rose as loan balances and asset yields increased, but funding costs rose faster. Q3 interest expense was $5.70 million versus $1.02 million; nine-month expense was $12.95 million versus $2.52 million. Nine-month net interest spread declined to 2.59% from 3.18%.
- Return on average assets was 0.73% for Q3 and 0.80% for the nine months, versus 1.18% and 0.98%, respectively, in the comparable periods. The nine-month efficiency ratio increased to 73.17% from 68.65%.
Financial position, cash flow, and capital
- At September 30, total assets were $1.40 billion, gross loans including loans held for sale were $1.03 billion, deposits were $1.22 billion, FHLB borrowings were $90.7 million, subordinated notes were $16.2 million, and stockholders’ equity was $49.2 million.
- Compared with December 31, 2022, total loans including loans held for sale increased $68.7 million, deposits increased $20.4 million, and FHLB borrowings increased $40.7 million. Time deposits rose $132.3 million, while noninterest-bearing deposits declined $57.0 million and other interest-bearing deposits declined $54.9 million.
- Nine-month operating cash flow was $6.2 million, down from $22.7 million. Investing activities used $78.9 million, primarily reflecting loan growth and investment activity; financing provided $56.1 million. Cash and cash equivalents ended at $21.3 million, down from $37.9 million at year-end.
- Available-for-sale securities had a $249.0 million fair value and $60.3 million of gross unrealized losses. Accumulated other comprehensive loss increased to $47.1 million from $37.4 million at year-end, contributing to the decline in equity from $55.2 million. Book value per share was $10.92, compared with $12.25 at year-end.
- Union’s total risk-based capital ratio was 13.18%; its Tier 1 leverage ratio was 7.68%. The filing states that the bank exceeded applicable “well capitalized” requirements. The quarterly dividend was $0.36 per share; a further $0.36 dividend was declared October 18, payable November 2, 2023.
Material changes, outlook, and risks
- Management attributed margin pressure to the inverted yield curve, higher deposit pricing, and increased use of higher-cost wholesale funding. It expected the average cost of funds to continue rising over the next quarter. The filing provides no specific earnings or full-year numerical guidance.
- Estimated uninsured deposits were $362.7 million, or 29.7% of deposits. Funding included $103.0 million of retail brokered deposits and $50.2 million of purchased ICS deposits. Management stated it believed liquidity was sufficient; available unused FHLB capacity was reported at $102.8 million, subject to collateral and other conditions. The company had not drawn on the Federal Reserve Bank Term Funding Program.
- Asset quality indicators included $2.1 million of nonperforming assets, equal to 0.15% of total assets, and a $6.9 million loan allowance. Nonaccrual loans were $1.9 million; loans 90 days or more past due and still accruing were $0.25 million. Management considered the allowance appropriate but cautioned that future losses could exceed it.
- Unrealized securities losses were attributed primarily to higher long-term interest rates, not identified credit impairment. Management warned that market or liquidity changes could affect securities values and potentially lead to realized or credit losses.
- Vermont flooding in July damaged two branches. Jeffersonville was restored; the Johnson facility was being upgraded. Management reported no material financial impact. A full-service branch in North Conway, New Hampshire, opened in late October 2023.
- Noninterest expense growth included higher FDIC assessments, employee costs, and donations supporting flood recovery. Management also cited increased debit-card fraud losses and ongoing cybersecurity, economic, interest-rate, credit, and deposit-retention risks. No material change to the risk factors in the 2022 Form 10-K was reported.
- The company adopted CECL on January 1, 2023. Adoption reduced the loan allowance by $1.50 million, added a $1.46 million allowance for off-balance-sheet exposures, and increased retained earnings by a net $37,000. Prior-year credit-loss figures use the former incurred-loss method and are not fully comparable.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. Legal proceedings were not expected to have a material adverse effect.
Key facts for investors to verify
- Whether deposit pricing, brokered and purchased deposits, and FHLB funding continue to pressure net interest margin and liquidity.
- Trends in uninsured deposits, available borrowing capacity, and cash balances, including any changes after September 30.
- Whether unrealized AFS securities losses or loan-credit trends materially change; review allowance assumptions and commercial real estate exposure.
- Whether loan growth and operating expenses translate into improved earnings, and whether the declared dividend remains supported by earnings and capital.
- Progress and costs associated with the flood-damaged Johnson branch and North Conway expansion; confirm subsequent developments beyond those disclosed in the filing.