Union Bankshares, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Figures are unaudited and, unless stated otherwise, in millions of dollars.
Business context and financial performance
Union Bankshares is the parent of Union Bank. Second-quarter net income was $2.93 million, down 2.0% from $2.99 million a year earlier; diluted EPS was $0.65 versus $0.66. For the first half, net income fell 7.7% to $5.41 million from $5.87 million, and diluted EPS was $1.20 versus $1.30.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $9.67 | $8.92 | $18.63 | $17.32 |
| Noninterest income | $2.17 | $3.14 | $4.22 | $5.76 |
| Noninterest expense | $8.30 | $8.39 | $16.41 | $15.84 |
| Net interest margin | 3.28% | 3.40% | 3.23% | 3.36% |
Higher net interest income was offset by lower noninterest income, chiefly reduced gains from residential mortgage loan sales. First-half loan-sale gains were $0.30 million versus $2.05 million; management sold fewer mortgages and retained more originations in the portfolio. No loan-loss provision was recorded in 2022, compared with $0.08 million for Q2 2021 and $0.23 million for the first half of 2021. The allowance was $8.34 million.
Financial position, cash flow and credit
- Assets and lending: Total assets were $1.192 billion, down 1.1% from year-end 2021. Gross loans plus loans held for sale were $821.8 million, up 2.6%; loans grew in residential, construction and commercial real estate, partly offset by a seasonal municipal-loan decline.
- Deposits and liquidity: Deposits totaled $1.103 billion, up 0.7% from year-end. Cash and cash equivalents were $25.3 million versus $65.9 million at year-end. The filing reports $138.4 million of additional FHLB borrowing capacity, subject to collateral and FHLB review; no FHLB advances or correspondent-line borrowings were outstanding. Estimated uninsured deposits were $419.1 million, or 38.0% of deposits.
- Debt and capital: Subordinated notes were $16.2 million, issued in 2021 and due 2031. Stockholders’ equity fell to $59.9 million from $84.3 million at year-end, primarily reflecting a $26.8 million increase in accumulated other comprehensive loss from securities valuation declines and $3.1 million of declared dividends. Book value per share was $13.34 versus $18.77 at year-end. Company total risk-based capital was 14.33%; Union Bank’s was 14.28%, and its Tier 1 leverage ratio was 8.02%.
- Cash flow, first half: Operating activities provided $16.3 million, investing activities used $61.7 million, and financing activities provided $4.8 million. Cash and cash equivalents decreased $40.6 million to $25.3 million.
- Credit quality: Nonperforming assets were 0.13% of assets, down from 0.39% at year-end 2021; nonperforming loans were $1.53 million versus $4.75 million. The allowance was 1.01% of total loans. Management reported no net charge-offs in the first half and considered the allowance appropriate, while noting estimates may change with economic conditions.
Outlook, risks and unusual items
The filing gives no formal earnings or financial guidance. Management expected new loan yields to improve as loans were booked at higher rates, but also expected funding costs to rise as customers seek higher deposit rates. It cited inflation, rate increases, possible recession, geopolitical and pandemic-related uncertainty, competition, credit deterioration, deposit outflows, cybersecurity and other operational risks as factors that could affect results.
Available-for-sale securities had $36.0 million of gross unrealized losses at June 30, versus $4.3 million at year-end; the after-tax accumulated OCI loss was $28.4 million. Management attributed the decline to market conditions and interest rates, not credit quality, and deemed no losses other-than-temporary. The filing warns that future market or liquidity changes could affect fair values or lead to losses being recognized in earnings.
Management reported $70.2 million of new municipal loans in July, following the normal June 30 seasonal paydown. It believed liquidity was sufficient for reasonable needs. The company declared a $0.35-per-share quarterly dividend payable August 4, 2022. Management said routine legal proceedings were not expected to materially affect results; risk factors were unchanged from the 2021 annual report. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- How rapidly deposit pricing and funding costs respond to further interest-rate changes, and the resulting effect on net interest margin.
- Whether securities unrealized losses remain unrealized and how AOCI affects reported equity and regulatory capital.
- Loan growth and credit performance, particularly commercial real estate, construction and tourism-related borrowers, and the adequacy of the allowance as CECL adoption approaches in 2023.
- Deposit retention and liquidity exposure, including the size and stability of uninsured deposits and access to contingent funding.
- Mortgage origination, retention and sale trends, which materially affected noninterest income compared with 2021.