Union Bankshares, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Unaudited consolidated results are compared with Q1 2021; balance-sheet comparisons are primarily with December 31, 2021. Unless noted, financial amounts below are in millions of dollars.
Financial performance and position
- Profit: Net income was $2.48 million, down 13.7% from $2.88 million; diluted effects were not material. Basic EPS was $0.55 versus $0.64. Return on average assets was 0.81% and return on average equity was 12.38%.
- Revenue and margins: Net interest income rose 6.7% to $8.96 million. Tax-equivalent net interest margin declined to 3.17% from 3.32%; net interest spread fell to 3.08% from 3.19%. Total noninterest income fell 21.6% to $2.06 million, mainly as gains on residential loan sales dropped to $14,000 from $894,000. Noninterest expense increased 8.9% to $8.11 million. The efficiency ratio rose to 73.08% from 66.90%.
- Credit costs: No loan-loss provision was recorded, compared with $150,000 in Q1 2021. The allowance remained $8.34 million, or 1.00% of total loans. Nonperforming loans were $4.63 million, 0.56% of loans, versus $6.14 million and 0.73% a year earlier.
- Cash flow: Operating activities provided $14.77 million, compared with $4.78 million used in Q1 2021. Investing activities used $67.42 million, including $40.56 million of net loan growth and $31.39 million of net purchases of available-for-sale securities. Financing activities provided $37.53 million. Cash and cash equivalents ended at $50.80 million, down from $65.92 million at year-end.
- Balance sheet and liquidity: Total assets were $1.23 billion, up 2.3% from year-end. Gross loans, including loans held for sale, were $830.0 million; deposits were $1.13 billion, up 3.6%. Noninterest-bearing deposits increased $38.2 million during the quarter. The company reported no borrowed funds at quarter-end and cited $69.1 million in unused FHLB credit availability, subject to collateral and other conditions. Estimated uninsured deposits were $449.1 million, or 39.6% of deposits.
- Debt and capital: Subordinated notes, net of issuance costs, were $16.18 million; they mature in 2031 and initially bear 3.25% interest through September 2026. Stockholders’ equity declined to $69.42 million from $84.34 million, primarily reflecting the securities-related increase in accumulated other comprehensive loss. Union’s total risk-based capital ratio was 14.79%; the bank exceeded applicable “well capitalized” thresholds.
- Dividend: The company paid and declared a quarterly dividend of $0.35 per share. A subsequent $0.35 dividend was declared April 20, payable May 5, 2022.
Material changes and management commentary
- Net income declined as lower mortgage-sale gains and higher operating expenses more than offset higher net interest income and lower credit and tax provisions. Management reduced residential mortgage sales to retain more loans and use excess liquidity; sales were $16.4 million versus $29.7 million in Q1 2021.
- Average earning assets increased, but their average yield declined 32 basis points to 3.44%. Lower deposit rates reduced funding costs, while average interest-bearing liabilities increased. Management noted that rate increases had not yet flowed through to asset yields or interest costs.
- Rapid increases in Treasury rates reduced the fair value of available-for-sale securities. Their net unrealized losses were $22.36 million at March 31, versus $4.27 million at year-end; accumulated other comprehensive loss was $17.43 million versus $1.55 million. Management attributed the decline to market conditions, not credit quality, and did not deem losses other-than-temporary.
- Management cited regional economic improvement but continues to monitor COVID-19 effects, especially on tourism and restaurants, as well as borrower credit quality and real estate values. The allowance estimate is subject to management judgment and may require future increases.
Outlook, risks and contingencies
- No specific earnings or financial guidance was provided. Management said further short-term rate increases could raise deposit costs and affect future earnings; rising rates had already affected securities values, mortgage rates and loans held for sale.
- Key disclosed risks include economic conditions, competition, interest-rate and depositor behavior, inflation, credit losses, regulation, technology and cybersecurity. The company cautioned that forward-looking statements are uncertain and undertook no general obligation to update them.
- Off-balance-sheet credit commitments totaled $228.47 million, including $62.25 million of commitments to originate loans and $163.08 million of unused lines. These amounts are not necessarily expected cash requirements because commitments may expire unused.
- Management said routine legal proceedings were not expected to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors and no material changes in internal control over financial reporting.
- CECL adoption is scheduled for fiscal 2023; the company was conducting parallel calculations during 2022. Management did not expect the LIBOR transition or ASU 2022-02 to have a material financial-statement impact.
Important facts for investors to verify
- Whether loan and deposit pricing adjusts as rates change, and the resulting effect on net interest margin and earnings.
- Whether available-for-sale securities losses remain market-driven and unrealized, and how they affect equity and regulatory capital.
- Trends in uninsured deposits, deposit retention, contingent liquidity access and loan growth.
- Credit quality, especially nonaccrual and substandard loans, COVID-19-modified loans, and the adequacy of the allowance as CECL approaches.
- Whether lower mortgage-sale activity and higher compensation, benefits and technology costs persist.