Union Bankshares, Inc. — Q1 2021 Form 10-Q
Business context and reporting period. Union Bankshares, Inc., through its sole subsidiary Union Bank, is a Vermont community bank. This unaudited filing covers the three months ended March 31, 2021, with operating results compared with Q1 2020 and balance-sheet figures generally compared with December 31, 2020. Unless noted, amounts below are in U.S. dollars.
Financial performance and position
- Profitability: Net income was $2.876 million, up 31.0% from $2.196 million; diluted earnings per share were $0.64 versus $0.49. Return on average assets was 1.05% and return on average equity was 14.27%.
- Revenue and margins: Net interest income rose 11.9% to $8.399 million. Net interest margin declined to 3.32% from 3.88%, and net interest spread declined to 3.19% from 3.70%. Noninterest income increased 4.1% to $2.621 million.
- Expenses and credit costs: Noninterest expense increased 3.9% to $7.453 million. Provision for loan losses was $150,000 versus $300,000. No loan charge-offs were recorded in Q1 2021; recoveries were $8,000.
- Cash flow: Operating activities used $4.776 million and investing activities used $73.621 million; financing activities provided $12.132 million. Cash and cash equivalents decreased $66.265 million during the quarter to $56.506 million.
- Balance sheet and liquidity: Total assets were $1.104 billion, up 1.0% from year-end. Deposits were $1.008 billion, up $13.6 million; loans and loans held for sale totaled $842.5 million. Management stated that the company had sufficient liquidity and access to multiple funding sources, including $93.3 million of unused FHLB lines, subject to collateral and other conditions.
- Debt and capital: Borrowed funds were $7.164 million, consisting of FHLB borrowings. Stockholders’ equity was $79.823 million, down from $80.867 million, principally reflecting a $2.555 million after-tax decline in accumulated other comprehensive income and declared dividends. Company total risk-based capital was 13.48%; Union Bank’s was 13.40%. Both exceeded applicable capital adequacy requirements, and Union exceeded the “well capitalized” thresholds.
- Other metrics: Efficiency ratio was 66.90%, compared with 70.75%. The quarterly dividend was $0.33 per share, versus $0.32 a year earlier.
Material changes versus comparable periods
- Net income improved as higher net interest income, higher noninterest income, and a lower loan-loss provision more than offset increased operating expenses and taxes.
- Interest income rose $537,000, while interest expense fell $356,000, reflecting lower deposit rates despite substantially higher average interest-bearing liabilities. Lower market rates reduced average earning-asset yields and compressed the net interest margin.
- Loan growth included $77.2 million of PPP loans at quarter-end. Total loans, including loans held for sale, rose $39.1 million from year-end; average deposits increased substantially year over year, with management citing PPP proceeds, government stimulus payments, and reduced customer spending.
- Nonperforming assets increased to $6.141 million from $2.971 million at year-end. Nonaccrual loans rose mainly because a commercial real estate hospitality relationship was placed on nonaccrual. The allowance for loan losses was $8.429 million, or 1.05% of loans not held for sale.
- Unrealized losses on available-for-sale securities reduced accumulated other comprehensive income by $2.555 million after tax during the quarter. Management attributed the declines to market conditions, not credit quality, and did not consider them other-than-temporary impairment.
Outlook, commentary, risks and unusual items
- The filing provides no specific earnings, revenue, margin, or credit-loss guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Management described economic conditions as improving as of quarter-end but warned that a COVID-19 resurgence or prolonged effects could weaken borrowers, increase required reserves and credit costs, reduce interest income on deferred loans, or pressure liquidity and capital. The company reported no COVID-related charge-offs to date.
- As of March 31, 2021, 53 COVID-related loan deferrals remained in effect, covering $28.0 million of balances; 352 deferrals had been executed on $167.2 million in outstanding balances in total. The company noted that future losses on deferred loans remain uncertain.
- PPP loans totaled $77.2 million. The company expected significant forgiveness during 2021 and stated that the loans are government-guaranteed, subject to borrower eligibility and program terms. It recognized $668,000 of PPP origination fees in Q1.
- Management cited continued low interest rates, competition for quality loans, borrower and deposit behavior, regional tourism and restaurant exposure, and possible future credit deterioration as risks. It also noted that higher funding costs or deposit withdrawals could affect margins and liquidity.
- The company entered into a commitment to purchase property in Shelburne, Vermont, for a future branch at a price of $2.2 million; closing was expected in Q2 2021, subject to conditions. A $0.33 quarterly dividend was declared on April 21, payable May 6, 2021.
- Management said ordinary-course legal proceedings were not expected to have a material adverse effect. Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether the rise in nonaccrual loans, especially the hospitality-related commercial real estate exposure, leads to additional credit costs or charge-offs.
- How the remaining COVID-related deferrals perform as accommodations end, and whether reported delinquency and asset-quality measures fully reflect borrower stress.
- Whether PPP forgiveness and fee recognition, together with loan growth and loan-sale activity, sustain earnings as those temporary effects diminish.
- Whether deposit growth persists and how cash deployment, funding costs, and the decline in cash balances affect liquidity and net interest margin.
- Whether available-for-sale securities valuations recover or further reduce equity, and whether capital remains adequate under any deterioration in credit conditions.
- The Shelburne property purchase’s closing and cost, and the company’s ability to maintain its dividend if subsidiary-bank capital or dividend capacity weakens.