Union Bankshares, Inc. — Q3 2021 Form 10-Q
Business context and period: Vermont-based bank holding company with Union Bank as its sole subsidiary. This unaudited filing covers the quarter and nine months ended September 30, 2021; balance-sheet comparisons are primarily with December 31, 2020.
Financial performance and position
| Metric | Q3 2021 / September 30, 2021 | Comparable period / change |
|---|---|---|
| Net interest income | $9.15 million for the quarter; $26.46 million for nine months | Quarter +11.7%; nine months +12.8% year over year |
| Net income | $3.93 million for the quarter; $9.79 million for nine months | Quarter -5.4%; nine months +8.7% year over year |
| EPS | $0.87 diluted for the quarter; $2.17 for nine months | Quarter $0.92; nine months $2.01 in 2020 |
| Net interest margin | 3.44% for the quarter; 3.39% for nine months | 3.57% and 3.66%, respectively, in 2020 |
| Total assets | $1.158 billion | +5.9% from year-end 2020 |
| Loans and deposits | Gross loans including loans held for sale: $790.0 million; deposits: $1.041 billion | Loans -1.7%; deposits +4.7% from year-end 2020 |
| Cash and liquidity | Cash and cash equivalents: $120.1 million | $122.8 million at year-end 2020; unused FHLB capacity of $98.8 million, subject to collateral and other conditions |
| Borrowings and equity | $7.0 million borrowed funds; $16.2 million subordinated notes; $83.7 million stockholders’ equity | Notes were newly issued in August 2021; equity was $80.9 million at year-end 2020 |
| Capital | Company total risk-based capital ratio 16.16%; Union 15.91% | Management reported capital above applicable requirements; Union exceeded “well capitalized” thresholds |
| Cash flows, nine months | Operating +$27.3 million; investing -$88.0 million; financing +$58.0 million | Operating cash flow was -$11.7 million in 2020; ending cash was $120.1 million |
Material changes and management commentary
- Quarterly net income declined despite higher net interest income and no loan-loss provision, as noninterest income fell $1.31 million and noninterest expense rose $553,000 year over year. Nine-month net income increased.
- Lower deposit costs supported net interest income, while low asset yields compressed the margin. For the nine-month comparison, average earning assets grew, but their average yield fell 53 basis points; average funding cost fell 31 basis points.
- Noninterest income declined 9.6% for nine months, mainly because the bank sold fewer residential loans: $164.2 million versus $187.5 million in the prior-year period. Management said it slowed sales to use excess liquidity and increase loan interest income.
- Noninterest expense increased 9.5% for nine months, including higher salaries, software costs, FDIC assessments, professional fees and franchise taxes.
- Available-for-sale securities increased to $184.2 million from $105.8 million at year-end 2020. Market-value changes produced $2.82 million of nine-month after-tax other comprehensive loss; management attributed unrealized losses to market conditions, not credit quality, and reported no securities impairment.
- Credit indicators weakened in some respects: nonaccrual loans rose to $5.67 million from $2.41 million at year-end 2020, primarily due to a commercial real estate hospitality relationship. Nonperforming assets were 0.50% of assets versus 0.27% at year-end. The allowance was $8.56 million, or 1.11% of loans not held for sale.
- Management reported no COVID-related charge-offs to date. Of $145.6 million in COVID-related loan modifications executed, $748,000 remained subject to modified terms at quarter-end. PPP originations totaled $102.1 million since program inception, of which $73.9 million had been forgiven by the SBA.
Outlook, risks and contingencies
- The filing provides no specific earnings or financial guidance. Management said a prolonged low-rate environment could continue to pressure asset yields, while deposit costs might decline further. It also cited possible adverse effects from interest-rate changes, deposit outflows, competition, economic conditions, credit losses and COVID-19 resurgence or variants.
- In August, the company issued $16.5 million of subordinated notes due 2031. The notes pay 3.25% through September 2026, then reset quarterly to three-month SOFR plus 263 basis points; proceeds supported the bank’s capital and growth. The balance-sheet carrying amount was $16.2 million net of issuance costs.
- Commitments to originate loans and unused credit lines totaled $244.9 million; total disclosed off-balance-sheet credit-risk instruments were $251.4 million. These amounts are not necessarily expected cash requirements.
- Management stated that ordinary-course legal proceedings were not expected to have a material adverse effect. It reported no material change in previously disclosed risk factors, effective disclosure controls, and no material quarterly change in internal control over financial reporting.
- On October 20, 2021, the company declared a regular $0.33-per-share dividend, payable November 4, 2021.
Important facts for investors to verify
- Whether the rise in nonaccrual loans and nonperforming assets—particularly the hospitality-related CRE exposure—leads to higher provisions or charge-offs.
- How much of earnings depends on PPP fee recognition and residential mortgage sale gains, and how those sources change as PPP loans are forgiven and loan-sale volumes fluctuate.
- The sustainability of net interest income and margin if asset yields, deposit pricing, or customer deposit balances change.
- The valuation and interest-rate sensitivity of the enlarged available-for-sale securities portfolio, including the impact of unrealized losses on accumulated other comprehensive income and equity.
- The funding, capital and future interest-cost implications of the subordinated notes and the company’s ability to maintain its dividend under adverse conditions.