Union Bankshares, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited consolidated results for Union Bankshares and its subsidiary, Union Bank. Dollar amounts below are in millions unless noted.
Financial performance and condition
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $8.92 | $7.78 | $17.32 | $15.28 |
| Provision for loan losses | $0.08 | $0.50 | $0.23 | $0.80 |
| Noninterest income | $3.14 | $2.99 | $5.76 | $5.51 |
| Noninterest expense | $8.39 | $7.11 | $15.84 | $14.28 |
| Net income | $2.99 | $2.67 | $5.87 | $4.86 |
| Diluted EPS | $0.66 | $0.59 | $1.30 | $1.08 |
- Q2 net income rose 12.1% year over year; first-half net income rose about 20.6%. First-half revenue growth and lower credit-loss provision were partly offset by higher operating expenses.
- Net interest margin was 3.40% for Q2 versus 3.55% a year earlier, and 3.36% for the first half versus 3.71%. Management attributed margin pressure to lower asset yields; lower deposit costs partly cushioned the decline.
- Q2 return on average assets was 1.06% and return on average equity 14.76%. The efficiency ratio was 68.89%, compared with 65.28% a year earlier.
- At June 30, assets were $1.066 billion, deposits $967.7 million, loans $741.5 million, loans held for sale $42.1 million, borrowed funds $7.2 million, and shareholders’ equity $82.4 million. Total assets declined 2.5% from year-end, primarily reflecting seasonal municipal loan and deposit reductions.
- Cash and cash equivalents were $61.2 million, down from $122.8 million at year-end. First-half cash flow was negative $2.6 million from operations, negative $29.4 million from investing, and negative $29.5 million from financing, resulting in a $61.5 million net cash decrease.
- Company and bank total risk-based capital ratios were 13.47% and 13.39%, respectively. The bank exceeded applicable “well capitalized” thresholds. The reported Tier 1 leverage ratios were 7.03% for the company and 6.98% for the bank.
- Quarterly dividend was $0.33 per share; the board declared another $0.33 dividend payable August 5, 2021.
Material changes and operating developments
- First-half net interest income increased 13.3%, with higher average earning-asset balances and PPP fee income contributing; interest expense fell as deposit rates declined. Average earning assets increased $209.0 million year over year.
- Noninterest income increased 4.6% in the first half, primarily from service fees. Loan-sale gains were essentially flat year over year, while residential loan-sale volume declined as management retained more loans to use excess liquidity and earn interest.
- First-half noninterest expense increased 10.9%. Notable contributors included salaries, software and equipment costs, professional fees, and FDIC assessments. Q2 occupancy expense included a $108,000 loss on disposition of a branch location.
- Available-for-sale securities rose to $158.1 million from $105.8 million at year-end. Net unrealized gains declined, and accumulated other comprehensive income fell by $1.6 million in the first half. Management attributed unrealized losses to market conditions, not credit quality, and reported no securities impairment.
- Gross loans declined from year-end, largely due to a temporary municipal fiscal-year-end paydown; the company reported $50.7 million of new municipal loans in July. Residential real estate and construction balances increased, while municipal loans fell to $32.5 million from $98.5 million.
Outlook, risks and contingencies
- The filing provides no specific earnings or financial guidance. Management expected the low-rate environment to continue pressuring asset yields and indicated deposit costs could decline further as higher-rate time deposits mature.
- Management said regional economic conditions were improving but warned that renewed COVID-19 impacts or variants could weaken borrowers, increase credit-loss provisions, affect asset quality, or disrupt funding. It reported no COVID-related charge-offs to date.
- Nonperforming assets were $5.9 million, or 0.56% of assets, versus $3.0 million and 0.27% at year-end. Nonaccrual loans rose to $5.8 million, primarily due to a commercial real estate hospitality relationship. The allowance for loan losses was $8.5 million; management considered it appropriate but noted actual losses or regulatory review could require additional provisions.
- The company had executed COVID-related loan modifications totaling $159.1 million; $2.0 million remained under modified terms at quarter-end. It had originated $102.1 million of PPP loans since the program began, with $44.8 million forgiven by the SBA; $57.3 million remained outstanding at June 30. Management expected significant forgiveness and reported $1.7 million of PPP origination fees remaining for future recognition.
- Liquidity sources included $100.2 million of additional FHLB borrowing capacity, a $15.0 million correspondent-bank line, and other contingent funding options. Management considered liquidity sufficient, while noting that deposit withdrawals, higher funding costs, or prolonged economic weakness could create pressure.
- Off-balance-sheet commitments totaled $285.2 million, including $136.2 million of loan-origination commitments and $144.1 million of unused credit lines. Management said many commitments may expire undrawn and do not necessarily represent future cash requirements.
- Management reported no material adverse expectation from ordinary-course legal proceedings, no material change in previously disclosed risk factors, and effective disclosure controls. The company had not adopted CECL and did not intend to early adopt it; implementation was in progress.
Important facts for investors to verify
- Whether the hospitality-related commercial real estate exposure or remaining modified loans lead to further deterioration in nonaccrual loans, charge-offs, or reserve needs.
- Whether municipal loans and deposits rebounded as expected after the June 30 seasonal paydown, and how deposit growth and liquidity evolve as pandemic-related balances shift.
- How PPP forgiveness and the remaining deferred fee income affect future loan balances and earnings.
- Whether lower asset yields, deposit pricing, and securities valuation changes continue to pressure net interest margin and accumulated other comprehensive income.
- Whether expense growth and the $0.33 quarterly dividend remain supported by earnings, capital, and subsidiary-bank dividend capacity.