Union Bankshares, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited consolidated results compared with Q1 2019. Balance-sheet comparisons are against December 31, 2019. The filing describes Union Bankshares and its sole subsidiary, Union Bank, as a community banking company operating in Vermont and New Hampshire. Amounts below are in millions unless otherwise noted.
Financial performance and position
- Earnings: Net income was $2.20 million, down 16.2% from $2.62 million; diluted/basic earnings per share as reported were $0.49 versus $0.59. Return on average assets declined to 1.03% from 1.32%, and return on average equity to 12.09% from 16.09%.
- Interest and margin: Interest and dividend income rose 4.3% to $8.96 million. Net interest income increased 1.9% to $7.51 million, but net interest margin declined to 3.88% from 4.07%; net interest spread fell to 3.70% from 3.90%. Interest expense increased 18.7% to $1.46 million.
- Credit provision: Provision for loan losses rose to $300,000 from $50,000, reflecting higher economic-risk factors tied to COVID-19. Allowance for loan losses was $6.39 million, or 0.94% of loans not held for sale, versus $6.12 million and 0.91% at year-end.
- Noninterest items and costs: Noninterest income increased 12.8% to $2.52 million, largely as gains on sales of loans held for sale rose to $812,000 from $374,000. Noninterest expense increased 9.9% to $7.17 million, including higher salaries, occupancy, and equipment costs. The efficiency ratio increased to 70.75% from 67.14%.
- Cash flow: Operating activities used $6.93 million, versus $1.05 million provided in Q1 2019; loan-held-for-sale originations exceeded related sale proceeds. Investing activities used $8.12 million, while financing activities provided $5.63 million. Cash and cash equivalents fell $9.42 million during the quarter to $41.71 million.
- Balance sheet and funding: Assets were $883.1 million, up 1.2% from year-end. Gross loans, including loans held for sale, were $693.0 million; deposits were $736.1 million, down 1.1%; borrowed funds were $62.2 million, up $15.0 million. Stockholders’ equity rose to $73.8 million. The loan-to-deposit ratio was 94.15%.
- Asset quality and capital: Nonperforming assets were $3.93 million, or 0.45% of assets, compared with $3.50 million and 0.40% at year-end. Total capital to risk-weighted assets was 13.20% at the company and 13.17% at the bank; the bank exceeded applicable “well capitalized” thresholds. Book value per share was $16.50.
- Dividends: The quarterly dividend was $0.32 per share, versus $0.31 in Q1 2019. A $0.32 dividend for Q2 was declared, payable May 7, 2020.
Material changes and management commentary
- Management attributed lower earnings to increased credit provisioning and operating expenses, an anticipated flat-rate environment, competition, and the initial effects of COVID-19. Loan growth and increased residential mortgage sales supported interest and fee income.
- Federal Reserve rate cuts in March lowered the target federal funds range to 0%–0.25%. Management expects the lower-rate environment to affect future interest income and results; the filing provides no quantified earnings or margin guidance.
- Commercial real estate represented 43.9% of gross portfolio loans; total real-estate-secured loans represented 81.6%. Management specifically noted monitoring regional tourism exposure and the broader effects of unemployment, business conditions, and property values.
- As of April 30, 2020, the bank had executed 335 COVID-related payment deferrals covering $160.5 million of outstanding loans. Deferrals could cover all or principal payments for up to 180 days. Management stated that qualifying short-term COVID modifications are not treated as troubled debt restructurings under the applicable guidance.
- The bank began participating in the SBA Paycheck Protection Program (PPP) on April 3. By April 30, 626 applications totaling more than $66.7 million had been approved. PPP loans carry 1% interest and a two-year maximum maturity, are stated to be 100% SBA-guaranteed, and may be forgiven if requirements are met. The bank estimated approximately $2.4 million of gross SBA processing fees on approvals through April 30, to be recognized over loan terms or upon forgiveness.
- Liquidity actions included increased FHLB borrowing during Q1, preparation of contingency funding plans, pledging $42.5 million of qualifying securities to the Federal Reserve discount window in April, and a $2.3 million PPPLF advance outstanding as of April 30. Management stated it believed liquidity was sufficient, while noting uncertainty in future cash flows.
- COVID-19 risks include borrower credit deterioration, collateral-value declines, fee and interest-income pressure, funding-cost or deposit volatility, operational and cyber risks, and possible goodwill or intangible impairment. Management could not quantify the pandemic’s duration or full financial impact. The filing reports no material operational or internal-control challenges identified to date.
- The filing gives no formal financial forecast. Management said the allowance was appropriate at quarter-end, but future provisions could rise. It also warned that deterioration in capital could constrain the parent company’s ability to maintain dividends. Ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Subsequent-quarter delinquency, nonaccrual, charge-off, and allowance trends, particularly in commercial real estate and tourism-sensitive borrowers.
- Performance and repayment or forgiveness of the $66.7 million-plus of approved PPP loans, including continued eligibility for the SBA guarantee and recognition of related fees.
- Whether the $160.5 million of payment deferrals resume payments as scheduled and whether further accommodations or credit losses emerge.
- Changes in net interest margin, funding costs, deposits, and use of borrowings as the low-rate environment and loan demand evolve.
- Capital and liquidity headroom, dividend capacity, and any material update to COVID-related risks or asset valuations.