10-Q: Union Bankshares Inc. Reports Second Quarter 2024 Results Amidst Yield Curve Challenges

Union Bankshares Inc. experienced a decrease in net income for the second quarter of 2024 compared to the same period last year, primarily due to the impact of an inverted yield curve and increased expenses.

Summary

• Union Bankshares Inc. reported a net income of $2.0 million for the second quarter of 2024, a decrease of 25.2% compared to $2.7 million in the second quarter of 2023.
• The decrease in net income is attributed to a $134 thousand decrease in net interest income, a $718 thousand increase in noninterest expenses, and a $484 thousand increase in credit loss expense.
• Net interest margin decreased to 2.74% for the six months ended June 30, 2024, compared to 3.05% for the same period in 2023.
• Total assets decreased to $1.40 billion at June 30, 2024, from $1.47 billion at December 31, 2023.
• Total deposits decreased to $1.05 billion at June 30, 2024, from $1.31 billion at December 31, 2023.
• The company's loan portfolio decreased to $1.01 billion at June 30, 2024, from $1.03 billion at December 31, 2023.
• The company's book value per share decreased to $14.16 at June 30, 2024, from $14.56 at December 31, 2023.
• The company's total capital decreased to $64.0 million at June 30, 2024 from $65.8 million at December 31, 2023.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative due to the decrease in net income, net interest margin, and overall asset size. While the company maintains strong asset quality and capital ratios, the challenges posed by the yield curve and increased expenses are concerning.

Positives

• The company's financial position remains strong, supported by a diverse deposit base, a strong liquidity position, excellent asset quality, and regulatory capital in excess of all required levels.
• The company continues to focus on gathering deposits, optimization of the net interest margin and maintaining strong asset quality.
• Residential mortgage loan origination activity was strong during the first half of 2024.
• The company sold $41.0 million of qualified residential real estate loans to the secondary market during the first six months of 2024 compared to sales of $29.6 million during the first six months of 2023.

Negatives

• The company experienced earnings pressure due to the prolonged and steep yield curve inversion.
• Deposit and funding costs have risen at a faster pace than assets have repriced, resulting in compression of the net interest margin and spread.
• Net interest income decreased by $1.1 million for the six months ended June 30, 2024, compared to the same period in 2023.
• Noninterest expenses increased by $1.2 million for the six months ended June 30, 2024, compared to the same period in 2023.
• Credit loss expense increased by $180 thousand for the six months ended June 30, 2024, compared to the same period in 2023.
• The company's total capital decreased to $64.0 million at June 30, 2024 from $65.8 million at December 31, 2023.

Risks

• The banking industry continues to be faced with an inverted yield curve, unrealized securities losses, and higher funding costs.
• Changes in interest rates, competitive pressures, and general economic conditions could impact future performance.
• The company is exposed to credit risks related to the value of collateral and the ability of borrowers to repay loans.
• The State of Vermont suffered a second historical flood from July 10-11, 2024 on the anniversary of the flood that occurred in 2023, followed by another on July 30, 2024 which has impacted many businesses, individuals, and municipalities primarily in the Northeast Kingdom of Vermont.
• Deterioration in credit quality and/or imbalances in liquidity that may result from changes in financial market conditions might adversely affect the fair values of the Companys investment portfolio and the amount of gains or losses ultimately realized on the sale of such securities and may also increase the potential that credit losses may be identified in future periods, resulting in credit loss expense recorded in earnings.

Future Outlook

The company continues to focus on gathering deposits, optimization of the net interest margin and maintaining strong asset quality. Management believes the Company has sufficient liquidity to meet all reasonable borrower, depositor, and creditor needs in the present economic environment.

Management Comments

• Management is not aware of the occurrence of any events after June 30, 2024 which would materially affect the information presented.
• The Company continues to focus on gathering deposits, optimization of the net interest margin and maintaining strong asset quality.
• Management believes the Company has sufficient liquidity to meet all reasonable borrower, depositor, and creditor needs in the present economic environment.

Industry Context

The company, like other financial institutions, has experienced earnings pressure due to the prolonged and steep yield curve inversion. The sharp increases in short-term rates during 2022 and 2023 have had a significant impact on the Company's funding costs due to higher rates paid on deposit accounts and increased utilization of wholesale funding at higher costs.

Comparison to Industry Standards

• The decrease in net interest margin is a common challenge for banks in the current interest rate environment, with many institutions facing similar pressures on profitability.
• The increase in borrowed funds is a common strategy for banks to manage liquidity and fund loan growth, but it also increases interest expense.
• The decrease in deposits is a trend seen across the industry as customers seek higher yields elsewhere, and banks are competing for deposits.
• The company's asset quality metrics remain strong, which is a positive sign compared to some peers that may be experiencing higher levels of nonperforming assets.
• The company's capital ratios remain above regulatory requirements, which is consistent with industry standards for well-capitalized institutions.

Legal Proceedings

• In the normal course of business, the Company is involved in various legal and other proceedings.
• In the opinion of management, any liability resulting from such proceedings is not expected to have a material adverse effect on the Company's consolidated financial condition or results of operations.

Stakeholder Impact

• Shareholders may be concerned about the decrease in net income and book value per share.
• Employees may be affected by any potential cost-cutting measures.
• Customers may be impacted by changes in deposit rates and loan terms.
• Creditors may be concerned about the company's increased reliance on borrowed funds.

Next Steps

• The company will continue to focus on gathering deposits, optimizing the net interest margin, and maintaining strong asset quality.
• The company will continue to monitor the impact of the inverted yield curve and adjust its strategies as needed.
• The company will continue to evaluate growth opportunities both through internal growth or potential acquisitions.

Key Dates

Keywords

net interest margin, credit loss expense, loan portfolio, deposits, yield curve, interest rates, financial results, bank, capital, liquidity