10-Q: Union Bankshares Reports Strong Profit Growth Amid Asset Quality Concerns

Union Bankshares, Inc. reported increased net income and improved net interest margin for Q2 2025, despite a significant rise in nonperforming assets and a decrease in total deposits.

Summary

• Net income for the three months ended June 30, 2025, increased by $376 thousand, or 18.6%, to $2.4 million compared to $2.0 million for the same period in 2024.
• For the six months ended June 30, 2025, net income rose by $460 thousand, or 10.4%, to $4.9 million from $4.4 million in the prior year period.
• Basic earnings per common share increased to $0.53 for the three months and $1.08 for the six months ended June 30, 2025, up from $0.45 and $0.98, respectively, in 2024.
• Net interest income increased by $962 thousand for the three months and $2.2 million for the six months ended June 30, 2025, driven by higher interest earned on average earning assets and increased average loan volume.
• Total assets decreased by $48.0 million, or 3.1%, to $1.48 billion at June 30, 2025, from $1.53 billion at December 31, 2024, primarily due to seasonal decreases in the municipal loan portfolio and corresponding deposits.
• Total deposits decreased by $65.5 million, or 5.6%, to $1.10 billion at June 30, 2025, from $1.17 billion at December 31, 2024.
• Nonperforming assets to total assets significantly increased to 1.03% at June 30, 2025, from 0.12% at December 31, 2024, primarily due to a commercial construction loan placed in nonaccrual status.
• The Allowance for Credit Losses (ACL) on loans increased to $8.3 million at June 30, 2025, from $7.7 million at December 31, 2024.
• The Company entered into an Equity Distribution Agreement on May 20, 2025, to sell up to $40.0 million of common stock via 'at-the-market offerings', having issued 8,437 shares for $52 thousand net proceeds by June 30, 2025.

Sentiment

Score: 6

Explanation: The company shows strong profitability growth and improved net interest margin, indicating effective core banking operations. However, a significant increase in nonperforming assets due to a single commercial construction loan and a decline in total deposits are notable concerns that temper the overall positive financial performance.

Positives

• Net income increased by 18.6% for the three months and 10.4% for the six months ended June 30, 2025, demonstrating robust profitability growth.
• Basic and diluted earnings per share showed strong increases for both the three and six-month periods.
• Net interest income grew by $962 thousand (10.1%) for the quarter and $2.2 million (12.0%) for the six months, driven by higher loan volumes and improved yields.
• The net interest margin improved to 2.89% for the quarter and 2.88% for the six months ended June 30, 2025, up from 2.81% and 2.74% respectively in 2024.
• Return on average assets and return on average equity both improved for the three-month period.
• Wealth management income increased by 8.1% for both the three and six-month periods due to growth in managed fiduciary accounts and asset values.
• Net gains on sales of loans held for sale increased significantly by 40.8% for the quarter and 38.4% for the six months, reflecting higher sales volume and premiums.
• Accumulated other comprehensive loss decreased by $2.8 million, indicating an increase in the fair market value of available-for-sale investment securities.
• The Company and its subsidiary, Union Bank, met all regulatory capital adequacy requirements, with Union Bank exceeding the requirements for a 'well capitalized' bank.

Negatives

• Total assets decreased by 3.1% from December 31, 2024, to June 30, 2025.
• Total deposits decreased by 5.6% from December 31, 2024, to June 30, 2025, with noninterest bearing and interest bearing deposits declining significantly.
• Nonperforming assets to total assets increased substantially to 1.03% at June 30, 2025, from 0.12% at December 31, 2024, primarily due to one commercial construction loan.
• Interest expense increased by 17.1% for the three months and 19.1% for the six months ended June 30, 2025, driven by higher rates on customer deposits and increased wholesale funding utilization.
• Noninterest income saw a slight decrease for both the three and six-month periods, primarily due to lower service fees and a lack of death benefit proceeds from company-owned life insurance received in the prior year.
• Noninterest expenses increased by 7.2% for the three months and 6.9% for the six months ended June 30, 2025, mainly due to higher salaries, employee benefits, equipment, and FDIC insurance assessments.
• Credit loss expense for the six months ended June 30, 2025, increased significantly to $456 thousand from $158 thousand in the prior year period.
• The loan to deposit ratio increased to 100.76% at June 30, 2025, from 96.10% at June 30, 2024, indicating a higher reliance on loans relative to deposits.

Risks

• Changes in interest rates can significantly impact net interest income and the value of investment portfolios.
• Competitive pressures from other financial institutions may affect loan and deposit pricing, impacting profitability.
• General economic conditions, both national and local, including inflation, tariffs, and trade policies, can influence loan demand, credit quality, and deposit levels.
• Downgrades of U.S. government securities could impact the value of the Company's investment portfolio.
• Eroding public confidence in the banking system could lead to deposit outflows.
• Changes in consumer behavior due to economic conditions may affect loan and deposit activity.
• Increases in loan and lease default and charge-off rates could negatively impact asset quality and require higher credit loss provisions.
• Decreases in deposit levels may necessitate increased borrowing, leading to higher funding costs.
• Operational risks, including cybersecurity incidents, fraud, natural disasters, and future pandemics, could disrupt operations and financial performance.
• Changes in regulation could impose additional compliance costs or restrict business activities.
• The banking industry faces challenges from an inverted yield curve, unrealized securities losses, and higher funding costs.
• Goodwill and intangibles recorded in the financial statements are subject to impairment risk.
• Substandard loans, totaling $557 thousand at June 30, 2025, represent a higher risk of becoming nonperforming in the future.

Future Outlook

Management anticipates continued challenges from the current macroeconomic and geopolitical environment, including an inverted yield curve, unrealized securities losses, and higher funding costs. Despite these factors, the Company remains confident in the resilience and strength of its business and financial model, expecting to meet all reasonable borrower, depositor, and creditor needs.

Management Comments

• The financial trends for the three and six months ended June 30, 2025 indicate a positive trajectory for the Company.
• Net interest income, the largest component of net income, saw an increase due to higher interest earned on average earning assets and an increase in average loan volume.
• Interest expense also rose, primarily driven by higher rates on customer deposits and increased utilization of wholesale funding.
• The net interest spread and net interest margin both improved, reflecting the overall positive impact of these changes.
• Overall, the Company's financial performance showed robust growth and improved profitability.
• While we remain confident in the resilience and strength of our business and financial model, the current macroeconomic and geopolitical environment could negatively impact our financial condition and results of operations.
• Management believes the Company has sufficient liquidity to meet all reasonable borrower, depositor, and creditor needs in the present economic environment.
• Management believes, in its best estimate, that the ACL on loans at June 30, 2025 is appropriate to cover expected credit losses over the expected life of the Company's loan portfolio as of such date.

Industry Context

The banking industry continues to face an inverted yield curve, unrealized securities losses, and higher funding costs, which Union Bankshares is navigating through strategies like balance sheet repositioning (selling lower-yielding securities for higher-yielding ones and loan funding). The Company's increased reliance on wholesale funding and higher deposit rates reflects the broader competitive landscape for deposits in the current interest rate environment. Despite industry headwinds, the Company observed strong residential mortgage loan origination activity in its markets, indicating local resilience in housing despite low inventory and higher rates.

Comparison to Industry Standards

• The Company's capital ratios (Total capital to risk weighted assets at 12.71%, Tier I capital to risk weighted assets at 10.14%, Common Equity Tier 1 to risk weighted assets at 10.14%, and Tier I capital to average assets at 6.34%) exceed the minimum regulatory requirements (8.0%, 6.0%, 4.5%, and 4.0% respectively) for capital adequacy.
• Union Bank, the Company's sole subsidiary, also exceeded the requirements for a 'well capitalized' bank under the FDIC's Prompt Corrective Action framework, with a Total capital to risk weighted assets ratio of 12.62% (vs. 10.00% required), Tier I capital to risk weighted assets of 11.69% (vs. 8.00% required), Common Equity Tier 1 to risk weighted assets of 11.69% (vs. 6.50% required), and Tier I capital to average assets of 7.30% (vs. 5.00% required).

Corporate Governance

Legal Proceedings

• The Company is involved in various legal and other proceedings in the normal course of business, but management does not expect any resulting liability to have a material adverse effect on the consolidated financial condition or results of operations.

Stakeholder Impact

• Shareholders: Increased net income and EPS are positive, but the significant rise in nonperforming assets and a decrease in deposits could be a concern. The 'at-the-market' equity offering could dilute existing shareholders but provides capital for growth. Dividends of $0.36 per share were maintained.
• Customers: The Company's ability to offer full FDIC insurance coverage through CDARS and ICS programs benefits depositors. Loan customers may experience extended terms or payment deferrals in cases of financial difficulty, as seen with a commercial construction loan.
• Employees: Increased salaries, wages, and employee benefits reflect annual adjustments and higher plan premiums, indicating continued investment in human capital. Stock-based compensation plans are in place to incentivize employees.
• Creditors: Increased borrowed funds and the issuance of subordinated notes indicate reliance on external financing. The Company's strong capital ratios provide assurance regarding its ability to meet obligations.
• Regulatory Authorities: The Company and its subsidiary continue to meet and exceed all regulatory capital adequacy requirements, demonstrating financial stability and compliance.

Next Steps

• New municipal loans totaling $66.4 million were recorded in the first few days of July 2025, following the seasonal reduction at June 30, 2025.
• The interest rate on the subordinated notes due 2031 will reset quarterly to SOFR + 263 basis points starting September 1, 2026.
• The Company may redeem the subordinated notes, in whole or in part, beginning September 1, 2026, and on any scheduled interest payment date thereafter.
• RSUs granted to non-employee directors on May 21, 2025, will vest in May 2026, subject to continued board service.
• The Company's limited stock repurchase plan authorization for a calendar quarter (currently 2,500 shares) expires at the end of that quarter and is not carried forward; the overall authorization expires on December 31, 2026, unless reauthorized.
• The Company will be required to provide enhanced income tax disclosures for 2025 and subsequent annual periods, including interim periods, as per ASU No. 2023-09.
• The Company will be required to disclose disaggregated information about certain costs and expenses in both annual and interim filings for annual reporting periods beginning after December 15, 2026, as per ASU No. 2024-03.

Key Dates

Recommendation

While Union Bankshares, Inc. demonstrated strong profitability growth, improved net interest margin, and maintained robust capital ratios, the significant increase in nonperforming assets, primarily driven by a single commercial construction loan, introduces a notable credit quality concern. Additionally, the decline in total deposits and increased reliance on borrowed funds warrant close monitoring. The 'at-the-market' equity offering provides capital flexibility but could lead to dilution. Given these mixed signals, a 'hold' recommendation is appropriate, suggesting investors monitor asset quality trends and funding stability closely before making further investment decisions.

Keywords

Banking, Financial Services, Community Bank, SEC Filing, 10-Q, Earnings, Net Interest Income, Loan Portfolio, Deposits, Asset Quality, Nonperforming Assets, Capital Adequacy, Credit Losses, Investment Securities, Shareholders Equity, Vermont