10-Q: Union Bankshares Reports Strong Q3 Earnings Growth

Union Bankshares, Inc. announced a significant increase in net income and earnings per share for the third quarter and first nine months of 2025, driven by improved net interest income and noninterest income, despite a notable rise in nonperforming assets.

Summary

• Net income for the third quarter of 2025 increased by 159.5% to $3.4 million, up from $1.3 million in the same period of 2024.
• Basic earnings per common share rose to $0.75 for Q3 2025, compared to $0.29 for Q3 2024.
• For the nine months ended September 30, 2025, net income grew 44.7% to $8.3 million, up from $5.8 million in the prior year.
• Net interest income increased by $1.7 million (18.3%) for the three months and $4.0 million (14.1%) for the nine months ended September 30, 2025, compared to the respective periods in 2024.
• The net interest margin improved to 3.03% for Q3 2025 (up 32 bps) and 2.93% for the nine months ended September 30, 2025 (up 20 bps).
• Total noninterest income surged by 108.7% to $3.35 million for Q3 2025, largely due to the non-recurrence of a $1.3 million loss on investment securities sales in Q3 2024.
• Total assets grew by 3.0% to $1.57 billion at September 30, 2025, from $1.53 billion at December 31, 2024.
• Total loans (including loans held for sale) increased by 1.5% to $1.18 billion at September 30, 2025.
• Total deposits increased by 1.8% to $1.19 billion, with time deposits increasing by 36.5% to $311.1 million.
• Stockholders' equity increased by 16.8% to $77.7 million at September 30, 2025, reflecting net income and an improvement in accumulated other comprehensive loss.
• Nonaccrual loans significantly increased to $12.99 million at September 30, 2025, from $1.65 million at December 31, 2024, primarily due to a commercial construction loan.
• Total nonperforming assets rose to $13.46 million (0.86% of total assets) at September 30, 2025, compared to $1.89 million (0.12% of total assets) at December 31, 2024.
• The Allowance for Credit Losses (ACL) on loans increased to $8.4 million, but its coverage of nonperforming loans decreased significantly from 405.71% to 62.40%.
• The company initiated an 'at-the-market' equity offering on May 20, 2025, and has issued 38,834 shares for net proceeds of $801 thousand year-to-date, with approximately $38.9 million remaining available.

Sentiment

Score: 7

Explanation: The company demonstrated strong profitability growth with significant increases in net income, EPS, and improved net interest margin and efficiency ratio. This indicates effective operational management and revenue generation. However, the substantial deterioration in asset quality metrics, particularly the sharp rise in nonaccrual loans and nonperforming assets, and the reduced ACL coverage, introduce a notable level of credit risk. The capital raise is a positive for strengthening the balance sheet but also suggests a proactive measure in light of potential future uncertainties. The overall sentiment is positive due to strong financial performance, but tempered by asset quality concerns.

Positives

• Net income for the three months ended September 30, 2025, increased by 159.5% to $3.4 million, and by 44.7% to $8.3 million for the nine months ended September 30, 2025.
• Basic earnings per common share rose to $0.75 for Q3 2025 and $1.83 for the nine months ended September 30, 2025.
• Net interest income increased by $1.7 million for Q3 2025 and $4.0 million for the nine months ended September 30, 2025, driven by higher interest on earning assets and increased loan volume.
• Net interest margin improved by 32 bps to 3.03% for Q3 2025 and by 20 bps to 2.93% for the nine months ended September 30, 2025.
• The efficiency ratio significantly improved to 70.15% for Q3 2025 from 83.42% in Q3 2024, and to 74.43% for the nine months ended September 30, 2025, from 80.04% in the prior year.
• Total assets increased by 3.0% to $1.57 billion at September 30, 2025.
• Stockholders' equity increased by 16.8% to $77.7 million, partly due to an improvement of $6.5 million in accumulated other comprehensive loss.
• Wealth management income increased by 12.1% for Q3 2025 and 9.5% for the nine months ended September 30, 2025, reflecting growth in managed fiduciary accounts and asset values.
• Net gains on sales of loans held for sale increased by 29.6% for Q3 2025 and 34.3% for the nine months ended September 30, 2025, due to higher sales volume and premiums.
• The company completed a balance sheet repositioning in Q3 2024, selling lower-yielding securities to purchase higher-yielding ones, which contributed to improved interest income in 2025.
• The company and its subsidiary, Union Bank, met all regulatory capital adequacy requirements and Union Bank exceeded the requirements for a 'well capitalized' bank.

Negatives

• Nonaccrual loans increased significantly to $12.99 million at September 30, 2025, from $1.65 million at December 31, 2024, primarily due to a commercial construction loan.
• Total nonperforming assets rose sharply to $13.46 million (0.86% of total assets) at September 30, 2025, from $1.89 million (0.12% of total assets) at December 31, 2024.
• The ratio of ACL on loans to nonperforming loans decreased substantially from 405.71% at December 31, 2024, to 62.40% at September 30, 2025, indicating reduced coverage.
• Delinquent loans (30-89 days past due) increased to $80 thousand at September 30, 2025, from $1.96 million at December 31, 2024, while 90 days and over past due increased to $1.11 million from $241 thousand.
• Net charge-offs for the nine months ended September 30, 2025, were $31 thousand, compared to net recoveries of $16 thousand in the prior year period.
• Interest bearing deposits decreased by $63.6 million (8.9%) at September 30, 2025, compared to December 31, 2024, although time deposits increased.
• Total noninterest expenses increased by 9.9% for Q3 2025 and 7.9% for the nine months ended September 30, 2025, driven by higher salaries, employee benefits, occupancy, equipment, professional fees, FDIC assessment, and electronic banking expenses.
• Credit loss expense for the nine months ended September 30, 2025, increased to $769 thousand from $583 thousand in the prior year period.

Risks

• Changes in interest rates can significantly impact the company's financial performance.
• Competitive pressures from other financial institutions may affect profitability and market share.
• General economic conditions, both nationally and in local markets, can influence loan demand, credit quality, and deposit levels.
• Downgrades of U.S. government securities could impact the value of the investment portfolio.
• Eroding public confidence in the banking system poses a risk to deposit stability and overall operations.
• Changes in consumer behavior due to political, business, and economic conditions, including inflation, tariffs, and government shutdowns, could affect customer activity.
• Changes in the value of securities and other assets in the investment portfolio could lead to losses.
• Increases in loan and lease default and charge-off rates would negatively impact asset quality and profitability.
• The adequacy of the Allowance for Credit Losses (ACL) is crucial; actual losses could exceed current estimates.
• Decreases in deposit levels may necessitate increases in more expensive borrowing to fund operations.
• Operational risks, including cybersecurity incidents, fraud, natural disasters, and future pandemics, could disrupt business.
• Changes in regulation, war, terrorism, and civil unrest can create an uncertain operating environment.
• The inverted yield curve, unrealized securities losses, and higher funding costs continue to challenge the banking industry.
• Banking regulators may require adjustments to the ACL based on their examinations, potentially increasing credit loss expense.
• Deterioration in credit quality or imbalances in liquidity could adversely affect the fair values of the investment portfolio and increase potential for future credit losses.

Future Outlook

Management believes the company is on a positive trajectory, with expectations of continued improvement in net interest income due to higher interest earned on average earning assets and increased loan volume. However, the current macroeconomic and geopolitical environment, including an inverted yield curve, unrealized securities losses, and higher funding costs, could negatively impact financial condition and results. The Federal Reserve's 25 bps rate reduction in September 2025 had minimal impact on Q3 results, suggesting potential future challenges from a changing rate environment. The company remains confident in its business resilience and strength.

Management Comments

• The financial trends for the three and nine months ended September 30, 2025, indicate a positive trajectory for the Company.
• Net interest income saw an increase due to higher interest earned on average earning assets and an increase in average loan volume.
• The net interest spread and net interest margin both improved, reflecting the overall positive impact of these changes.
• Noninterest income experienced growth in wealth management income and net gains on sales of loans held for sale, partially offset by decreases in service fees.
• Noninterest expenses increased, particularly in salaries, wages, and employee benefits, due to annual salary adjustments, higher medical and dental plan premiums, and an increase in the number of full time employees.
• Overall, the Company's financial performance showed robust growth and improved profitability.
• In September 2025, the Federal Reserve reduced short-term interest rates by 25 bps; however, there was minimal impact on third quarter financial results from this rate reduction.
• 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.

Industry Context

The banking industry continues to face challenges from an inverted yield curve, unrealized securities losses, and higher funding costs. Union Bankshares' performance reflects these trends, with rising interest expenses on deposits and borrowed funds. However, the company's ability to increase its net interest margin and overall profitability, partly through strategic balance sheet repositioning and loan growth, suggests effective management in a challenging rate environment. The increase in nonperforming assets, particularly a commercial construction loan, highlights ongoing credit quality risks that are prevalent in the broader economic landscape, especially in real estate sectors. The Federal Reserve's recent rate cut, while having minimal immediate impact, signals a potential shift in monetary policy that could influence future interest income and expense dynamics across the industry.

Comparison to Industry Standards

• NA

Corporate Governance

Legal Proceedings

• The company is involved in various legal and other proceedings in the normal course of business. Management believes any resulting liability is not expected to have a material adverse effect on the consolidated financial condition or results of operations.

Stakeholder Impact

• Shareholders: Experienced significant increases in net income and EPS, improved return on equity, and an increase in book value per share. However, the 'at-the-market' offering could lead to some dilution, and the rise in nonperforming assets introduces increased risk.
• Employees: Benefited from annual salary adjustments, higher medical and dental plan premiums, and an increase in the number of full-time equivalent employees, leading to higher salaries and wages and employee benefits expenses.
• Customers: Time deposit customers benefited from higher rates, leading to a significant increase in time deposits. Loan customers continue to engage in residential mortgage and construction loan activity.
• Creditors: Borrowed funds increased, and subordinated notes continue to qualify as Tier 2 capital, supporting the company's capital structure. The increase in nonperforming assets could be a concern for credit risk assessment.
• Regulators: The company and its subsidiary met all capital adequacy requirements, with Union Bank exceeding 'well capitalized' thresholds, indicating compliance with regulatory standards.

Next Steps

• The company will continue to evaluate growth opportunities through internal growth or potential acquisitions.
• Management will continue to monitor the macroeconomic and geopolitical environment for potential impacts on financial condition and results of operations.
• The interest rate on subordinated notes will reset quarterly to SOFR + 263 basis points from September 1, 2026, which is also the earliest redemption date for these notes.
• The company will adopt ASU No. 2023-09, 'Income Taxes (Topic 740), Improvements to Income Tax Disclosures,' for 2025 and subsequent annual periods.
• The company will adopt ASU No. 2024-03, 'Income Statement Reporting Comprehensive Income Expense Disaggregation Disclosures,' for annual reporting periods beginning after December 15, 2026.
• The Board-reauthorized limited stock repurchase plan for 2025 and 2026 will expire on December 31, 2026, unless reauthorized.

Key Dates

Recommendation

Union Bankshares delivered strong profitability growth in Q3 and year-to-date 2025, with significant increases in net income and EPS, alongside improved net interest margin and efficiency. This indicates effective operational management and a positive trajectory for core earnings. However, the substantial deterioration in asset quality, marked by a sharp rise in nonaccrual loans and nonperforming assets, and a significant drop in ACL coverage, introduces considerable credit risk. While the 'at-the-market' equity offering strengthens capital, it also signals a proactive response to potential future uncertainties. Given the mixed signals of strong earnings growth offset by deteriorating asset quality, a 'hold' recommendation is appropriate. Investors should monitor asset quality trends closely in upcoming quarters to assess if the increase in nonperforming assets is an isolated event or indicative of broader credit challenges.

Keywords

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