Union Bankshares, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Union Bankshares is a Vermont bank holding company; Union Bank is its sole subsidiary. Financial statements are unaudited.
Financial results and position
Quarter: Net income was $2.227 million, up 4.1% from $2.139 million; diluted earnings per share were $0.50 versus $0.48. Net interest income was $6.585 million, up 6.7%; net interest margin was 4.26% versus 4.20%. Noninterest income declined 10.2% to $2.333 million, while noninterest expense rose 1.1% to $5.871 million. No loan-loss provision was recorded, compared with $75,000 in Q2 2016.
Six months: Net income was $4.157 million, up 6.6% from $3.898 million; EPS was $0.93 versus $0.87. Net interest income rose 6.5% to $12.887 million, and net interest margin was 4.20% versus 4.17%. Noninterest income decreased 4.5% to $4.566 million; noninterest expense increased 2.6% to $11.812 million. There was no loan-loss provision, versus $150,000 in the prior-year period.
| Key measure | June 30, 2017 | Comparison / comment |
|---|---|---|
| Total assets | $664.9 million | Down 3.8% from Dec. 31, 2016; up 4.5% year over year |
| Gross loans and loans held for sale | $541.6 million | Up 0.1% from year-end; up $32.4 million from June 2016 |
| Deposits | $564.6 million | Down $33.0 million, or 5.5%, from year-end |
| Borrowed funds | $36.4 million | Up $4.8 million from year-end, including $5.3 million in overnight federal funds purchased |
| Stockholders’ equity | $58.5 million | Up $2.2 million from year-end |
| Cash and cash equivalents | $14.4 million | Down from $39.3 million at year-end |
| Allowance for loan losses | $5.168 million | 0.96% of loans not held for sale; down from $5.247 million at year-end |
For the first six months, operating cash flow was $8.452 million, investing activities used $2.451 million, and financing activities used $30.841 million; cash and equivalents declined $24.840 million. Quarterly return on average assets was 1.31%, return on average equity 15.51%, and the efficiency ratio 64.36%. The six-month figures were 1.23%, 14.60%, and 66.12%, respectively. These ratios and net interest margins are presented on the filing’s stated basis; net interest margin is tax-equivalent.
Material changes and credit quality
- Growth in net interest income reflected higher average earning-asset volume, notably loans, and a modest increase in asset yields. Management cited a 24-basis-point increase in average loans for the quarter comparison; loan volume was the primary driver of higher loan interest income.
- Lower gains on loan sales contributed to reduced noninterest income: six-month gains were $1.105 million versus $1.275 million. Management said average sale premiums were lower in 2017. Q2 2016 also included $73,000 of life-insurance death-benefit income that did not recur.
- Total nonperforming assets were $3.085 million, down from $4.385 million at year-end. Nonperforming loans were 0.57% of total loans, versus 0.81% at year-end; allowance coverage of nonperforming loans rose to 167.52% from 119.66%.
- Impaired loans totaled $4.031 million, including $3.228 million of troubled-debt restructurings. Two residential loans totaling $436,000 were in foreclosure. Performing substandard loans increased to $2.9 million from $1.8 million at year-end.
- Management recorded no provision for loan losses in the first half, citing portfolio size and mix, nonperforming-loan levels, qualitative review, and economic conditions. It considers the allowance appropriate but cautions that actual losses may exceed estimates and regulators may require adjustments.
Outlook, risks and contingencies
- The filing gives no specific earnings or revenue guidance. Management described itself as cautiously optimistic about loan collectability and stated it believes liquidity is sufficient for reasonable borrower, depositor, and creditor needs.
- Interest-rate modeling showed projected 12-month net interest income changes of negative 14% under a 200-basis-point rate rise and negative 21% under a 300-basis-point rise, against stated limits of positive 1.9% and 2.5%, respectively. Management also said rising-rate scenarios may support improvement after near-term funding-cost increases stabilize. The filing emphasizes these simulations are not forecasts and depend on assumptions.
- Liquidity sources include up to $62.4 million of unused FHLB capacity, a $7.0 million correspondent federal-funds line, and access to the Federal Reserve discount window, subject to collateral and other conditions. At quarter-end, the bank had $2.0 million of retail brokered deposits and no purchased ICS or CDARS deposits.
- Off-balance-sheet credit commitments totaled $152.8 million, up from $112.5 million at year-end. Commitments to originate loans were $62.5 million, including $42.6 million for municipalities and school districts tied to their July fiscal-year start. Such commitments may expire unused and do not necessarily represent cash requirements.
- Key stated risks include economic weakness, competition, interest-rate and funding-cost changes, credit deterioration, regulatory and tax changes, technology investment, and cybersecurity threats. Management reported no material change in previously disclosed risk factors; ordinary-course litigation is not expected to have a material adverse effect.
- The company is evaluating new accounting standards, including CECL, effective for it in 2020; it has started implementation planning but does not quantify the eventual financial impact. The company declared a $0.29 per-share dividend payable August 9, 2017.
Important facts for investors to verify
- Whether deposit contraction and the increased use of borrowings persist, and how funding costs respond to rising rates.
- The assumptions and interpretation behind the interest-rate sensitivity results, particularly the modeled declines despite management’s discussion of longer-term improvement.
- Allowance adequacy and trends in performing substandard loans, impaired loans, foreclosures, and municipal/commercial real-estate concentrations.
- Whether loan-sale premiums and noninterest income recover, and whether expense growth continues to outpace revenue growth.
- The timing and funding of the substantial loan commitments, including seasonal municipal and school-district lines, and the ultimate effect of CECL adoption.