Union Bankshares, Inc. — Q1 2016 Form 10-Q
Business context and reporting period. The filing covers the unaudited three months ended March 31, 2016, compared with Q1 2015 for operating results and December 31, 2015 for balance-sheet changes. Union Bankshares is a bank holding company whose sole subsidiary is Union Bank. Dollar amounts below are in millions unless otherwise noted.
Key financial results
| Metric | Q1 2016 / March 31, 2016 | Comparison |
|---|---|---|
| Net interest income | $5.935 | Up 6.9% from $5.552 in Q1 2015 |
| Net interest margin, tax-equivalent | 4.14% | Up 14 basis points from 4.00% |
| Noninterest income | $2.186 | Down 6.4% from $2.335 |
| Noninterest expense | $5.821 | Up 8.0% from $5.390 |
| Provision for loan losses | $0.075 | Down from $0.100 |
| Net income | $1.759 | Down 6.6% from $1.884 |
| Diluted/basic earnings per share as reported | $0.39 | Down from $0.42 |
| Return on average assets / equity | 1.11% / 12.90% | Down from 1.22% / 14.44% |
| Efficiency ratio | 70.01% | Up from 66.59% |
| Cash and cash equivalents | $14.017 | Down from $17.961 at year-end |
| Total assets | $640.819 | Up 1.9% from $628.879 at year-end |
| Loans, including loans held for sale | $519.302 | Up $13.2 million from year-end |
| Deposits | $559.004 | Down $1.4 million from year-end |
| Borrowed funds | $21.883 | Up $12.3 million from year-end |
| Stockholders’ equity | $54.675 | Up from $53.568 at year-end |
| Allowance for loan losses | $5.125 | 1.00% of loans not held for sale |
Cash flow, liquidity, and capital
- Operating cash flow was $1.325 million, versus $3.876 million in Q1 2015. Investing activities used $15.004 million, chiefly reflecting $12.227 million of net loan growth and securities purchases. Financing activities provided $9.735 million, including $12.395 million of net borrowing inflows, partly offset by dividends.
- Loans grew mainly in commercial real estate, commercial, and municipal categories. Real estate-secured loans were 86.4% of total loans. The loan-to-deposit ratio was 92.90%, compared with 91.67% a year earlier.
- Deposits declined slightly as a $5.0 million reduction in time deposits outweighed increases in noninterest-bearing and other interest-bearing deposits; management attributed time-deposit movement primarily to seasonal municipal balances.
- Borrowings increased to fund loan demand and municipal securities purchases. The company reported $6.8 million of unused FHLB lines above outstanding term advances; additional availability was estimated at about $30.4 million subject to required stock purchase and collateral evaluation. It also had $12.0 million of correspondent-bank federal funds lines.
- Management said liquidity was sufficient for reasonable borrower, depositor, and creditor needs. The company and bank met applicable capital requirements. The bank’s total risk-based capital ratio was 13.09%; the company’s was 13.15%.
- Quarterly dividends were $0.27 per share. On April 20, 2016, the board declared a $0.28 dividend, a 3.7% increase, payable May 10 to holders of record April 30.
Material changes and management commentary
- Net interest income improved as average earning-asset yields rose 10 basis points and average funding costs declined 5 basis points. Management cited variable-rate commercial real estate loans, investment in higher-yielding municipal securities, and lower time-deposit costs.
- Lower mortgage-sale gains were the main drag on noninterest income: gains declined 31.4% to $0.500 million as residential mortgage sales fell to $22.9 million from $31.3 million in Q1 2015.
- Expense growth reflected higher salaries and benefits, including health costs and 401(k) profit-share accruals, as well as higher equipment depreciation following technology upgrades. The resulting expense increase more than offset stronger net interest income.
- Credit indicators improved versus year-end: nonperforming loans were $3.084 million, or 0.59% of total loans, versus $3.357 million and 0.66%; nonperforming assets were 0.48% of assets. Net charge-offs were $0.151 million, compared with $0.021 million in Q1 2015. The allowance covered 166.18% of nonperforming loans.
- Management noted that a poor-snow winter put some strain on local tourism borrowers, while Vermont and New Hampshire unemployment rates had improved year over year. It described itself as cautiously optimistic about loan collectability and warned that future losses could exceed current reserves.
- No material changes to risk factors were reported. Routine legal proceedings were not expected to have a material adverse effect. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Outlook, risks, and unusual items
- The filing provides no specific earnings or revenue guidance. Management’s interest-rate analysis, based on December 31, 2015 modeling, said flat rates could pressure net interest income and its narrative said rising rates could benefit results as asset yields reset faster than funding costs. However, the table reports projected 12-month net-interest-income changes of (14%) for a 200-basis-point rise and (21%) for a 300-basis-point rise, against stated limits of 5.6% and 8.5%. The filing cautions that the model is not a forecast and depends on assumptions.
- Principal stated risks include local and broader economic conditions, competition, interest-rate and margin changes, credit quality and reserve estimates, regulatory and tax changes, technology spending, customer behavior, and cybersecurity threats. Management specifically identified tourism-related borrower exposure and possible deterioration in collateral values or credit quality.
- Unrealized gains on available-for-sale securities improved, and accumulated other comprehensive loss narrowed to $1.790 million from $2.302 million. Management did not identify any investment-security impairment as other-than-temporary.
- The company contributed $0.750 million to its frozen defined-benefit pension plan during the quarter. It reported no material subsequent event other than the increased quarterly dividend.
Important facts for investors to verify
- Reconcile the interest-rate sensitivity table’s negative modeled results for rising rates with management’s accompanying statement that rising rates produce positive results; review the underlying assumptions and risk limits.
- Monitor whether loan growth—particularly commercial real estate and commercial lending—continues without weakening asset quality, and whether the increase in substandard performing loans from $2.4 million at year-end to $2.8 million persists.
- Assess the sustainability of earnings given higher operating expenses and lower mortgage-sale volumes and gains, despite improved net interest margin.
- Track funding mix, seasonal municipal deposits, and increased borrowing; confirm that liquidity sources remain available on acceptable terms.
- Review future allowance needs and tourism-related borrower performance, as management notes that actual losses may exceed current estimates.