Union Bankshares, Inc. — Q2 2015 Form 10-Q
Business context and period. The filing covers the quarter and six months ended June 30, 2015. Union Bankshares is a Vermont bank holding company whose sole subsidiary is Union Bank. Financial statements are unaudited.
Key financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net interest income | $5.755 million | $5.655 million | $11.307 million | $11.190 million |
| Provision for loan losses | $150,000 | $75,000 | $250,000 | $150,000 |
| Noninterest income | $2.526 million | $2.126 million | $4.861 million | $4.079 million |
| Noninterest expense | $5.556 million | $5.286 million | $10.946 million | $10.465 million |
| Net income | $2.017 million | $1.919 million | $3.901 million | $3.683 million |
| Diluted/basic EPS as reported | $0.46 | $0.43 | $0.88 | $0.83 |
- Q2 net income rose 5.1%; first-half net income rose 5.9%. First-half dividends were $0.54 per share, versus $0.52 a year earlier.
- Q2 net interest margin declined to 4.09% from 4.22%; first-half margin was 4.04% versus 4.21%. The Q2 net interest spread fell to 4.00% from 4.13%. Management attributed pressure to lower asset yields, particularly on loans, amid a prolonged low-rate environment.
- Q2 efficiency ratio improved to 65.46% from 66.33%; first-half ratio improved to 66.01% from 67.17%. Return on average assets was 1.29% in Q2 and 1.26% for the first half; return on average equity was 15.27% and 14.84%, respectively.
- First-half operating cash flow was $8.698 million, compared with $1.548 million in 2014. Investing used $9.805 million and financing used $25.983 million; cash and cash equivalents fell $27.090 million to $14.654 million. The cash-flow movement includes deposit seasonality and funding activity.
Financial position, credit and liquidity
- At June 30, total assets were $600.981 million, down 3.7% from year-end 2014; stockholders’ equity was $52.756 million, up from $51.434 million. Equity-to-assets was 8.78%.
- Total loans, including loans held for sale, were $478.239 million; net loans and loans held for sale were $473.771 million. Commercial real estate loans increased $15.8 million from year-end, while municipal loans fell $16.9 million. Management attributed much of the municipal decline to the customary June fiscal-year-end funding cycle.
- Deposits declined 7.1% to $512.979 million, primarily due to municipal and school district balances used to repay seasonal credit lines. Time deposits declined $43.4 million. Borrowed funds increased 102.4% to $30.601 million, including short-term FHLB advances and federal funds purchased.
- Nonperforming assets were $3.145 million, or 0.52% of assets, down from $4.876 million and 0.78% at December 31, 2014. The allowance for loan losses was $4.919 million, 1.04% of loans not held for sale, compared with $4.694 million at year-end. First-half net charge-offs were $25,000.
- Management said liquidity was sufficient for reasonable borrower, depositor and creditor needs. Union had $13.0 million of unused FHLB capacity, two Federal Funds lines totaling $12.0 million, and access to other contingent funding sources.
- Union’s total risk-based capital ratio was 13.60%; its Tier 1 leverage ratio was 8.27%. Management stated the company and bank met applicable capital requirements and Union remained “well capitalized.”
Changes, outlook and risks
- Higher gains on residential loan sales were a key earnings driver: Q2 gains rose 54.5% to $785,000, with residential loan sales of $36.5 million versus $22.2 million a year earlier. First-half sales were $67.8 million versus $42.5 million. Management cited the sales strategy as a way to limit long-term interest-rate risk and generate fee income.
- Noninterest expense increased 5.1% in Q2 and 4.6% for the first half, including higher compensation, benefits and equipment costs. A $5.0 million company-owned life insurance purchase in Q1 contributed to higher insurance income.
- Management provided no specific earnings or revenue guidance. It said flat rates could lead net interest income to trend downward as asset yields erode and funding costs offer little relief. The filing’s rate-sensitivity discussion is internally inconsistent: narrative commentary says rising rates could increase net interest income, while the sensitivity table appears to report declines of 14% under +200 basis points and 21% under +300 basis points. These scenario results should be verified against the original table and assumptions.
- Other risks include local and national economic weakness, borrower repayment and collateral values, competition, regulation, changing customer behavior, and interest-rate effects on margins and mortgage-sale income. The allowance estimate is judgmental and regulators may require adjustments.
- Off-balance-sheet commitments totaled $125.560 million, including $54.007 million of commitments to originate loans and $68.208 million of unused lines. The filing says commitments may not be fully drawn. Management considered ordinary-course legal matters not likely to have a material adverse effect.
- Management reported no material change in internal controls and no known material regulatory examination comments. A regular $0.27-per-share dividend was declared July 15, payable August 6, 2015.
Investor verification priorities
- Reconcile the stated interest-rate sensitivity results with management’s narrative about rising rates and assess model assumptions.
- Track whether the municipal deposit and loan declines reverse after the seasonal June 30 funding cycle, and monitor the increased use of borrowings.
- Assess sustainability of mortgage-sale gains and related servicing income, given their importance to noninterest income and sensitivity to market conditions.
- Monitor commercial real estate and construction credit quality, impaired loans, reserve adequacy, and the reported increase in specific reserves.
- Review cash and available liquidity alongside commitments, deposit maturities, and the decline in cash and cash equivalents.