Business context and reporting period
Union Bankshares, Inc. is a Vermont-based bank holding company. This unaudited Form 10-Q covers the three months ended March 31, 2013; balance-sheet comparisons are with December 31, 2012. Amounts below are in U.S. dollars; financial-statement amounts are generally in millions unless stated otherwise.
Key financial results and position
| Metric | Q1 2013 / March 31, 2013 | Comparable period / prior year-end |
|---|---|---|
| Net income | $1.737 million; diluted EPS $0.39 | $1.227 million; EPS $0.28 in Q1 2012 |
| Net interest income | $5.289 million | $5.286 million in Q1 2012 |
| Net interest margin / spread | 4.16% / 4.05% | 4.27% / 4.13% in Q1 2012 |
| Noninterest income | $2.156 million | $1.903 million in Q1 2012 |
| Noninterest expense | $5.179 million | $5.541 million in Q1 2012 |
| Total assets | $562.7 million | $577.3 million at December 31, 2012 |
| Deposits | $496.2 million | $510.0 million at December 31, 2012 |
| Borrowed funds | $14.5 million | $15.7 million at December 31, 2012 |
| Stockholders’ equity | $45.7 million | $45.0 million at December 31, 2012 |
Profit rose 41.6% year over year. Total interest and dividend income declined 4.2% to $5.937 million, but interest expense fell 28.8% to $648,000. The loan-loss provision decreased to $60,000 from $180,000. Income tax expense increased to $469,000 from $241,000; the effective tax rate was 21.3%, versus 16.4%.
Net interest margin compressed 11 basis points as the average yield on earning assets fell more than funding costs. The efficiency ratio improved to 68.13% from 76.02%. Return on average assets was 1.23% and return on average equity was 15.36%. The quarterly dividend was $0.25 per share, unchanged year over year.
Loans and loans held for sale totaled $449.8 million, down 1.2% from year-end; management attributed the decline mainly to several large commercial real estate loan payoffs. The allowance for loan losses was $4.714 million, or 1.07% of loans not held for sale. Nonperforming loans were $2.333 million and nonperforming assets were $3.001 million, equal to 0.53% of assets. The allowance covered 202.06% of nonperforming loans.
Operating cash flow was $2.647 million, compared with cash used of $4.900 million in Q1 2012. Investing activities used $3.796 million and financing activities used $16.075 million; cash and cash equivalents fell $17.224 million to $29.286 million. The loan-to-deposit ratio was 90.64%. The company reported a 13.23% total risk-based capital ratio and an 8.11% equity-to-assets ratio. The bank’s total risk-based capital ratio was 13.16%, above the 10% well-capitalized threshold.
Material changes versus the prior comparable period
- Net gains on residential mortgage loan sales increased to $667,000 from $473,000; sales volume rose 50.4% to $33.7 million. This materially supported noninterest income and earnings.
- Noninterest expense fell 6.5%, primarily because the defined-benefit pension plan was frozen in October 2012, reducing pension costs. Equipment expense increased 23.5%, reflecting software and maintenance costs and accelerated depreciation on a replaced telephone system.
- Nonperforming loans declined from $6.665 million at March 31, 2012 and $3.146 million at December 31, 2012 to $2.333 million. However, performing substandard loans increased to $8.7 million from $6.2 million at year-end.
- At quarter-end, deposits were down 2.7% from year-end, which management attributed mainly to seasonal municipal and school-district outflows. Management expected some funds to return with second-quarter real-estate tax collections.
- Capital increased from year-end, and book value per share was $10.24 versus $9.09 a year earlier.
Outlook, management commentary, risks and unusual items
The filing provides no formal earnings or financial guidance. Management described the local economy and loan demand as cautiously improving, but noted that low interest rates continue to pressure asset yields and net interest margin. It cited strong residential mortgage demand and ongoing secondary-market loan sales as part of its interest-rate-risk management strategy.
Key risks include prolonged low rates, faster downward repricing of loan and investment yields than funding costs, deposit competition and possible deposit outflows, weaker loan demand, deterioration in borrower credit or collateral values, and regulatory and compliance costs. Management also noted potential effects from proposed Basel III requirements and new mortgage rules. The company stated that its capital ratios exceeded proposed minimums, while implementation timing remained unsettled.
The company closed its Green Mountain Mall branch on April 5, 2013; staff were reassigned and the lease was expected to end June 30. The pension plan remains frozen, with a new 3% Safe Harbor 401(k) contribution effective January 1, 2013. Management reported no investment-security impairments considered other-than-temporary. Ordinary-course legal proceedings were not expected to have a material adverse effect. A $0.25 per-share dividend was declared April 17, payable May 9, 2013.
Management said liquidity was adequate and identified available borrowing facilities, including unused FHLB capacity and correspondent-bank and repurchase-agreement lines. These alternatives could raise funding costs or reduce asset yields if used. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether seasonal municipal deposits returned as management expected, and whether the quarter-end deposit decline continued.
- Whether net interest margin stabilizes or falls further in the low-rate environment.
- Whether mortgage-sale income remains sustainable, given its significant contribution to quarterly earnings.
- Whether the increase in performing substandard loans develops into higher delinquencies, nonperforming assets, or required loan-loss provisions.
- Whether liquidity and capital remain adequate under deposit outflows, credit stress, or final regulatory capital requirements.