Union Bankshares, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited consolidated results. Comparisons are with Q1 2011 unless stated otherwise. The company is a Vermont bank holding company; results include the effects of its May 2011 acquisition of three New Hampshire branches.
Key financial results
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Interest and dividend income | $6.20 million | $5.50 million |
| Net interest income | $5.29 million | $4.54 million; up 16.5% |
| Provision for loan losses | $180,000 | $150,000 |
| Noninterest income | $1.90 million | $1.40 million; up 35.8% |
| Noninterest expense | $5.54 million | $4.58 million; up 21.0% |
| Net income | $1.23 million | $1.03 million; up 19.4% |
| EPS / dividend per share | $0.28 / $0.25 | $0.23 / $0.25 |
| Net interest margin / spread | 4.27% / 4.13% | 4.43% / 4.21% |
| Return on average assets / equity | 0.90% / 12.16% | 0.91% / 9.94% |
At March 31, total assets were $555.4 million, gross loans were $425.5 million, loans held for sale were $12.1 million, deposits were $478.0 million, borrowings were $27.3 million, and stockholders’ equity was $40.5 million. Assets increased 0.5% from year-end 2011 and 20.8% year over year; management attributed much of the annual increase to the branch acquisition.
Cash and cash equivalents were $19.5 million, down from $24.4 million at December 31, 2011. Operating activities used $4.9 million of cash, compared with $5.0 million provided in Q1 2011; the filing’s cash-flow detail reflects elevated originations of loans held for sale relative to proceeds from loan sales. Investing activities used $1.7 million, while financing activities provided $1.7 million. The filing does not present a conventional standalone free-cash-flow measure.
Material changes and financial condition
- Net interest income grew as average earning assets expanded 19.6%, including acquisition-related balances and loan growth. Lower asset yields partly offset volume growth; net interest margin fell 16 basis points year over year.
- Loan-sale gains rose to $473,000 from $168,000. The company sold $22.4 million of residential mortgages to manage long-term interest-rate risk and retained $7.2 million of qualifying residential loans in its portfolio.
- Expenses rose $961,000, with higher salaries, employee benefits, pension costs, branch operating costs, affordable-housing investment losses and core-deposit-intangible amortization among the drivers.
- Nonperforming assets were $8.1 million, or 1.46% of assets, versus $7.7 million and 1.40% at year-end 2011. Nonperforming loans were $6.7 million; nonaccrual loans increased $869,000 from year-end. The allowance was $4.4 million, 1.04% of loans not held for sale, and 66.11% of nonperforming loans.
- Deposits increased $4.6 million from year-end; interest-bearing deposits rose while noninterest-bearing and time deposits declined. Borrowings decreased $1.7 million. The loan-to-deposit ratio was 91.54%.
- The company reported a 12.07% total risk-based capital ratio, compared with 12.17% at December 31, 2011; its subsidiary bank’s ratio was 12.04%. Management said the bank remained “well capitalized.”
Outlook, risks and contingencies
No quantified forward earnings guidance was provided. Management described the local economy and loan demand as gradually improving and said it was cautiously optimistic, while noting that Q1 net income was in line with its 2012 budget. The company said historically low interest rates were expected to persist at least through 2014, citing the Federal Reserve’s outlook at the time. It warned that low rates, deposit competition, asset-yield repricing, weaker-than-expected loan demand, and shifts in customer deposits could pressure earnings or liquidity.
Other cited risks include deterioration in borrower finances or collateral values, higher nonperforming loans, uncertain performance of acquired branches and loans, investment-security impairment, regulatory changes and costs, and broader economic or financial-market disruption. Off-balance-sheet credit commitments totaled $85.9 million, including $61.1 million of unused lines and $20.8 million of commitments to originate loans; amounts drawn may differ. Management did not expect ordinary-course legal proceedings to materially affect financial condition or results.
On April 18, 2012, the company declared a regular $0.25-per-share dividend, payable May 9 to shareholders of record April 28. The filing reports no new troubled-debt restructurings in the quarter. Management stated disclosure controls were effective and that no material change in internal control occurred during the quarter.
Important facts for investors to verify
- Whether subsequent asset-quality data confirms the Q1 increase in nonaccrual and nonperforming loans, especially commercial real estate exposure.
- Whether the allowance remains adequate as credit conditions, collateral values and acquired-loan performance develop.
- How much loan-sale gains and elevated mortgage production contribute to future results, and whether the lower net interest margin stabilizes or declines further.
- Deposit retention, funding costs, liquidity and capital ratios; the dividend payout was 89.29% of Q1 EPS.
- The filing’s reported Q1 operating cash outflow and loan-held-for-sale movements, and the actual utilization of $85.9 million in off-balance-sheet commitments.