Business context and reporting period
Union Bankshares, Inc. is a Vermont bank holding company. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2011, compared with the same 2010 periods; balance-sheet comparisons are with December 31, 2010. Amounts are in U.S. dollars unless stated otherwise.
On May 27, 2011, its subsidiary acquired three New Hampshire branches, assuming approximately $67 million of deposits and acquiring $32.9 million of loans at acquisition. The acquired branches recorded a $20,000 net loss for the third quarter and a $203,000 net loss from acquisition through September 30.
Financial results and condition
| Metric | Third quarter 2011 | Third quarter 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net interest income | $5.102 million | $4.698 million | $14.371 million | $13.971 million |
| Provision for loan losses | $150,000 | $200,000 | $450,000 | $380,000 |
| Noninterest income | $2.012 million | $1.556 million | $5.060 million | $4.196 million |
| Noninterest expense | $5.145 million | $4.137 million | $14.734 million | $12.291 million |
| Net income | $1.427 million | $1.460 million | $3.486 million | $4.205 million |
| EPS | $0.32 | $0.33 | $0.78 | $0.94 |
- Third-quarter net income declined 2.3%; nine-month net income declined 17.1%. Nine-month diluted earnings per share were not materially diluted by options.
- Net interest margin was 4.19% for the quarter and 4.29% for nine months, down from 4.66% and 4.62%, respectively. The third-quarter net interest spread fell to 4.04% from 4.43%.
- Third-quarter return on average assets was 1.07% and return on average equity 13.63%; nine-month results were 0.95% and 11.17%, respectively. The efficiency ratio rose to 72.67% for the quarter and 75.02% for nine months.
- Cash dividends were $0.25 per share quarterly and $0.75 per share for nine months. The board declared a further $0.25 quarterly dividend, payable November 10, 2011.
Balance sheet, cash flow and capital
- At September 30, assets were $545.8 million, up 20.5% from year-end 2010; deposits were $471.5 million, up 25.2%; gross loans were $424.6 million, plus $4.2 million held for sale; and stockholders’ equity was $42.6 million.
- Borrowed funds were $26.0 million, down from $29.0 million. The company prepaid $2 million of long-term FHLB advances, incurring a $177,000 penalty during the quarter; it reported $3.5 million of customer overnight repurchase sweeps at period-end.
- Nine-month operating cash flow was $3.984 million, investing cash use was $9.282 million, and financing cash flow was $21.564 million. Cash and cash equivalents increased $16.266 million to $30.558 million; the branch transaction contributed $29.607 million of cash at acquisition.
- The company reported a 12.25% total risk-based capital ratio and 11.10% Tier 1 risk-based ratio. The bank’s total risk-based ratio was 12.23%, above the 10% well-capitalized threshold. Capital ratios fell from year-end following the branch acquisition, but the company and bank remained well capitalized.
- Management reported $7.3 million of additional FHLB borrowing availability, with potential availability up to approximately $29.9 million subject to collateral and stock requirements, as well as other credit facilities. Management believed liquidity was adequate.
Material changes versus prior periods
- Net interest income increased, supported by higher average earning assets and loan growth, while asset yields and net interest margin declined in the low-rate environment.
- Noninterest income rose, including loan-sale gains of $483,000 for the quarter and $990,000 year to date, and securities-sale gains of $173,000 and $183,000, respectively.
- Expenses increased 24.4% for the quarter and 19.9% year to date. Drivers included higher staffing and operating costs, branch expansion, acquisition costs, core deposit intangible amortization, and FHLB prepayment penalties. Acquisition expenses were $62,000 for the quarter and $407,000 year to date.
- Loans and deposits grew substantially, with much of the increase attributable to the acquired branches. Total assets, deposits and loans should therefore be assessed with the acquisition’s timing and contribution in mind.
- Nonperforming loans rose to $6.0 million from $3.6 million at December 31, 2010; nonperforming assets were $6.7 million, or 1.22% of assets. The allowance was $4.186 million, 69.77% of nonperforming loans. Net charge-offs were low, with $19,000 net charge-offs for nine months.
Outlook, commentary and risks
The filing provides no numerical earnings or revenue guidance. Management described the regional economy and loan demand as improving but remained cautiously optimistic. It noted historically low interest rates, anticipated by the FOMC to persist at least through mid-2013, and warned that weak loan demand, repricing, refinancing and limited room to reduce deposit costs could pressure margins. Actual nine-month net interest income was 2.8% below the company’s projection, and net income was 12.0% below projection.
- Credit risks include rising nonperforming loans, more loans specifically reserved, and borrowers’ exposure to economic weakness, tourism conditions and collateral values. Management considered the allowance appropriate but noted future losses or regulatory review could require additional provisions.
- Interest-rate and liquidity risks include deposit competition, potential deposit outflows as rates rise, and difficulty maintaining yields on excess liquidity. Approximately 71.9% of time deposits were expected to mature within 12 months.
- Other stated risks include acquired-branch performance, market and investment-security valuations, regulatory costs and changes, and federal and state health-care requirements. Management noted that actual results may differ materially from forward-looking statements.
- Management reported no material adverse regulatory examination findings, no known legal proceedings expected to materially affect results, and effective disclosure controls; no material change in internal controls was reported.
Most important facts for investors to verify
- Whether acquired branches retain deposits and achieve improved profitability, and how their results affect reported growth.
- Trends in nonperforming and substandard loans, impaired credits, collateral values, and the adequacy of the loan-loss allowance.
- Whether margin pressure continues as assets and deposits reprice in the low-rate environment, and the impact of loan sales on interest income.
- Whether expense growth moderates after acquisition-related costs and branch integration, including the effect of FHLB prepayment decisions.
- Capital and liquidity headroom after the acquisition, including deposit concentration and upcoming large time-deposit maturities.
- Reconcile any detailed comparisons to the filing’s unaudited statements and notes; the filing contains varying acquisition-deposit figures reflecting purchase-date amounts and subsequent growth.