UNB

Union Bankshares Inc. 10-Q Summary

Business Context and Reporting Period

Union Bankshares, Inc. (the Company), a smaller reporting company based in Morrisville, Vermont, filed its Quarterly Report on Form 10-Q for the period ended June 30, 2010. The Company operates primarily through its subsidiary, Union Bank, providing commercial and consumer banking services in Vermont and northern New Hampshire. The filing reflects a seasonal decline in assets and deposits associated with the annual municipal finance cycle in Vermont.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability: Net income increased 23.6% to $1.53 million for the quarter and 9.7% to $2.75 million for the six months compared to the same periods in 2009. This was driven by a 5.2% increase in net interest income and a 24.2% increase in noninterest income.
• Net Interest Income: Increased to $4.69 million for the quarter, primarily due to a significant decrease in interest expense on deposits (down 28.9% year-over-year) which offset a slight decline in interest income.
• Asset Base: Total assets decreased 4.4% to $427.9 million from $447.5 million at year-end 2009. This decline is attributed to seasonal municipal loan payoffs and deposit outflows typical of the Vermont fiscal year-end.
• Asset Quality: Nonperforming assets increased to $6.0 million (1.40% of total assets) from $5.2 million at December 31, 2009. This increase was largely driven by a rise in accruing loans 90+ days delinquent, though nonaccrual loans decreased slightly.
• Noninterest Income: Rose significantly due to higher net gains on sales of loans held for sale ($324k for the quarter vs. $186k prior year) and increased service fees.

Guidance, Outlook, and Risks

• Regulatory Environment: Management highlights the impact of the newly enacted Dodd-Frank Wall Street Reform and Consumer Protection Act, which introduces new capital requirements, consumer protection regulations, and changes to FDIC assessment formulas. The Company anticipates increased compliance costs but potential savings from the elimination of certain Sarbanes-Oxley attestation requirements for non-accelerated filers.
• Interest Rate Risk: The Company operates in a low-interest-rate environment with the prime rate at 3.25%. Management utilizes a positive interest rate sensitivity gap strategy. Simulation analysis indicates that a 300 basis point increase in rates would boost net interest income by 21%, while a 100 basis point decrease would reduce it by 6.8%.
• Economic Outlook: While the local Vermont economy shows signs of stabilization with unemployment dropping to 6.0%, management remains cautious regarding the broader recession's impact on borrowers and real estate collateral values.
• Dividends: A quarterly cash dividend of $0.25 per share was declared on July 21, 2010, payable August 12, 2010.

Investor Verification Checklist

• Seasonality Impact: Verify the extent to which the decline in assets and deposits is purely seasonal (municipal cycle) versus a trend in customer retention.
• Asset Quality Trends: Monitor the increase in accruing loans 90+ days delinquent and the specific concentration of nonperforming assets in the commercial real estate/construction sector.
• FDIC Assessment Costs: Track the impact of the new FDIC assessment base (total average assets less tangible equity) mandated by the Dodd-Frank Act on future expense lines.
• Loan Sales Economics: Review the rising "delivery fees" on secondary market loan sales, which increased 176% year-over-year, and their effect on net gains from loan sales.
• Capital Ratios: Confirm the Company remains "well capitalized" under regulatory standards as it navigates new capital requirements.