Union Bankshares Inc. 10-Q Summary: Period Ended June 30, 2009
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, 2009. The Company operates primarily through its subsidiary, Union Bank, serving Vermont and northwestern New Hampshire. The report covers the three and six months ended June 30, 2009, comparing results to the same periods in 2008.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|
| Net Income | $2.502 million | $2.596 million |
| Earnings Per Share (Diluted) | $0.56 | $0.58 |
| Total Assets | $424.880 million | $392.796 million (Average) |
| Total Deposits | $347.888 million | $364.370 million (Dec 31, 2008) |
| Net Interest Income | $8.817 million | $8.658 million |
| Noninterest Income | $2.623 million | $2.315 million |
| Noninterest Expense | $8.146 million | $7.783 million |
| Return on Average Assets (ROA) | 1.18% | 1.32% |
| Return on Average Equity (ROE) | 12.87% | 12.32% |
| Net Interest Margin | 4.58% | 4.90% |
| Allowance for Loan Losses | $3.565 million | $3.556 million (Dec 31, 2008) |
| Cash and Cash Equivalents | $10.910 million | $26.330 million (Dec 31, 2008) |
Material Changes vs. Prior Period
- Net Income: Decreased slightly by $94,000 (3.6%) year-over-year for the six-month period, driven by higher noninterest expenses partially offset by increased noninterest income.
- Interest Income/Expense: Total interest income decreased $696,000 (5.6%) due to lower yields on loans and federal funds, despite a 9.7% increase in average earning assets. Interest expense decreased $855,000 (23.1%) as rates paid on deposits and borrowed funds declined significantly.
- Net Interest Margin (NIM): Declined 32 basis points to 4.58% due to the compression of the net interest spread (down 16 basis points to 4.25%) resulting from the 400 basis point drop in the prime rate since early 2008.
- Noninterest Income: Increased $308,000 (13.3%), primarily driven by a $285,000 increase in net gains on sales of loans held for sale ($486,000 vs. $201,000).
- Noninterest Expense: Increased $363,000 (4.7%). The primary driver was a $442,000 increase in FDIC insurance assessments due to rate hikes and a special emergency assessment of $191,000. This was partially offset by a $210,000 decrease in salaries and wages due to deferred loan origination costs and operational efficiencies.
- Asset Quality: Nonperforming assets decreased to 1.54% of total assets from 2.16% in the prior year. Net charge-offs were $161,000 for the six months ended June 30, 2009, compared to $94,000 in the prior year.
Guidance, Outlook, and Risks
Management Commentary: Management notes that while the U.S. and global economies face stress, Vermont has maintained low foreclosure rates. Loan demand remains strong due to historically low interest rates, prompting refinancing activity. The Company opted out of the TARP Capital Purchase Program, citing its strong capital position and the restrictions associated with participation.
Outlook: Management expects loan refinancing trends to slow if interest rates rise. They anticipate continued pressure on net interest margins if funding rates do not decline in tandem with asset yields. The Company is actively managing liquidity and has access to unused lines of credit at the Federal Home Loan Bank of Boston.
Risks and Contingencies:
- Interest Rate Risk: A significant portion of the loan portfolio is variable-rate, but the low-rate environment limits upside potential. Simulation analysis indicates that a 300 basis point rate increase could negatively impact the Net Fair Value Ratio below internal guidelines.
- FDIC Assessments: Increased insurance costs and potential future special assessments pose a risk to operating expenses.
- Asset Quality: While current nonperforming assets are declining, management warns that further economic deterioration could impact borrower repayment ability and collateral values.
- Investment Portfolio: The Company holds $22.8 million in available-for-sale securities with gross unrealized losses of $261,000. Management believes these are temporary impairments, but further market volatility could necessitate other-than-temporary impairment charges.
Key Facts for Investor Verification
- FDIC Assessment Impact: Verify the sustainability of the $465,000 FDIC expense for the six-month period, which includes a one-time special assessment, and its impact on future profitability.
- Loan Sales Gains: Confirm the reliance on gains from the sale of loans held for sale ($486,000 YTD) as a significant contributor to noninterest income.
- Seasonality of Municipal Loans: Note the significant seasonal fluctuation in municipal loans and deposits (approx. $14-16 million) occurring around June 30 and July 1, which impacts balance sheet totals.
- Capital Ratios: Verify that the Company remains "well capitalized" with a Total Capital to Risk-Weighted Assets ratio of 14.98% (Union Bank) and 15.0% (Company), well above regulatory minimums.
- Dividend Policy: Note the dividend payout ratio of 94.64% for the six months ended June 30, 2009, and the recent declaration of a $0.25 per share quarterly dividend.