Union Bankshares, Inc. — Q1 2018 Form 10-Q
Business context and period: Union Bankshares is a Vermont-based bank holding company whose sole subsidiary is Union Bank. This unaudited filing covers the three months ended March 31, 2018; comparable income and cash-flow figures are for Q1 2017, and balance-sheet changes are generally versus December 31, 2017. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2018 / March 31, 2018 | Prior comparable period / date |
|---|---|---|
| Net interest income | $6.924 million | $6.302 million, Q1 2017 |
| Net income | $2.747 million; $0.62 per share | $1.930 million; $0.43 per share, Q1 2017 |
| Net interest margin / spread | 4.15% / 4.04% | 4.15% / 4.06%, Q1 2017 |
| Noninterest income / expense | $2.471 million / $6.135 million | $2.233 million / $5.941 million, Q1 2017 |
| Assets | $722.7 million | $745.8 million at December 31, 2017 |
| Loans, gross, including loans held for sale | $594.6 million | $594.6 million at December 31, 2017 |
| Deposits | $623.8 million | $647.6 million at December 31, 2017 |
| Borrowed funds | $31.3 million | $31.6 million at December 31, 2017 |
| Stockholders’ equity | $59.2 million; 8.19% of assets | $58.7 million at December 31, 2017 |
| Operating / investing / financing cash flow | $9.120 million / $(9.000) million / $(25.382) million | $7.857 million / $(5.404) million / $(16.761) million, Q1 2017 |
- Net income rose 42.3% year over year. Revenue and earnings benefited from higher net interest income and lower income-tax expense; noninterest expenses increased and gains on loan sales declined.
- Return on average assets was 1.51% and return on average equity was 18.76%, compared with 1.14% and 13.67%, respectively. The efficiency ratio improved to 64.48% from 67.95%.
- The effective tax rate fell to 15.7% from 25.6%, principally reflecting the federal corporate tax-rate reduction under the 2017 Tax Act. The filing reports no loan-loss provision in either comparison quarter; Q1 2018 net charge-offs were $3,000.
- Cash and cash equivalents fell to $13.2 million from $38.5 million at year-end, principally alongside a $23.7 million decrease in deposits. Management attributed the deposit decline to seasonal municipal account balances. The reported loan-to-deposit ratio was 95.31%.
- Regulatory capital remained above minimum requirements: the company’s total risk-based capital ratio was 13.96%, and the bank’s was 13.89%. Management said the company had sufficient liquidity, including access to unused FHLB capacity and other contingent funding sources.
Material changes and notable items
- Net interest income increased 9.9%, primarily because average loan balances were higher. Net interest margin was unchanged, while the net interest spread narrowed by 2 basis points as funding costs rose faster than asset yields.
- Noninterest income increased 10.7%. A $252,000 life-insurance death benefit and a $191,000 gain on sale of a branch building were unusual contributors. These partly offset a 41.9% decline in gains on sales of loans, reflecting lower sales volume and premiums.
- Noninterest expense increased 3.3%. Pension and employee-benefit costs rose; a favorable medical-plan credit partly offset that increase. The company also incurred $40,000 of additional electronic-banking expense following a service-provider change.
- Available-for-sale securities had net unrealized losses of about $1.6 million before tax at March 31, versus about $381,000 at year-end. The after-tax unrealized loss in accumulated other comprehensive income increased by $950,000 during Q1. Management considered the declines temporary and reported no other-than-temporary impairment.
- Nonperforming assets were $1.694 million, or 0.23% of assets, versus $1.721 million, or 0.23%, at year-end and $3.340 million, or 0.49%, a year earlier. Nonaccrual loans increased from $1.191 million at year-end to $1.400 million; the allowance was $5.405 million, or 0.91% of loans not held for sale.
- The company plans to terminate its defined benefit pension plan. It estimates a $1.1 million contribution in 2018 and expects a $3.2 million reduction in net income in Q4 2018 from settlement; both amounts remain subject to change. Completion is expected by December 31, 2018.
Outlook, risks and contingencies
- No numerical earnings or revenue guidance is provided. Management expects deposit pricing competition and rising short-term rates may increase funding costs, and says alternative funding could be needed to support loan demand. It cautions that this could pressure the net interest spread.
- Interest-rate modeling projected first-year net interest income decreases of 14% under a 200-basis-point parallel rise and 21% under a 300-basis-point rise, relative to the expected forecast. Management said higher-rate scenarios may support income over a longer horizon after funding-cost increases stabilize; the model is not a forecast and depends on assumptions.
- Credit risks include economic weakness, changes in collateral values, loan concentrations and possible future reserve needs. Management considered the allowance appropriate but noted actual losses or regulatory reviews could require additional provision.
- The company is implementing the expected-credit-loss standard (CECL), effective for fiscal years beginning after December 15, 2019. It selected Sageworks and was compiling data for parallel calculations during 2018; the filing does not provide a clear estimate of the adoption impact.
- Off-balance-sheet credit commitments totaled $122.1 million, including $28.4 million of commitments to originate loans and $87.5 million of unused credit lines. These amounts are contractual limits and do not necessarily represent expected cash draws.
- Management said ordinary-course legal proceedings are not expected to have a material adverse effect. The filing reports no material changes to previously disclosed risk factors and no material changes in internal control over financial reporting.
- A regular $0.30-per-share quarterly dividend was declared in April, payable May 10, 2018. The filing states results for the quarter are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether the pension-plan termination contribution and estimated $3.2 million Q4 earnings impact change as settlement elections and interest rates develop.
- Whether seasonal deposit outflows reverse, and how deposit pricing competition affects funding costs, liquidity and the net interest margin.
- Whether the increase in unrealized securities losses persists or results in realized losses or impairment charges.
- Whether nonaccrual loans, delinquency trends and the allowance remain consistent with management’s no-provision assessment.
- The eventual CECL adoption effect on reserves, earnings and capital; the filing provides no quantified estimate.
- How actual results compare with the interest-rate sensitivity model, which indicates significant near-term exposure to rising rates.