Business Context and Reporting Period
Union Bankshares, Inc., through its sole subsidiary Union Bank, is a Vermont-based banking company. This unaudited Form 10-Q covers the quarter ended March 31, 2019; operating results are compared with the three months ended March 31, 2018, and balance-sheet amounts primarily with December 31, 2018. Amounts below are in millions unless otherwise stated.
Key Financial Metrics
- Revenue and earnings: Net interest income was $7.42 million, up 7.2% year over year. Net income was $2.62 million, down 4.6%; diluted effects were not material, and earnings per share were $0.59 versus $0.62. Dividends were $0.31 per share versus $0.30.
- Margins and returns: Tax-equivalent net interest margin was 4.10%, down 5 basis points; net interest spread was 3.93%, down 11 basis points. Return on average assets was 1.32% versus 1.51%, and return on average equity was 16.09% versus 18.76%. The efficiency ratio increased to 67.14% from 64.48%.
- Income and expenses: Noninterest income fell 12.2% to $2.17 million, while noninterest expense rose 6.3% to $6.52 million. A $50,000 loan-loss provision was recorded, compared with none a year earlier. The effective federal tax rate was 13.2%, versus 15.7%.
- Assets and lending: Total assets were $813.3 million, up 1.0% from year-end and 12.5% from March 2018. Gross loans were $649.8 million; loans held for sale were $5.6 million. Total loans, including loans held for sale, increased 1.6% from year-end and 10.2% year over year.
- Credit quality: The allowance for loan losses was $5.57 million, or 0.86% of loans not held for sale. Nonperforming assets were $2.28 million, or 0.28% of assets, compared with $1.96 million and 0.24% at year-end. Net charge-offs were $217,000 for the quarter.
- Funding and liquidity: Deposits were $700.4 million, down 0.9% from year-end; time deposits increased $17.6 million while interest-bearing and noninterest-bearing deposits declined. Borrowed funds rose 35.8% to $37.8 million, principally FHLB advances. Cash and cash equivalents were $26.6 million, down $10.7 million during the quarter. Management said liquidity was sufficient and reported $53.2 million of additional FHLB borrowing capacity, subject to collateral and other conditions.
- Capital: Stockholders’ equity was $66.7 million. The company reported a 13.05% total capital-to-risk-weighted-assets ratio and an 8.14% leverage ratio; the bank reported a 13.00% total risk-based capital ratio and met applicable capital requirements.
- Cash flow: Operating activities provided $1.11 million, versus $9.12 million in the prior-year quarter. Investing activities used $14.01 million and financing activities provided $2.20 million, resulting in a $10.70 million net decrease in cash and cash equivalents.
Material Changes Versus the Prior Comparable Period
- Higher average loan balances and yields drove most of the increase in net interest income. However, the average rate paid on interest-bearing liabilities rose 35 basis points, and the net interest margin and spread narrowed.
- Noninterest income declined largely because the prior-year quarter included a $252,000 life-insurance death benefit and a $191,000 gain on sale of a bank-owned building. Loan-sale gains increased to $374,000 from $295,000.
- Noninterest expense increased $389,000, including higher salaries, professional fees, occupancy costs, and FDIC assessments.
- Loans grew faster than deposits, prompting additional FHLB borrowing. The deposit mix shifted toward time deposits, and purchased CDARS deposits reached $20.0 million.
- Unrealized losses on available-for-sale securities improved substantially: accumulated other comprehensive loss narrowed to $83,000 from $1.02 million at year-end. Management did not consider the securities losses other-than-temporary.
Outlook, Commentary, Risks, and Unusual Items
- The filing provides no numerical earnings or revenue guidance. Management said deposit competition and deposit pricing increases were likely to continue, putting upward pressure on funding costs; noncore funding had been used to support loan demand.
- Management described the allowance as appropriate but cautioned that future losses could exceed current estimates and that regulators could require reserve increases. Credit quality remains exposed to economic weakness, borrower performance, collateral values, and local real-estate conditions.
- Interest-rate modeling qualitatively projected net interest income to trend upward in flat-rate conditions, to track the flat-rate case in rising-rate conditions over the modeled period, and to decline in a falling-rate scenario. The filing’s displayed numerical rate-shock sensitivity figures are unclear in the supplied text and should not be relied upon without checking the original table.
- Risk factors include competition, interest-rate and deposit behavior changes, economic and credit conditions, regulatory and tax changes, technology and cybersecurity risks, and changes in accounting requirements. The filing reported no material change from the risk factors in the 2018 annual report.
- The company adopted lease accounting in the quarter, recording operating lease assets and liabilities of approximately $490,000 each and finance lease assets and liabilities of approximately $1.5 million each; management reported no material income-statement impact. Expected implementation of the CECL credit-loss standard was being evaluated, with parallel calculations planned during 2019.
- Management said ordinary-course legal proceedings were not expected to have a material adverse effect. No OREO was reported at quarter-end. The company declared a regular $0.31-per-share dividend on April 17, payable May 9, 2019.
Important Facts for Investors to Verify
- Check the original filing’s interest-rate sensitivity table; the numerical shock results in the supplied text appear unclear.
- Monitor deposit trends, funding costs, brokered or purchased deposits, and borrowing needs as loan growth continues.
- Review subsequent credit performance, nonperforming and delinquent loans, charge-offs, and allowance adequacy, including exposure to commercial real estate.
- Assess whether margin pressure, expense growth, and lower noninterest income persist, and distinguish recurring income from prior-period unusual items.
- Track the company’s CECL implementation and any resulting estimate of its effect on reserves, earnings, and capital.