Business context and reporting period
Union Bankshares, Inc., through its sole subsidiary Union Bank, is a Vermont community banking company. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2015; balance-sheet comparisons are with December 31, 2014. Dollar amounts below are in millions unless noted.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $5.912 | $5.730 | $17.219 | $16.920 |
| Provision for loan losses | $0.150 | $0.150 | $0.400 | $0.300 |
| Noninterest income | $2.533 | $2.709 | $7.394 | $6.788 |
| Noninterest expense | $5.674 | $5.552 | $16.620 | $16.017 |
| Net income | $2.050 | $2.126 | $5.951 | $5.809 |
| Earnings per share | $0.45 | $0.47 | $1.33 | $1.30 |
| Net interest margin | 4.21% | 4.17% | 4.10% | 4.20% |
| Return on average assets | 1.33% | 1.42% | 1.28% | 1.31% |
| Return on average equity | 15.36% | 16.31% | 15.01% | 15.15% |
At September 30, 2015, total assets were $620.3 million, net loans were $493.3 million, loans held for sale were $7.3 million, deposits were $543.9 million, borrowings were $17.4 million, and stockholders’ equity was $53.8 million. The allowance for loan losses was $5.0 million, or 1.01% of loans not held for sale. Cash and cash equivalents were $13.7 million, down from $41.7 million at year-end. Nine-month operating cash flow was $9.8 million; investing activities used $28.3 million and financing activities used $9.5 million.
Other indicators: Q3 and nine-month efficiency ratios were 65.97% and 66.00%, respectively. Total capital to risk-weighted assets was 13.59% at the Company and 13.53% at Union; Union’s Tier 1 leverage ratio was 8.53%. The company reported a $0.27 quarterly dividend per share; it declared the next $0.27 dividend on October 21, payable November 9, 2015.
Material changes versus comparable periods
- Q3 net income fell 3.6% year over year, as lower noninterest income and higher expenses outweighed improved net interest income and lower income tax expense. Nine-month net income rose 2.4%.
- Nine-month noninterest income increased 8.9%, led by a $0.620 million rise in gains on residential loan sales. Loan sales were $102.4 million versus $72.7 million a year earlier. Q3 noninterest income declined 6.5%, including lower securities and OREO gains.
- Nine-month expenses rose 3.8%, including increases in salaries, benefits, occupancy and equipment costs. Equipment costs reflected new employee computers and teller-capture technology; the prior-year period also included a $0.256 million FHLB prepayment penalty that did not recur.
- Net loans and loans held for sale grew 2.9% from year-end, driven mainly by commercial real estate, commercial and municipal lending. Deposits declined 1.5%, as a $27.6 million reduction in time deposits more than offset growth in noninterest- and interest-bearing deposits; management cited seasonal municipal fluctuations and customers shifting toward non-maturity funds.
- Asset quality ratios improved overall: nonperforming loans were 0.55% of total loans versus 0.93% at year-end, and nonperforming assets were 0.46% of assets versus 0.78%. Nonaccrual loans edged up to $2.3 million; impaired loans and TDRs also increased from year-end.
Outlook, commentary, risks and unusual items
No formal earnings or revenue guidance is provided. Management said it remained cautiously optimistic about loan collectability, considered the allowance adequate, and believed liquidity and capital were sufficient. Management reported that Union was well capitalized and that recent regulatory examinations produced no comments expected to have a material adverse effect. The filing states interim results are not necessarily indicative of full-year results.
Management cited prolonged low interest rates as a source of pressure on asset yields and margins. The filing’s interest-rate discussion contains an apparent inconsistency: narrative text says rising-rate scenarios project higher net interest income, while the accompanying sensitivity table reports declines of 14% under a 200-basis-point increase and 21% under a 300-basis-point increase over 12 months. The filing cautions that these model estimates depend on assumptions and are not forecasts.
Other disclosed risks include economic weakness and borrower repayment or collateral deterioration; competition; interest-rate and funding changes; regulatory, tax and technology costs; cybersecurity; and uncertainty in loan-loss estimates. Off-balance-sheet commitments and related credit exposures totaled $108.2 million, including $85.0 million of unused lines of credit; the increase included an overdraft program and larger construction-line availability. Management stated that commitment totals do not necessarily represent future cash needs. Legal matters were described as ordinary-course proceedings not expected to have a material adverse effect.
Notable items include the $5.0 million purchase of company-owned life insurance in Q1 2015, which contributed to higher insurance income, and changes in affordable-housing partnership losses following exits from three partnerships in late 2014. The allowance methodology was unchanged, though a higher-risk commercial real estate development subcategory was established within construction lending and assigned higher reserve factors.
Important facts for investors to verify
- Reconcile the interest-rate sensitivity narrative with the table’s reported negative net-interest-income impacts under rising-rate scenarios.
- Monitor whether deposit migration from time deposits persists, and assess the impact on funding costs, liquidity and reliance on borrowings.
- Track loan growth and composition, especially commercial real estate and construction exposures, alongside impaired loans, TDRs, delinquencies and allowance adequacy.
- Assess whether gains from residential loan sales and servicing-related income remain sustainable, and whether operating expense growth moderates.
- Review cash and available contingent funding against deposit outflows, lending commitments and the $17.4 million of borrowings; cash equivalents declined substantially during the period.
- Confirm ongoing capital compliance as Basel III requirements phase in, and evaluate the dividend and repurchase program relative to earnings and capital needs.