Union Bankshares, Inc. — Q2 2019 Form 10-Q
Business context and period. Unaudited consolidated results for the quarter and six months ended June 30, 2019, compared with the corresponding 2018 periods. The Company’s sole subsidiary is Union Bank, serving markets in Vermont and New Hampshire. Balance-sheet comparisons are primarily with December 31, 2018.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net interest income | $7.52m | $7.21m | $14.95m | $14.14m |
| Provision for loan losses | $0.15m | $0.15m | $0.20m | $0.15m |
| Noninterest income | $2.45m | $2.15m | $4.62m | $4.62m |
| Noninterest expense | $6.81m | $6.31m | $13.32m | $12.43m |
| Net income | $2.53m | $2.45m | $5.15m | $5.20m |
| Earnings per share | $0.56 | $0.54 | $1.15 | $1.16 |
| Net interest margin (annualized) | 4.07% | 4.24% | 4.08% | 4.19% |
June 30, 2019 balance sheet: Total assets were $773.9m; gross loans plus loans held for sale were $614.5m; deposits were $652.8m; borrowed funds were $42.4m; and stockholders’ equity was $68.7m. The allowance for loan losses was $5.68m, or 0.94% of loans not held for sale. Book value per share was $15.38. Company total capital to risk-weighted assets was 13.06%; Union Bank’s ratio was 13.01%.
Cash flow, six months ended June 30: Operating activities provided $2.24m (versus $6.93m in 2018); investing activities provided $28.31m (versus $2.30m); and financing activities used $42.15m (versus $33.90m). Cash and cash equivalents declined $11.60m to $25.69m. The filing attributes much of the investing cash inflow to the net decrease in loans; cash flows also reflect securities purchases and sales, loan-sale activity, and deposit changes.
Material changes and management commentary
- Quarterly net income rose 3.3%, as higher net interest income and noninterest income more than offset higher expenses and taxes. First-half net income fell 0.9%, with higher expenses and loan-loss provision outweighing increased net interest income.
- Net interest income increased, supported by loan growth and higher asset yields, but margins narrowed as funding costs rose. Average cost of funds for the first half increased to 0.88% from 0.51%; management noted continued competitive pressure on deposit pricing.
- Quarterly noninterest income benefited from higher gains on residential loan sales. First-half loan-sale gains rose to $1.06m from $0.73m. Management said loan sales help limit long-term interest-rate risk. Expense growth reflected staffing and branch expansion, occupancy, technology, FDIC assessments, and card-related costs.
- Assets fell 3.9% from year-end, and deposits fell 7.6%; management described the decline as largely a temporary, expected June 30 municipal and school-district fiscal-year paydown, with related deposits expected to return in early July. Time deposits increased while interest-bearing and noninterest-bearing deposits declined. Borrowed funds rose 52.3% to $42.4m, including a $25m one-month FHLB advance.
- Credit indicators included $1.57m of nonperforming assets (0.20% of assets), compared with $1.96m at year-end. Net charge-offs were $0.26m for the first half, versus $0.01m in 2018. Management considered the allowance appropriate but cautioned that future losses or regulatory review could require additional provision.
- Management said liquidity was sufficient for reasonable needs, citing $63.3m of additional FHLB capacity, other borrowing and deposit channels, and potential liquidity from loan and securities portfolios. It also noted uncertainty in deposit flows and loan and investment prepayments.
- No formal earnings or revenue guidance was provided. Interest-rate simulations project net interest income trending downward in a falling-rate scenario; management cautioned that the simulations are not forecasts and depend on assumptions. The table’s displayed shock percentages are unclear in the supplied filing text and warrant verification.
Risks, contingencies, and unusual items
- Key disclosed risks include local and national economic conditions, credit quality and collateral values, deposit competition and funding costs, interest-rate movements, regulation, technology and cybersecurity, and changes in customer behavior.
- Off-balance-sheet credit commitments totaled $188.2m, including $76.3m of commitments to originate loans and $108.9m of unused lines. The increase in loan-originating commitments was mainly seasonal; $54.8m related to municipal and school-district fiscal years beginning July 1.
- Management reported no material adverse effect expected from ordinary-course legal proceedings and no material change in previously disclosed risk factors. It reported effective disclosure controls and no material quarterly change in internal controls over financial reporting.
- The Company adopted lease accounting in 2019, recording lease right-of-use assets and liabilities; management said adoption had no material income-statement impact. CECL implementation work was underway. A proposed delay for smaller reporting companies had not been approved at filing time.
- The board declared a $0.31-per-share quarterly dividend payable August 8, 2019. First-half results in 2018 included a $0.252m life-insurance death benefit and a $0.191m gain on a branch-building sale, which affect year-over-year comparisons.
Important facts for investors to verify
- Confirm the duration and balance-sheet effects of the seasonal municipal loan and deposit decline, and whether balances returned after June 30 as management expected.
- Track deposit mix, repricing costs, brokered or purchased deposits, and reliance on FHLB advances as funding needs change.
- Review loan delinquencies, charge-offs, impaired and substandard loans, and allowance adequacy, particularly given commercial real-estate concentration.
- Verify the interest-rate simulation table directly in the filed report; the rate-shock percentages are not clear in the supplied text.
- Monitor operating expense growth, mortgage-sale income and volumes, and the final timing and financial effects of CECL adoption.
- Assess the $188.2m commitment total against actual funding, including seasonal municipal commitments, and confirm liquidity capacity under changing conditions.