Union Bankshares, Inc. — 2017 Third-Quarter Form 10-Q
Business context and reporting period. Union Bankshares, Inc., a Vermont bank holding company whose sole subsidiary is Union Bank, reported unaudited results for the three and nine months ended September 30, 2017. Comparisons below are year over year unless otherwise noted. Amounts are in U.S. dollars; financial statement amounts are in thousands unless stated otherwise.
Financial performance and condition
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $6.810 million | $6.315 million | $19.697 million | $18.419 million |
| Provision for loan losses | $150,000 | $0 | $150,000 | $150,000 |
| Noninterest income | $2.506 million | $2.804 million | $7.072 million | $7.587 million |
| Noninterest expense | $5.941 million | $6.024 million | $17.753 million | $17.535 million |
| Net income | $2.370 million | $2.268 million | $6.527 million | $6.166 million |
| Earnings per share | $0.53 | $0.51 | $1.46 | $1.38 |
| Net interest margin | 4.23% | 4.26% | 4.22% | 4.21% |
- Q3 net income rose 4.5%; nine-month net income rose 5.9%. Nine-month return on average assets was 1.27% and return on average equity was 15.10%.
- Net interest income increased 7.8% in Q3 and 6.9% year to date, mainly as average loan balances grew. Q3 net interest spread narrowed 3 basis points to 4.15%; the average rate paid on interest-bearing liabilities rose 5 basis points to 0.44%.
- The efficiency ratio improved to 62.31% for Q3 and 64.79% year to date, from 66.22% and 68.05%, respectively.
- Loan-sale gains fell 28.7% in Q3 and 19.8% year to date, reflecting lower sale volumes and premiums. Q3 noninterest income declined 10.6%; nine-month noninterest income declined 6.8%.
- At September 30, total assets were $705.3 million, gross loans including loans held for sale were $584.6 million, deposits were $606.6 million, borrowed funds were $32.5 million, and stockholders’ equity was $59.6 million. Assets were up 2.0% and deposits up 1.5% from December 31, 2016.
- Loans including loans held for sale increased 8.0% from year-end. Municipal loans rose to $56.5 million from $31.4 million, principally reflecting municipal lending activity. The loan-to-deposit ratio was 96.37%, versus 92.93% in the comparable prior-year period.
- Cash and cash equivalents were $12.4 million, down from $39.3 million at year-end 2016. Nine-month operating cash flow was $10.6 million, investing cash flow was negative $43.5 million, and financing cash flow was positive $6.0 million. Net cash decreased $26.9 million.
- Available-for-sale and held-to-maturity securities totaled $65.0 million, or 9.2% of assets. The allowance for loan losses was $5.259 million, 0.91% of loans not held for sale.
- Union’s September 30 regulatory capital ratios exceeded “well-capitalized” thresholds: total risk-based capital 13.47%, Tier 1 risk-based capital 12.37%, common equity Tier 1 12.37%, and Tier 1 leverage 8.49%. The Company’s total risk-based capital ratio was 13.51%.
Material changes and credit quality
- Nonperforming assets declined to $2.258 million, or 0.32% of assets, from $4.385 million and 0.63% at December 31, 2016. Nonperforming loans were 0.39% of total loans, down from 0.81%.
- Nonaccrual loans were $2.029 million, versus $3.545 million at year-end; loans at least 90 days past due and accruing were $229,000, versus $840,000. Three residential loans totaling $373,000 were in foreclosure.
- Substandard performing loans increased to $2.9 million from $1.8 million at year-end. Management said the allowance was appropriate but cautioned that actual losses or regulatory assessments could require additional provisions.
- Deposits grew overall, with noninterest-bearing deposits up $6.8 million and interest-bearing deposits up $5.6 million from year-end; time deposits fell $3.5 million. The company reported $37.7 million of exchanged ICS money-market deposits and $2.0 million of retail brokered deposits at quarter-end.
- Net interest income growth outpaced expense growth over nine months, but the margin was nearly unchanged year over year and Q3 narrowed. Noninterest expense increased 1.2% year to date, including higher benefits and occupancy costs.
Outlook, risks and unusual items
- No formal earnings or revenue guidance is provided. Management described itself as cautiously optimistic about loan collectability, citing improved local economic indicators, while continuing to monitor economic conditions, borrower performance and collateral values.
- On October 18, 2017, the Board approved termination of the frozen defined-benefit pension plan, expected in Q4 2018. Management estimated a $1.1 million cash contribution to fully fund liabilities and an approximately $3.2 million charge to earnings at termination; both estimates may change. The expected-return assumption on plan assets was reduced to 4.25% from 6.75%.
- Interest-rate risk analysis projected net interest income declines over the next 12 months of 14% under a 200-basis-point rise and 21% under a 300-basis-point rise. Management’s accompanying discussion says rising rates may initially track near the base case and later increase income as assets reprice. The filing cautions that the simulation is not a forecast and depends on assumptions.
- Liquidity sources include up to $58.0 million of unused FHLB capacity, a $10.0 million correspondent-bank federal funds line, and access to other funding channels. Management believes liquidity is sufficient, while noting that future cash needs and flows remain uncertain.
- Risks identified include local or broader economic weakness, competition, interest-rate and margin pressure, credit losses and reserve estimates, regulatory or tax changes, technology investment needs, changing customer behavior and cybersecurity threats. The company reported no material change in previously disclosed risk factors.
- The company expects the new revenue-recognition standard to have an immaterial net-income effect and is evaluating the lease standard. It has begun planning for CECL, effective for fiscal years beginning after December 15, 2019; the filing does not quantify the expected effect.
- Management reported no material adverse legal proceedings, no material comments from recent regulatory examinations, effective disclosure controls and no material change in internal controls over financial reporting.
- A quarterly dividend of $0.29 per share was declared for payment November 8, 2017. The nine-month dividend declared was $0.87 per share.
Most important facts for investors to verify
- Reconcile the sharply negative modeled 12-month net interest income sensitivity to management’s qualitative discussion of rising rates; review the model assumptions, limits and updated results.
- Track the pension-plan termination, including the timing and final amount of the estimated $1.1 million contribution and $3.2 million earnings charge.
- Monitor loan growth and mix—particularly municipal and commercial real estate exposure—and whether the rise in performing substandard loans leads to higher delinquencies, charge-offs or provisions.
- Assess the sustainability of earnings growth given lower mortgage-sale gains, rising deposit costs and a high loan-to-deposit ratio; also track liquidity and deposit composition.
- Follow CECL implementation and any quantified impact on reserves, earnings or regulatory capital when disclosed.