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, 2014. Balance-sheet comparisons are with December 31, 2013; income and cash-flow comparisons are with the corresponding 2013 periods. Amounts are in U.S. dollars; financial-statement amounts are generally in thousands unless noted.
Financial performance and condition
- Profitability: Third-quarter net income was $2.126 million, up 2.6% from $2.073 million; diluted or basic EPS was reported as $0.47 in both periods. Nine-month net income was $5.809 million, up 3.6%, and EPS was $1.30 versus $1.26.
- Revenue and margins: Third-quarter net interest income rose 1.9% to $5.730 million; nine-month net interest income rose 3.3% to $16.920 million. Tax-equivalent net interest margin declined to 4.17% from 4.23% for the quarter and to 4.20% from 4.21% year to date. Total noninterest income increased 23.2% to $2.709 million for the quarter and 4.9% to $6.788 million year to date. The quarter included $234,000 of net securities-sale gains.
- Expenses and credit provision: Noninterest expense increased 8.7% to $5.552 million for the quarter and 3.3% to $16.017 million year to date. Provision for loan losses was $150,000 for the quarter and $300,000 year to date, compared with $95,000 and $230,000, respectively, in 2013.
- Assets and lending: Total assets were $602.7 million, up 2.9% from year-end. Loans held for sale plus net loans were $482.6 million, up 4.8%; gross loans were $481.0 million. Growth was primarily in municipal, construction, and residential lending. Investment securities totaled $53.4 million.
- Funding and liquidity: Deposits were $531.0 million, up 2.4%; noninterest-bearing and other interest-bearing deposits grew, while time deposits fell 13.9% to $139.0 million. Borrowed funds were $14.9 million, up 13.0%. Cash and cash equivalents declined to $23.8 million from $30.7 million. For the nine months, operating cash flow was $4.5 million, investing cash flow was negative $22.3 million, financing cash flow was positive $10.9 million, and cash decreased $6.9 million. Management said liquidity was sufficient and reported access to additional FHLB and correspondent-bank credit lines.
- Capital and distributions: Stockholders’ equity was $52.7 million, up from $49.8 million. The company reported a 13.78% total risk-based capital ratio and said it remained well capitalized. Dividends were $0.26 per share for the quarter and $0.78 year to date. A further $0.26 dividend was declared for payment in November 2014.
- Credit quality: Nonperforming loans increased to $3.861 million from $1.697 million at year-end; nonperforming assets were $4.181 million, or 0.69% of assets, versus $2.256 million, or 0.39%. The allowance for loan losses was $4.758 million, 0.99% of loans not held for sale, and covered 123.23% of nonperforming loans. Management considered the allowance appropriate but cautioned actual losses could exceed estimates.
Material changes versus the prior comparable period
- Quarterly earnings increased modestly as higher net interest income and noninterest income were partly offset by increased operating costs, loan-loss provision, and taxes. Year-to-date earnings also improved.
- Quarterly noninterest income benefited from higher loan-sale gains, service fees, and securities-sale gains. Residential loan sales were lower: $30.2 million versus $31.7 million for the quarter and $72.7 million versus $97.9 million year to date.
- Quarterly expenses included a $256,000 penalty for early repayment of a $1.3 million FHLB advance. Management also cited increased employee benefits and accelerated depreciation on ATM equipment. A one-time estate-related trust fee contributed to quarterly trust income.
- Nonperforming loans rose notably, including a $1.5 million increase in loans 90 or more days past due and accruing since year-end. Management attributed the increase primarily to residential real estate loans; impaired loans overall declined from year-end, largely after a commercial real estate loan was upgraded.
- Accumulated other comprehensive income rose to $589,000 from $77,000, mainly reflecting improved unrealized values on available-for-sale securities. Management reported no investment-security impairment deemed other-than-temporary.
Outlook, risks, contingencies, and unusual items
- No specific earnings or revenue guidance was provided. Management said the prolonged low-rate environment was pressuring asset yields and margins, with limited room to reduce deposit rates further. It described local economic indicators as improving and expressed cautious optimism about loan collectability.
- Interest-rate sensitivity disclosures warrant particular attention: management’s narrative says rising rates are expected to increase net interest income as asset yields reset and funding costs lag. However, the displayed sensitivity table reports negative 12-month net-interest-income changes of 14% for a 200-basis-point rise and 21% for a 300-basis-point rise. The filing’s presentation is internally inconsistent or unclear on this point; verify the underlying table and assumptions.
- Key stated risks include economic weakness, borrower repayment and collateral-value deterioration, competition, margin pressure, regulatory or tax changes, technology costs, and changes to capital requirements. The company also noted that reserve estimates are judgmental and subject to regulatory review.
- Off-balance-sheet credit commitments totaled $83.6 million, including $61.4 million of unused credit lines and $18.0 million of commitments to originate loans. These amounts are contractual and do not necessarily represent expected cash requirements. The company reported no derivative or hedging instruments during the period.
- Management said ordinary-course legal proceedings were not expected to have a material adverse effect. A discretionary 2014 401(k) profit-sharing contribution of 3% of eligible earnings was approved after quarter-end.
Important facts for investors to verify
- Reconcile the interest-rate sensitivity narrative with the table’s negative modeled changes under rising-rate scenarios, and review the model assumptions and stated limits.
- Track whether the increase in 90-day accruing and nonaccrual residential loans continues, and assess subsequent delinquencies, charge-offs, foreclosures, and allowance adequacy.
- Assess the durability of earnings growth excluding securities-sale gains, the one-time trust fee, and the FHLB early-payoff penalty; monitor the margin trend and lower year-to-date mortgage-sale volume.
- Review deposit mix and maturities, liquidity use, and the cost and availability of borrowings as time deposits decline and loan balances grow.
- Confirm reported regulatory capital ratios and the effect of applicable Basel III requirements; review the $83.6 million of off-balance-sheet commitments for potential funding and credit exposure.