Union Bankshares, Inc. — Q2 2014 Form 10-Q
Business context and period: Community banking company operating through Union Bank in northern Vermont and northwestern New Hampshire. This unaudited filing covers the quarter and six months ended June 30, 2014; balance-sheet comparisons are with December 31, 2013.
Financial performance and position
| Metric | Q2 or June 30, 2014 | Comparison |
|---|---|---|
| Net income | $1.919 million; $0.43 per share | Q2 2013: $1.797 million; $0.40 per share |
| Six-month net income | $3.683 million; $0.83 per share | First half 2013: $3.534 million; $0.79 per share |
| Net interest income | Q2: $5.655 million; first half: $11.190 million | Up 3.5% and 4.0%, respectively, year over year |
| Net interest margin | Q2: 4.22%; first half: 4.21% | Q2 2013: 4.25%; first half 2013: 4.20% |
| Noninterest income | Q2: $2.110 million; first half: $4.073 million | Down 0.5% and 4.7%, respectively, year over year |
| Noninterest expense | Q2: $5.270 million; first half: $10.459 million | Up 0.9% and 0.6%, respectively, year over year |
| Total assets | $571.5 million | Down 2.4% from year-end 2013 |
| Deposits / borrowed funds | $490.9 million / $24.8 million | Deposits down $27.5 million; borrowings up $11.6 million from year-end |
| Stockholders’ equity | $51.9 million; equity/assets 9.08% | $49.8 million at year-end 2013 |
| Cash and cash equivalents | $19.6 million | $30.7 million at year-end 2013 |
- Profitability and drivers: Q2 net income increased 6.8% year over year. Higher net interest income, including lower funding costs, was partly offset by lower gains on residential loan sales and slightly higher operating expenses. First-half earnings rose 4.2%.
- Loan activity and revenue mix: Total loans, including loans held for sale, were $462.0 million. Residential mortgage sales were $22.2 million in Q2 versus $32.5 million a year earlier, and $42.5 million for the first half versus $66.2 million. Gains on loan sales fell 12.9% in Q2 and 24.7% year to date.
- Cash flow: First-half operating cash flow was $1.5 million, versus $12.4 million in 2013. Investing activities provided $5.7 million, while financing activities used $18.3 million. Cash and cash equivalents declined $11.1 million during the half.
- Capital and liquidity: Company total risk-based capital was 13.37%, above the stated 10% well-capitalized benchmark; Union Bank’s ratio was 13.29%. The loan-to-deposit ratio was 94.12%. Management said liquidity was adequate and cited unused borrowing facilities, including Federal Funds and repurchase lines.
- Credit quality: Nonperforming assets were $3.0 million, or 0.53% of assets, compared with $2.3 million and 0.39% at year-end. Nonperforming loans were $2.8 million; nonaccrual loans were $1.9 million and loans 90 days or more past due and accruing were $956,000. The allowance was $4.6 million, 1.01% of loans not held for sale, and 162.67% of nonperforming loans.
Material changes, outlook and risks
- Management attributed most of the first-half deposit decline to seasonal municipal and school-district cash use around Vermont’s June 30 fiscal year-end. Municipal loans also declined seasonally; other major loan categories grew.
- Borrowings increased primarily through FHLB advances, including short-term advances taken for liquidity. The filing reports $23.2 million of FHLB option advances at June 30, with a weighted-average rate of 1.80%.
- The prolonged low-rate environment continued to pressure asset yields and margins. Management cautioned that changing interest rates could affect margins, fee income, loan-sale gains, deposit behavior, and liquidity.
- Management considered the allowance adequate but noted actual losses could exceed estimates and regulators may require additional reserves. Credit risks include borrower repayment capacity, collateral values, economic conditions, and commercial real estate exposure.
- There is no specific earnings or revenue guidance in the filing. Management described itself as cautiously optimistic about loan collectability and said it expected to maintain and grow deposits, while acknowledging uncertainty.
- The company declared a regular $0.26-per-share quarterly dividend on July 16, payable August 7, 2014. Routine legal proceedings were not expected by management to have a material adverse effect. No material control changes were reported.
Important facts for investors to verify
- Whether the increase in nonperforming loans, including loans 90 days past due and accruing, persists or results in additional losses or reserve needs.
- Whether seasonal municipal deposit and loan movements reverse after June 30, and whether deposit funding remains stable as time deposits mature.
- How additional FHLB borrowing and any future funding needs affect liquidity, interest expense, and the net interest margin.
- Whether lower residential mortgage originations and loan sales continue to reduce gain-on-sale income and servicing-related revenue.
- Whether reported operating cash flow and cash balances recover, and how dividends and capital needs affect capital strength.