Union Bankshares, Inc. — Q2 2013 Form 10-Q
Business context and period. Regional bank holding company reporting unaudited consolidated results for the three and six months ended June 30, 2013, compared with the corresponding 2012 periods. Balance-sheet comparisons are against December 31, 2012, unless noted. Dollar amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Interest and dividend income | $6.079 | $6.185 | $12.016 | $12.381 |
| Net interest income | $5.466 | $5.332 | $10.755 | $10.618 |
| Provision for loan losses | $0.075 | $0.180 | $0.135 | $0.360 |
| Noninterest income | $2.120 | $2.168 | $4.276 | $4.071 |
| Noninterest expense | $5.222 | $5.563 | $10.401 | $11.104 |
| Net income | $1.797 | $1.438 | $3.534 | $2.665 |
| Earnings per share | $0.40 | $0.32 | $0.79 | $0.60 |
- Q2 net income rose 25.0% year over year; first-half net income rose 32.6%. Lower loan-loss provisions and reduced expenses supported earnings, while lower interest income and Q2 noninterest income were offsets.
- Net interest margin was 4.25% in Q2 versus 4.30% a year earlier, and 4.20% for the first half versus 4.29%. Net interest spread was 4.15% and 4.10%, respectively, down from 4.18% and 4.16% in the comparable 2012 periods.
- Efficiency ratio improved to 68.57% for Q2 from 72.67%, and to 67.72% for the first half from 74.26%. Return on average assets/equity was 1.27%/15.65% for Q2 and 1.25%/15.51% for the first half.
Financial position, cash flow and credit
- At June 30, assets were $546.7 million, down 5.3% from year-end; deposits were $474.0 million, down 7.1%; loans were $444.8 million before allowance, broadly flat versus year-end; and equity was $45.8 million, up from $45.0 million.
- Management attributed much of the asset and deposit decline to the seasonal Vermont municipal funding cycle, including municipal deposits used to pay down annual credit lines at fiscal year-end. Cash and cash equivalents fell to $12.3 million from $46.5 million, while borrowed funds increased to $20.2 million from $15.7 million.
- First-half operating cash flow was $12.4 million, compared with cash used of $5.6 million in 2012. Investing activities used $12.9 million and financing activities used $33.8 million; cash and cash equivalents declined $34.3 million over the period.
- Loan-loss allowance was $4.752 million, or 1.07% of loans not held for sale. Nonperforming loans were $3.0 million, down from $3.1 million at year-end; nonperforming assets were $3.7 million, down from $4.2 million. However, performing substandard loans increased to $7.7 million from $6.2 million. No new troubled debt restructurings were reported in the first half.
- Total risk-based capital ratio was 13.19% at the holding company and 13.11% at the bank; management said both met applicable well-capitalized standards and would meet Basel III requirements on a pro forma basis, including when fully phased in.
- Available-for-sale and held-to-maturity securities totaled $37.0 million. The portfolio had $1.1 million of gross unrealized losses at June 30; management considered none other-than-temporarily impaired. Accumulated other comprehensive loss increased to $2.6 million, primarily reflecting securities valuation changes.
Outlook, commentary and risks
- No specific earnings or revenue guidance was provided. Management described a persistently low-rate environment and cautioned that loan and investment yields could reprice down faster than funding costs; deposit rates already had limited room to decline further. Rising long-term rates late in Q2 could also slow mortgage originations.
- Management reported stronger residential mortgage activity, slower-than-anticipated commercial demand with signs of improvement, and modest regional real-estate recovery. The company sold $66.2 million of residential loans in the first half to reduce long-term interest-rate risk and generate fee income.
- Key stated risks include interest-rate and liquidity sensitivity, deposit competition and possible deposit outflows, borrower repayment and collateral values, economic weakness, and regulatory changes and compliance costs. Commitments to originate loans rose to $39.8 million from $7.3 million at year-end, including $25.5 million of municipal and school-district commitments for the new fiscal year; total listed off-balance-sheet credit commitments were $93.4 million.
- Unusual or material operating developments: the pension plan was frozen to benefit accruals in October 2012, reducing pension expense; a branch closed in April 2013; and a $51,000 early-repayment penalty was recorded on an FHLB advance. A quarterly dividend of $0.25 per share was declared after quarter-end, payable August 8, 2013.
- Management said ordinary-course legal matters were not expected to have a material adverse effect. The IRS was examining the company’s 2011 corporate tax return. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether deposit balances and cash recover after the seasonal municipal withdrawals, and whether reported liquidity sources remain available on expected terms.
- Whether the rise in performing substandard loans or 90-days-past-due accruing loans leads to higher delinquencies, nonperforming assets, charge-offs or provision expense.
- How the low-rate environment, late-quarter rise in longer-term rates, and loan-sale volumes affect net interest margin and mortgage-related fee income.
- Whether unrealized securities losses, deposit competition, regulatory implementation costs, or the 2011 IRS examination result in material financial effects.