Union Bankshares, Inc. — Q3 2019 Form 10-Q
Business context and reporting period
Unaudited consolidated results for the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. Union Bankshares is a Vermont community bank holding company; Union Bank is its sole subsidiary. Unless noted, financial amounts are in U.S. dollars.
Financial performance and condition
| Metric | Q3 / September 30, 2019 | Comparable period / prior date |
|---|---|---|
| Net interest income | $7.634 million for Q3; $22.580 million year to date | Q3 2018: $7.009 million; nine months 2018: $21.145 million |
| Net income | $2.738 million for Q3; $7.889 million year to date | Q3 2018: $2.311 million; nine months 2018: $7.508 million |
| Diluted/basic earnings per share as reported | $0.62 for Q3; $1.77 year to date | Q3 2018: $0.52; nine months 2018: $1.68 |
| Net interest margin | 4.05% Q3; 4.07% year to date | 4.05% is tax-equivalent; Q3 2018: 3.87%; nine months 2018: 4.08% |
| Total assets | $844.9 million | $805.3 million at December 31, 2018 |
| Total loans, including loans held for sale | $671.5 million | $645.4 million at December 31, 2018 |
| Deposits / borrowed funds | $716.7 million / $47.2 million | $706.8 million / $27.8 million at December 31, 2018 |
| Stockholders’ equity | $70.6 million | $64.5 million at December 31, 2018 |
| Cash and cash equivalents | $29.9 million | $37.3 million at December 31, 2018 |
| Allowance for loan losses | $5.808 million; 0.88% of loans not held for sale | $5.739 million; 0.89% at December 31, 2018 |
Q3 year-over-year net income rose 18.5%; nine-month net income rose 5.1%. Q3 tax-equivalent net interest margin improved from 3.87% to 4.05%, while the nine-month margin was nearly unchanged. Q3 return on average assets was 1.34% versus 1.20%; nine-month return was 1.31% versus 1.34%. The Q3 efficiency ratio improved to 66.72% from 68.63%.
For the first nine months, operating cash flow was $1.464 million, versus $9.853 million in 2018; investing activities used $34.058 million and financing activities provided $25.205 million. Cash and cash equivalents declined $7.389 million during the period. Loan growth outpaced deposit growth, and FHLB advances increased to fund loan demand. Management reported $51.2 million of unused FHLB capacity, subject to collateral and other conditions, alongside other available borrowing and funding sources.
Material changes versus comparable periods
- Q3 net interest income increased 8.9%; nine-month net interest income increased 6.8%. Loan growth and improved loan yields contributed, while the cost of interest-bearing liabilities rose.
- Noninterest income increased 11.4% in Q3 and 3.9% year to date, supported by higher gains on sales of residential mortgage loans. Mortgage loan sales were $44.7 million in Q3 and $101.3 million year to date.
- Noninterest expense increased 7.3% in Q3 and 7.2% year to date. New branches and a loan production office contributed to higher staffing, occupancy and equipment costs. The two new Vermont branches opened in May and August 2019.
- Time deposits increased $30.8 million from year-end, while interest-bearing deposits declined $25.1 million. Borrowed funds rose $19.3 million; the company cited new FHLB advances and loan growth.
- Available-for-sale securities increased to $85.3 million from $73.4 million at year-end. Net unrealized gains replaced year-end net unrealized losses; management said no impairment was other-than-temporary.
Outlook, commentary, risks and unusual items
No specific earnings or revenue guidance is provided. Management noted that the Federal Reserve cut its target rate by 50 basis points during Q3. Competition for deposits was expected to continue pressuring funding costs. The company’s interest-rate simulation estimated net interest income changes over 24 months of +6.8% under a 300-basis-point rise, +5.0% under a 200-basis-point rise and -4.6% under a 100-basis-point decline. These are scenario estimates, not forecasts, and depend on assumptions about repricing, deposit behavior, prepayments and other factors.
Management said the 2018 comparison periods included a one-time $310,000 correction of interest income on a tax-exempt loan, and pension-plan expenses of $169,000 in Q3 and $508,000 year to date that did not recur after the plan’s termination and settlement in 2018. The 2019 year-to-date results also included $8,000 of net gains on securities sales. A $3.0 million purchase of company-owned life insurance contributed to the increase in that balance-sheet item.
Nonperforming assets were $1.955 million, or 0.23% of assets, compared with $1.956 million and 0.24% at year-end. The allowance was 297.08% of nonperforming loans. Impaired loans totaled $5.385 million, including $2.981 million of troubled-debt restructurings; one residential TDR loan of $78,000 that had been modified in the prior year subsequently defaulted. Management considers the allowance appropriate but cautions that future losses or regulatory review could require additional provisions.
Other risks include economic and local-market conditions, borrower and collateral performance, interest-rate and deposit competition, cybersecurity, regulation and accounting changes. The company reported no material change in its previously disclosed risk factors. Routine legal proceedings were not expected to have a material adverse effect. The filing reported effective disclosure controls and no material quarterly change in internal control over financial reporting. The company adopted lease accounting in 2019 without a material income-statement impact; management did not intend to early-adopt CECL, whose effective date was expected to be delayed for smaller reporting companies.
Important facts for investors to verify
- Check the drivers and sustainability of loan growth, mortgage sale gains, and net interest income as rates and deposit costs change.
- Monitor deposit mix, time-deposit maturities, brokered and purchased deposits, and the rising use and cost of FHLB borrowings.
- Review credit quality trends, including impaired and substandard loans, delinquencies, TDR performance, charge-offs and the adequacy of the loan-loss allowance.
- Assess liquidity and capital capacity, including collateral-dependent FHLB availability, off-balance-sheet commitments of $134.7 million and regulatory capital ratios. The company reported a 12.95% total capital ratio and an 8.20% Tier I leverage ratio.
- Confirm the effect of branch expansion costs, interest-rate sensitivity, CECL implementation and any subsequent developments on earnings and capital. The filing declared a $0.31-per-share quarterly dividend payable November 7, 2019.