Union Bankshares, Inc. — Q1 2015 Form 10-Q
Business context and period: The Vermont-based bank holding company, whose sole subsidiary is Union Bank, reported unaudited consolidated results for the three months ended March 31, 2015, with comparisons to Q1 2014 and December 31, 2014 balance-sheet figures. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Key financial results
| Metric | Q1 2015 / March 31, 2015 | Comparable period / prior date |
|---|---|---|
| Net income; diluted/basic EPS as reported | $1.884 million; $0.42 per share | $1.764 million; $0.40 in Q1 2014 |
| Net interest income | $5.552 million | $5.535 million in Q1 2014 |
| Net interest margin; spread | 4.00%; 3.90% | 4.21%; 4.10% in Q1 2014 |
| Noninterest income; expense | $2.335 million; $5.390 million | $1.953 million; $5.179 million in Q1 2014 |
| Provision for loan losses | $100,000 | $75,000 in Q1 2014 |
| Operating cash flow | $3.876 million provided | $2.571 million provided in Q1 2014 |
| Total assets; stockholders’ equity | $622.5 million; $52.4 million | $624.1 million; $51.4 million at December 31, 2014 |
| Loans, net; deposits; borrowed funds | $488.6 million; $546.8 million; $18.6 million | $475.6 million; $552.1 million; $15.1 million at December 31, 2014 |
| Cash and cash equivalents | $13.2 million | $41.7 million at December 31, 2014 |
Material changes and management commentary
- Net income rose 6.8% year over year. Higher loan-sale gains and service fees drove noninterest income growth, partly offset by higher operating expenses, taxes and loan-loss provision.
- Gains on sales of loans held for sale rose to $729,000 from $433,000. Residential loan sales to the secondary market increased to $31.3 million from $20.3 million; management cited loan sales as a way to limit long-term interest-rate risk and generate fee income.
- Net interest income was nearly flat, while net interest margin declined 21 basis points. Management attributed margin pressure to lower asset yields, particularly a 29-basis-point decline in average loan yield, in a prolonged low-rate environment.
- Loans, including loans held for sale, increased $10.5 million from year-end, with growth primarily in commercial real estate and municipal lending. Deposits decreased $5.3 million, mainly because of seasonal reductions in municipal time deposits; noninterest-bearing deposits increased.
- Cash and equivalents fell $28.6 million during the quarter. Investing cash outflow included $14.4 million of AFS securities purchases, $13.1 million of net loan growth and a $5.0 million purchase of company-owned life insurance. The company also recorded $3.0 million of net financing cash outflow.
- Return on average assets was 1.22% versus 1.21%; return on average equity was 14.44% versus 14.09%. The efficiency ratio improved to 66.59% from 68.03%.
Asset quality, capital, liquidity and risk
- Nonperforming assets were $4.8 million, or 0.77% of assets, versus $4.9 million, or 0.78%, at year-end and $2.3 million, or 0.39%, a year earlier. Nonperforming loans were 0.90% of total loans. Loans 90 or more days past due and still accruing were $2.4 million; three residential loans were in foreclosure.
- The allowance for loan losses was $4.8 million, equal to 0.97% of loans not held for sale, compared with 0.99% at March 31, 2014. Net charge-offs were $21,000. Management considered the allowance appropriate, but noted that future losses or regulatory review could require additional provisions.
- Commercial real estate represented 44.0% of gross loans. Management identified economic weakness, borrower repayment capacity, collateral values and real estate conditions as credit risks. It increased reserve factors for a commercial real estate development subcategory within construction lending.
- The company reported total capital to risk-weighted assets of 13.47%, Tier 1 risk-based capital of 12.32%, common equity Tier 1 of 12.32%, and Tier 1 leverage of 8.26%. Management said the company and bank met applicable requirements; Union was categorized as well capitalized.
- Borrowings increased $3.5 million, including a $4 million one-month FHLB advance taken for liquidity. Management said liquidity was sufficient and cited unused FHLB capacity of $9.2 million and two Federal Funds lines totaling $12 million, in addition to other contingent sources.
- Off-balance-sheet credit commitments totaled $88.5 million, including $20.9 million to originate loans, $64.1 million in unused lines and $1.8 million in standby and commercial letters of credit. These amounts are not necessarily expected future cash requirements.
- The quarterly dividend was $0.27 per share; the company repurchased 1,077 shares for $26,000. A further $0.27 dividend was declared after quarter-end, payable May 7, 2015.
Outlook, contingencies and unusual items
The filing provides no specific earnings or revenue guidance. Management described continued low-rate pressure on margins and warned that economic conditions, competition, regulation, customer behavior, credit quality, interest rates and real estate values could affect results. The company’s interest-rate simulation describes declining net interest income in a flat-rate environment and says rising rates could improve results, but the reported sensitivity figures warrant confirmation (see investor checks below).
Management reported no material legal proceedings or regulatory examination findings expected to adversely affect the company. The company reported no investment-security declines deemed other-than-temporary. It purchased $5.0 million of company-owned life insurance during the quarter. The frozen defined-benefit pension plan remains in place. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile the interest-rate sensitivity disclosures: the narrative says rising rates produce positive net interest income results, while the table reports projected changes of negative 14% for a 200-basis-point rise and negative 21% for a 300-basis-point rise. The filing text does not clearly explain this apparent inconsistency.
- Assess whether higher loan-sale gains and sales volumes are sustainable, and how retaining mortgage servicing affects future fee income and interest-rate exposure.
- Monitor nonperforming and 90-days-past-due accruing loans, the CRE and construction portfolio, and any resulting allowance or charge-off changes.
- Evaluate the liquidity implications of lower cash balances, seasonal municipal deposit movements, time-deposit maturities and increased FHLB borrowing.
- Consider whether ongoing margin compression, expense growth and the 64.29% dividend payout ratio leave adequate capacity for planned growth and distributions.