Union Bankshares, Inc. — Q1 2017 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2017; interim financial statements are unaudited. Union Bankshares is a bank holding company whose sole subsidiary is Union Bank, serving northern Vermont and New Hampshire. Unless otherwise stated, dollar amounts below are in millions.
Financial performance and condition
| Metric | Q1 2017 / March 31, 2017 | Comparable period / prior date |
|---|---|---|
| Net interest income | $6.30 | $5.94 in Q1 2016; up 6.2% |
| Net income | $1.93; $0.43 per share | $1.76; $0.39 per share in Q1 2016; net income up 9.7% |
| Revenue indicators | Interest and dividend income $6.84; noninterest income $2.23 | Interest and dividend income $6.45; noninterest income $2.19 in Q1 2016 |
| Expenses and taxes | Noninterest expense $5.94; income tax provision $0.66 | Noninterest expense $5.70; income tax provision $0.58 in Q1 2016 |
| Net interest margin / spread | 4.15% / 4.06% | 4.14% / 4.05% in Q1 2016 |
| Assets | $676.5 | $691.4 at December 31, 2016; down 2.2% |
| Loans | Gross loans $537.5; loans held for sale $2.8 | Gross loans $533.3 and loans held for sale $7.8 at December 31, 2016 |
| Deposits / borrowed funds | $582.1 / $31.7 | $597.7 / $31.6 at December 31, 2016 |
| Equity / capital | Stockholders’ equity $57.2; total capital to risk-weighted assets 13.40% at the holding company | Equity $56.3 at December 31, 2016; total capital ratio 13.15% in Q1 2016 |
| Cash flows | Operating cash flow $7.86; investing cash use $5.40; financing cash use $16.76; cash and equivalents ended at $25.0 | Operating cash flow $1.33; cash and equivalents ended Q1 2016 at $14.0 |
Return on average assets was 1.14% and return on average equity was 13.67%, compared with 1.11% and 12.90%, respectively, in Q1 2016. The efficiency ratio improved to 67.95% from 70.01%. The quarterly dividend was $0.29 per share, versus $0.27 a year earlier; a further $0.29 dividend was declared after quarter-end.
Material changes and management commentary
- Net interest income increased $0.37 million, reflecting higher average earning-asset balances; the average yield on earning assets was unchanged at 4.49%. Management said recent Federal Reserve rate increases had so far produced only a modest loan-yield increase, while the average cost of funds declined slightly to 0.43% from 0.44%.
- No loan-loss provision was recorded, compared with $75,000 in Q1 2016. Net charge-offs were $55,000; the allowance for loan losses ended at $5.19 million, or 0.97% of loans not held for sale.
- Noninterest expense rose 4.2%, including higher salaries and occupancy costs. Noninterest income increased 2.2%; service fees and mortgage servicing income contributed, while company-owned life-insurance income declined.
- Quarter-end total loans, including loans held for sale, were nearly unchanged from December, though up $21.1 million year over year. Deposits fell $15.6 million from year-end. Management attributed changes in deposit mix in part to municipal and commercial customers moving funds from time deposits into insured ICS money-market accounts.
- Asset quality improved from year-end: nonperforming assets were $3.34 million, or 0.49% of assets, versus $4.39 million, or 0.63%, at December 31, 2016. Management nevertheless identified $1.9 million of performing substandard loans as a credit risk to monitor.
Outlook, risks, and contingencies
- The filing gives no specific earnings or revenue guidance. Management said it considered liquidity sufficient for reasonable borrower, depositor, and creditor needs, but noted projections are uncertain. Union reported $62.4 million of additional FHLB borrowing capacity, a $7.0 million federal-funds line, and no outstanding advances on that line or at the discount window.
- Interest-rate risk is material. Management’s narrative says rising-rate scenarios were expected to benefit net interest income as asset yields reset ahead of funding costs. However, the sensitivity table’s extracted figures appear inconsistent with that narrative and are not clearly presented; the filing text does not provide a clear value for the projected change. The company also projected declining net interest income if rates stayed flat.
- Key stated risks include local and national economic conditions, competition, interest-rate and deposit-pricing pressure, borrower credit quality and collateral values, regulation, technology investment, and cybersecurity. Management cautioned that actual credit losses could exceed the allowance and that regulators may require reserve adjustments.
- Available-for-sale securities had $665,000 of net unrealized losses before tax at quarter-end; management did not deem any decline other-than-temporary and said it could hold the securities for the foreseeable future. Securities valuations and possible future impairment remain risks.
- Off-balance-sheet credit commitments totaled $105.2 million, primarily unused lines of credit and loan-origination commitments. Management reported no material expected adverse effect from ordinary-course legal proceedings. No material change in the previously reported risk factors was disclosed.
- The company was evaluating the effects of new lease-accounting guidance and had begun planning for the expected-credit-loss (CECL) standard, effective for it in 2020 absent early adoption. Management reported effective disclosure controls and no material change in internal controls during the quarter.
Investor facts to verify
- Confirm the interest-rate sensitivity figures and their sign in the original filing, given the apparent conflict between the table extraction and management’s narrative.
- Monitor deposit outflows and mix, including reliance on ICS and other nontraditional funding channels, alongside available borrowing capacity and liquidity.
- Track loan delinquencies, nonperforming assets, performing substandard loans, charge-offs, and adequacy of the $5.19 million allowance as economic conditions change.
- Assess whether margin and earnings growth can continue as asset yields reprice and deposit funding costs respond to market rates.
- Review future CECL implementation disclosures for estimated effects on reserves, earnings, and regulatory capital.