Union Bankshares, Inc. — Q2 2016 Form 10-Q
Business context and reporting period. Vermont-based Union Bankshares, Inc. and its subsidiary Union Bank reported unaudited results for the quarter and six months ended June 30, 2016. The company is principally a community bank, with lending concentrated in real estate. Comparisons below are with Q2 or the first six months of 2015, or with December 31, 2015 for balance-sheet figures.
Financial performance and condition
| Metric | Q2 2016 / June 30, 2016 | Comparison |
|---|---|---|
| Net income | $2.139 million | Up 6.0% from $2.017 million in Q2 2015 |
| Earnings per share | $0.48 | $0.46 in Q2 2015 |
| Net interest income | $6.169 million in Q2; $12.104 million for six months | Q2 up 7.2%; six-month total up 7.0% from 2015 |
| Net interest margin | 4.20% Q2; 4.17% six months | 4.09% and 4.04%, respectively, in 2015; tax-equivalent measure |
| Noninterest income | $2.597 million Q2; $4.783 million six months | Q2 up 2.8%; six months down 1.6% |
| Noninterest expense | $5.926 million Q2; $11.747 million six months | Up 6.7% and 7.3%, respectively |
| Net income, six months | $3.898 million; EPS $0.87 | Net income essentially flat versus $3.901 million; EPS was $0.88 |
| Assets | $636.5 million | Up 1.2% from year-end 2015 |
| Loans and loans held for sale | $509.2 million | Up 0.6% from year-end; commercial real estate loans were $247.8 million |
| Deposits / borrowed funds | $548.0 million / $27.8 million | Deposits down $12.4 million; borrowings up $18.2 million from year-end |
| Stockholders’ equity | $56.0 million; equity-to-assets 8.80% | Equity up from $53.6 million at year-end |
| Cash flows, six months | Operating +$2.890 million; investing −$0.052 million; financing +$3.400 million | Cash and cash equivalents increased $6.238 million to $24.199 million |
For the first six months, net interest income growth and a $100,000 reduction in loan-loss provision were offset by lower noninterest income, higher expenses, and higher taxes. Q2 gains included stronger service-fee income; six-month loan-sale gains fell 15.8% to $1.275 million. Expenses rose notably in employee benefits and equipment costs. The quarter included $73,000 of life-insurance death-benefit income. The quarterly dividend was $0.28 per share; the company declared another $0.28 dividend payable August 9, 2016.
Material changes, liquidity and credit quality
- Funding: Deposits declined primarily due to seasonal municipal and school-district withdrawals around Vermont’s June 30 fiscal year-end. Time deposits fell $39.7 million, partly offset by growth in noninterest-bearing and other interest-bearing deposits. FHLB advances increased; management said the additional borrowing funded loan demand and securities purchases.
- Liquidity: Management believed available liquidity was sufficient for reasonable needs. Sources included FHLB capacity, $12 million of federal-funds lines, and other contingent sources. The filing reports $3.0 million of purchased ICS deposits at June 30. Liquidity remains exposed to deposit flows and loan and securities prepayments.
- Credit: Nonperforming loans were $3.422 million, or 0.67% of total loans, versus $3.357 million and 0.66% at year-end. The allowance was $5.226 million, equal to 1.04% of loans not held for sale and 152.72% of nonperforming loans. Six-month net charge-offs were $125,000. Troubled-debt restructurings totaled $2.966 million across 24 loans.
- Portfolio concentration and local conditions: Commercial real estate represented 48.7% of loans. Management cited weak winter conditions affecting local tourism borrowers, while noting improved regional unemployment measures. It said the allowance was appropriate but acknowledged future losses could exceed estimates and regulators could require adjustments.
- Capital: Union Bank’s total risk-based capital ratio was 13.33%, above the 10.00% well-capitalized threshold; its common equity Tier 1 ratio was 12.16%, versus a 6.50% threshold. The company reported compliance with applicable capital requirements.
Outlook, risks and unusual items
- Management described the company as asset-sensitive and said higher rates could benefit earnings, but judged rate increases during the remainder of 2016 unlikely after market events including Brexit. It said the absence of a rate increase alone was not expected to have a significant impact on results.
- There is an apparent inconsistency in the interest-rate discussion: management says rising rates produce positive results, while the disclosed 12-month sensitivity table reports net interest income changes of −14% for a 200-basis-point rise and −21% for a 300-basis-point rise. The filing cautions that the simulation is not a forecast and depends on assumptions.
- No specific earnings or revenue guidance is provided. Management cited risks including local and national economic conditions, competition, interest-rate and margin pressure, credit quality and reserve estimates, regulation, cybersecurity, and changes in customer behavior.
- Off-balance-sheet credit-related commitments totaled $132.7 million, including $52.8 million to originate loans and $74.3 million in unused lines. Management noted that commitments may not be fully drawn. The filing also reports an approximately $2.0 million commitment to purchase a real-estate limited-partnership investment.
- Management said ordinary-course legal proceedings were not expected to materially affect financial condition or results. No material risk-factor changes were reported. The company was evaluating new accounting standards, including the expected-credit-loss standard, effective for it in 2020.
Important facts for investors to verify
- Reconcile the disclosed interest-rate sensitivity table with management’s asset-sensitive characterization and confirm how modeled assumptions affect those results.
- Monitor whether seasonal deposit declines reverse, and assess reliance on increased FHLB and other noncore funding.
- Review commercial real-estate concentration, nonperforming and substandard loans, TDR trends, charge-offs, and the adequacy of the allowance.
- Assess whether expense growth—particularly benefits and equipment—continues to outpace revenue growth, and whether six-month earnings remain flat.
- Track the size, funding, and risk of loan commitments and the planned limited-partnership investment, along with the potential future impact of the expected-credit-loss accounting standard.