Union Bankshares, Inc. — Q2 2012 Form 10-Q
Business context and reporting period. The Vermont-based bank holding company reported unaudited consolidated results for the quarter and six months ended June 30, 2012. Comparisons are with the corresponding 2011 periods for operating results and with December 31, 2011 for balance-sheet items. Results include the full-period effect of three New Hampshire branches acquired in May 2011; Q2 2011 included $307,000 of branch-acquisition expense.
Key financial metrics
| Metric | Q2 2012 / June 30, 2012 | Comparison |
|---|---|---|
| Net interest income | $5.33 million | Up 12.7% from $4.73 million in Q2 2011 |
| Net interest margin | 4.30% | Up 1 basis point from 4.29% in Q2 2011 |
| Net income / diluted earnings per share | $1.44 million / $0.32 | Up from $1.03 million / $0.23 in Q2 2011 |
| Six-month net income / earnings per share | $2.67 million / $0.60 | Up from $2.06 million / $0.46 in first-half 2011 |
| Total assets | $534.3 million | Down 3.3% from $552.8 million at year-end 2011 |
| Loans, including loans held for sale | $436.2 million | Up 1.6% from $429.2 million at year-end 2011 |
| Deposits / borrowed funds | $459.4 million / $24.0 million | Deposits down 3.0%; borrowings down 17.3% from year-end |
| Stockholders’ equity | $41.0 million | Up from $40.3 million at year-end |
| Capital | Company total risk-based capital ratio 12.22%; subsidiary bank 12.18% | Bank exceeds the 10% well-capitalized threshold |
Q2 revenue gains reflected higher net interest income and noninterest income. Noninterest income rose 30.8% to $2.17 million, including $668,000 of gains on sales of loans. Noninterest expense rose 10.8% to $5.56 million; the prior-year quarter included acquisition costs, while 2012 expenses increased notably in compensation, pension benefits, and equipment. The Q2 provision for loan losses was $180,000, versus $150,000 a year earlier.
For the six months, net interest income was $10.62 million, up 14.6%; noninterest income was $4.07 million, up 33.1%; and noninterest expense was $11.10 million, up 15.7%. The six-month net interest margin was 4.29%, down from 4.36% in 2011. First-half operating cash flow was negative $5.65 million, investing activities provided $14.91 million, and financing activities used $21.29 million. Cash and cash equivalents declined $12.03 million to $12.35 million. Loan originations held for sale exceeded related sale proceeds during the period.
Material changes and financial condition
- Management attributed the year-end declines in assets and deposits largely to Vermont municipalities’ seasonal fiscal-year-end activity, including temporary loan paydowns and deposit withdrawals. Municipal deposits began rebuilding shortly after June 30.
- Loan growth and secondary-market mortgage activity increased: first-half loans sold generated $1.14 million of gains, compared with $507,000 in first-half 2011. Management cited low mortgage rates and stronger residential mortgage demand.
- Deposit costs fell, supporting the margin, but asset yields also declined. Management noted limited room for further reductions in deposit rates and sensitivity to continued low rates, repricing, and competition.
- Nonperforming loans were $5.42 million, or 1.24% of total loans, down from $6.21 million, or 1.45%, at year-end. The allowance for loan losses was $4.58 million, or 1.09% of loans not held for sale; the filing reports $84.52% coverage of nonperforming loans.
- Loans individually evaluated for impairment rose to $10.54 million from $9.79 million at year-end; total impaired loans were $3.20 million. Commercial real estate is the largest loan category, about 44% of the portfolio. Management cited continued local property-value weakness and elevated risks in the economic recovery.
- Liquidity sources include core deposits, asset maturities and repayments, available-for-sale securities, and borrowing facilities. The company reported $5.7 million of unused FHLB capacity based on then-available collateral, plus a $7 million federal funds line, a $15 million repurchase line, and access to the Federal Reserve discount window. Management stated liquidity was sufficient for reasonable needs.
Outlook, risks, contingencies, and unusual items
- No quantified company earnings or revenue guidance was provided. Management described the local economy as gradually improving and was cautiously optimistic about loan demand, while emphasizing uncertainty.
- Management highlighted historic-low interest rates, potential pressure on loan and investment yields, deposit competition, economic weakness, unemployment, real-estate collateral values, and possible borrower-credit deterioration. Global market disruption, drought-related inflation and customer repayment pressure, and regulatory changes were also identified as risks.
- The company expected additional regulatory costs and cited proposed Basel III requirements, mortgage and servicing rules, and the scheduled December 31, 2012 expiration of temporary unlimited FDIC coverage for certain noninterest-bearing accounts. Management said capital ratios exceeded proposed Basel III minimums, but final rules were pending.
- A property went to foreclosure auction on July 12, 2012. The company expected a $202,000 pretax charge in Q3 2012 related to the accepted sale price. A $0.25-per-share quarterly dividend was declared July 18, payable August 9.
- Management said ordinary-course legal proceedings were not expected to materially adversely affect financial condition or results. The filing reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether mortgage-sale gains and loan growth can persist, and how much earnings depend on secondary-market sales.
- Trends in net interest margin, deposit pricing, and asset yields under prolonged low rates or a rate reversal.
- Credit quality, especially commercial real estate exposure, impaired and performing substandard loans, nonperforming assets, and allowance adequacy.
- Liquidity and deposit trends after the seasonal municipal flows, including the effect of maturing large time deposits and changing customer behavior.
- The timing and final amount of the expected $202,000 Q3 OREO charge, and the impact of pension costs and other expense growth.
- Regulatory changes and capital requirements, and whether reported capital and liquidity buffers remain adequate as the balance sheet changes.