Business context and reporting period
Union Bankshares, Inc. is a bank holding company headquartered in Vermont. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2012; income comparisons are year over year, and balance-sheet comparisons are with December 31, 2011. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net interest income | $5.54m | $5.10m | $16.16m | $14.37m |
| Provision for loan losses | $0.15m | $0.15m | $0.51m | $0.45m |
| Noninterest income | $2.89m | $2.01m | $6.96m | $5.07m |
| Noninterest expense | $5.75m | $5.15m | $16.85m | $14.74m |
| Net income | $1.98m | $1.43m | $4.65m | $3.49m |
| Earnings per share | $0.44 | $0.32 | $1.04 | $0.78 |
- Third-quarter net income rose 38.8%. Growth reflected higher net interest income and noninterest income, partly offset by higher operating expenses and taxes. Loan-sale gains were $1.30m for the quarter and $2.44m year to date.
- Net interest margin was 4.32% in Q3 versus 4.19%; year-to-date margin was 4.30% versus 4.29%. Q3 efficiency ratio improved to 66.68% from 72.67%. Nine-month ROA was 1.12% and ROE was 15.20%, versus 0.95% and 11.17%.
- At September 30, assets were $582.9m, up 5.5% from year-end; deposits were $504.8m, up 6.6%; total loans including held-for-sale were $464.5m, up 8.2%; and stockholders’ equity was $42.1m. Borrowed funds declined 11.2% to $25.8m.
- Cash and cash equivalents were $35.1m, with a further $19.6m in interest-bearing bank deposits. Nine-month operating cash flow was negative $2.5m, compared with positive $4.0m in 2011, while investing cash outflow was $11.6m and financing cash inflow was $24.8m. Loan originations for sale exceeded proceeds from sales and contributed to the operating cash outflow.
- The allowance for loan losses was $4.56m, or 1.01% of loans not held for sale. Total risk-based capital was 12.17%; the bank met the “well capitalized” threshold of 10.0%. The quarterly dividend remained $0.25 per share.
Material changes versus comparable periods
- Q3 net interest income increased 8.6%; the nine-month increase was 12.4%. Lower funding costs more than offset modestly lower asset yields. The company cautioned that deposit rates have limited room to decline further.
- Noninterest income grew 43.5% in Q3 and 37.3% year to date, led by loan-sale gains. Residential loan sales in Q3 were approximately $39.7m versus $19.8m a year earlier; management cited strong mortgage demand and low long-term rates.
- Noninterest expense increased 11.7% in Q3 and 14.3% year to date. Drivers included compensation and benefits, pension costs, equipment spending, and costs and write-downs on foreclosed and other owned assets. Prior-year periods included branch-acquisition costs; Q3 2011 also included FHLB prepayment penalties.
- Asset quality improved on reported nonperforming measures: nonperforming loans were $3.55m versus $6.21m at year-end 2011, and nonperforming assets were $5.02m versus $7.72m. However, performing substandard loans rose to $6.0m from $4.1m at year-end, and impaired loans were $3.0m versus $2.6m.
Outlook, commentary, risks and unusual items
- No specific earnings or revenue guidance is provided. Management was cautiously optimistic about loan demand but highlighted the prolonged low-rate environment, which may constrain yields and margins. The filing cites the Federal Reserve’s then-current expectation that exceptionally low rates could persist through at least mid-2015; this is not company guidance.
- Management identified risks from weaker economic conditions, unemployment and local real-estate values, borrower credit deterioration, deposit competition and possible deposit outflows, and interest-rate movements. The filing also discusses regulatory changes, including proposed Basel III rules, and the scheduled December 31, 2012 expiration of temporary unlimited FDIC coverage for certain transaction accounts.
- OREO and other-asset expenses included valuation write-downs of $389,000 for the first nine months; Q3 included $312,000 of write-downs. Further softening in local property values could reduce recoveries.
- On October 5, 2012, the company closed its defined-benefit pension plan to new participants and froze future benefit accruals. The company expected to record a $3.6m reduction in the unfunded pension liability, a $1.2m reduction in the related deferred tax asset, and a $2.4m increase in equity; it projected no Q4 2012 pension expense but expects continuing cash-funding obligations for frozen benefits.
- Management reported no material adverse legal contingencies and stated that disclosure controls were effective. Regulatory examinations disclosed no comments expected to materially affect the company.
Important facts for investors to verify
- Whether earnings growth is sustainable without the increased volume and gains from loan sales, and how mortgage production and servicing affect interest-rate risk and fee income.
- Whether credit quality remains sound: track substandard and impaired loans, delinquencies, charge-offs, OREO valuation losses, and allowance adequacy alongside the decline in nonperforming loans.
- How persistent low rates, competition for deposits, and the maturity and repricing profile of deposits and borrowings affect net interest margin and liquidity.
- Confirm the accounting and equity effects of the pension-plan freeze, as well as future pension funding needs and expense.
- Monitor capital and dividend capacity, the potential effects of regulatory changes, and the company’s ability to meet the $74.8m of reported off-balance-sheet commitments and credit exposures.