Business context and reporting period
Union Bankshares, Inc. is a Vermont-based bank holding company. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods unless otherwise noted. Balance-sheet comparisons are with December 31, 2012. Amounts below are in U.S. dollars; financial statement figures are in thousands unless stated otherwise.
Key financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income | $5.623 million | $5.540 million | $16.378 million | $16.158 million |
| Provision for loan losses | $95,000 | $150,000 | $230,000 | $510,000 |
| Noninterest income | $2.186 million | $2.888 million | $6.462 million | $6.959 million |
| Noninterest expense | $5.096 million | $5.745 million | $15.497 million | $16.849 million |
| Net income | $2.073 million | $1.981 million | $5.607 million | $4.646 million |
| Earnings per share | $0.47 | $0.44 | $1.26 | $1.04 |
- Q3 net income rose 4.6%; nine-month net income rose 20.7%. Q3 results benefited from lower expenses and loan-loss provision, partly offset by lower noninterest income.
- Net interest margin was 4.23% in Q3 and 4.21% for nine months, down from 4.32% and 4.30%, respectively. Nine-month net interest spread was 4.11%, versus 4.16%.
- Return on average assets was 1.44% for Q3 and 1.31% year to date; return on average equity was 18.01% and 16.35%, respectively.
- Cash dividends were $0.25 per share in each reported quarter, or $0.75 for nine months. A subsequent quarterly dividend of $0.26 per share was declared for payment November 7, 2013.
Financial position, cash flow and credit
- At September 30, 2013, total assets were $574.7 million, down 0.4% from year-end 2012. Deposits were $507.3 million, down 0.5%; borrowed funds were $14.2 million, down 9.8%; and stockholders’ equity was $46.7 million, up from $45.0 million.
- Loans, including loans held for sale, totaled $475.9 million, up 4.6% from year-end. Net loans were $467.1 million; commercial real estate was the largest loan category at $207.9 million. The loan-to-deposit ratio was 93.81%.
- Cash and cash equivalents were $16.4 million, compared with $46.5 million at year-end. For the nine months, operating activities provided $15.2 million, investing activities used $37.8 million, and financing activities used $7.5 million; cash and cash equivalents declined $30.1 million.
- Nonperforming assets were $3.0 million, or 0.52% of assets, versus $4.2 million and 0.73% at year-end. Nonperforming loans were $2.5 million; nonaccrual loans were $1.7 million, while loans 90 days or more past due and accruing were $780,000.
- The allowance for loan losses was $4.8 million, equal to 1.01% of loans not held for sale and 189.33% of nonperforming loans. Nine-month net charge-offs were $114,000.
- Impaired loans increased to $9.8 million from $4.4 million at year-end, mainly reflecting three commercial real estate relationships. Specific reserves on impaired loans were $354,000; the filing reports $743,000 in government guarantees on impaired loans.
- The Company reported a 12.99% total risk-based capital ratio and stated it met current well-capitalized standards. Management also said it would be well capitalized under Basel III requirements, including when fully phased in.
Material changes, outlook and risks
- Lower funding costs supported net interest income despite reduced yields on earning assets. Management cited the prolonged low-rate environment as a continuing pressure: asset yields may decline faster than already-low deposit costs can fall.
- Q3 gains on sales of loans held for sale declined 58.4% to $541,000, reflecting lower secondary-market premiums after interest rates rose in late June and lower Q3 residential loan-sale volume. Nine-month loan-sale gains fell 26.7% to $1.8 million despite higher loan-sale volume.
- Noninterest expense fell 11.3% in Q3 and 8.0% year to date. The pension plan freeze, effective October 2012, reduced pension expense; lower OREO costs also contributed. Higher equipment, staffing, professional-fee and 401(k) costs partially offset savings.
- Available-for-sale and held-to-maturity securities had aggregate unrealized losses of approximately $1.6 million at quarter-end. Management considered the losses temporary and reported no other-than-temporary impairment. Rising long-term rates contributed to portfolio valuation pressure; the investment portfolio’s modified duration was approximately 7.5 years.
- Management described regional economic conditions as moderately improving, while noting persistent uncertainty and credit risks from economic weakness, unemployment, real estate values and borrower repayment capacity. It said the allowance was appropriate but future losses or regulatory review could require additional provisions.
- Liquidity sources include deposits, loan and securities cash flows, $15.9 million of reported unused FHLB capacity, two Federal Funds lines totaling $12 million, a $15 million repurchase line and access to the Federal Reserve discount window. Management said liquidity was adequate, but deposit outflows, loan funding needs and rising-rate-related early withdrawals could affect funding costs and liquidity.
- Off-balance-sheet credit commitments totaled $73.0 million, including $10.4 million to originate loans, $59.4 million in unused lines, and $1.6 million in standby letters of credit. These amounts are contractual commitments, not necessarily expected cash outflows.
- Management identified upcoming mortgage-related regulatory implementation, ongoing regulatory costs, interest-rate sensitivity, deposit competition and possible changes in investment values as risks. The filing provides no numerical earnings or revenue guidance.
- Ordinary-course legal proceedings were not expected by management to have a material adverse effect. The filing reports no material adverse regulatory examination findings and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether loan growth and lower nonperforming assets are sustained, particularly given the increase in impaired loans and commercial real estate exposures.
- Whether the allowance remains adequate as credit conditions, collateral values and regulatory assessments evolve.
- How net interest margin responds to rate movements, deposit pricing competition and repricing of loans and securities.
- Whether lower loan-sale gains and mortgage activity affect future fee income, and whether expense reductions persist as regulatory and technology costs rise.
- How liquidity and funding hold up against deposit shifts, commitment draws and potential early withdrawals of time deposits.
- Whether the disclosed unrealized securities losses remain temporary and whether the company maintains capital ratios above regulatory requirements.