Business context and reporting period
Union Bankshares, Inc., through its sole subsidiary Union Bank, is a Vermont-based banking company. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2018; comparisons are to the corresponding 2017 periods. Unless stated otherwise, dollar amounts below are in millions.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $7.009 | $6.810 | $21.145 | $19.697 |
| Provision for loan losses | $0.150 | $0.150 | $0.300 | $0.150 |
| Noninterest income | $2.452 | $2.506 | $7.075 | $7.072 |
| Noninterest expense | $6.547 | $5.941 | $19.000 | $17.753 |
| Net income | $2.311 | $2.370 | $7.508 | $6.527 |
| EPS | $0.52 | $0.53 | $1.68 | $1.46 |
| Dividend per share | $0.30 | $0.29 | $0.90 | $0.87 |
- Q3 net interest margin was 3.87% versus 4.23%; nine-month margin was 4.08% versus 4.22%. Q3 efficiency ratio was 68.63% versus 62.31%; nine-month ratio was 66.58% versus 64.79%.
- At September 30, total assets were $779.7, gross loans including loans held for sale were $643.7, deposits were $667.7, borrowings were $42.0, and stockholders’ equity was $60.8. Assets were up 4.5% from year-end 2017; total loans were up 8.3% and deposits 3.1%.
- Cash and cash equivalents were $13.9, down from $38.5 at December 31, 2017. Nine-month operating cash flow was $9.9; investing cash outflow was $61.0 and financing cash inflow was $26.6, resulting in a $24.6 decrease in cash.
- Return on average assets and equity for Q3 were 1.20% and 15.30%, respectively; nine-month measures were 1.34% and 16.86%. Equity/assets was 7.80%; total capital/risk-weighted assets was 13.63% at the company level and 13.70% at Union Bank.
Material changes versus comparable periods
- Q3 net income fell 2.5%, despite net interest income increasing 2.9%, as noninterest expenses rose 10.2% and noninterest income declined 2.2%. Nine-month net income rose 15.0%, supported by a $1.448 increase in net interest income and lower income-tax expense.
- Loan growth boosted interest income, but higher deposit and borrowing costs pressured spread and margin. Q3 average cost of interest-bearing liabilities rose to 0.74% from 0.44%; nine-month cost rose to 0.59% from 0.42%.
- Nine-month noninterest expense increased 7.0%, including higher employee and pension costs, professional fees, and electronic banking expense. Loan-sale gains declined 25.0% year over year for the nine-month period.
- The effective tax rate declined to 15.8% for the first nine months from 26.4%, primarily reflecting the federal corporate tax rate reduction under the 2017 Tax Act.
- Available-for-sale securities had $2.3 of gross net unrealized losses at September 30, compared with $0.4 at year-end 2017; the after-tax loss reduced accumulated other comprehensive income. Management did not consider the declines other-than-temporary.
Outlook, commentary, risks and unusual items
- No specific earnings or financial guidance was provided. Management said loan growth had outpaced deposit growth, requiring wholesale funding, and expected competition for deposits and upward pressure on funding costs to continue. Management considered liquidity sufficient for reasonable needs.
- Management expects to complete termination and settlement of the defined benefit pension plan by December 31, 2018. It expects $3.7 of total termination expense, of which $0.507 was recognized through September 30 and approximately $3.2 is expected in Q4. It anticipates no remaining plan obligations or periodic pension expense after settlement.
- Q3 and year-to-date results included a one-time $0.310 reduction in interest income to correct an overstated rate on a tax-exempt loan. Other notable nine-month items included $0.252 of life-insurance death-benefit income and a $0.191 gain on sale of a branch building.
- Nonperforming assets were $1.421, or 0.18% of assets, versus $1.721 at year-end 2017 and $2.258 a year earlier. The allowance was $5.610, or 0.88% of loans excluding loans held for sale; net charge-offs were $0.098 for nine months. Impaired loans were $4.454, including $3.315 of troubled-debt restructurings.
- Off-balance-sheet commitments totaled $154.459, including $47.954 in loan-originating commitments and $100.884 in unused credit lines. The filing notes credit, collateral, economic, regulatory, cybersecurity, competition, and interest-rate risks. Management reported no material change in risk factors and no legal proceedings expected to materially affect results.
- Interest-rate simulations indicated that net interest income could decline under both rising- and falling-rate scenarios; the disclosed model estimated declines of 30% under a 200-basis-point rise or fall and 45% under a 300-basis-point rise. Management cautioned that these are assumption-dependent sensitivity estimates, not forecasts.
- Union Bank reported meeting applicable regulatory capital requirements. The filing states disclosure controls were effective and there was no material change in internal controls during the quarter.
Important facts for investors to verify
- Review the expected Q4 pension termination charge, its final amount and timing, and the completion of the plan settlement.
- Track whether loan growth can be funded with stable deposits without further increases in higher-cost deposits or borrowings, and monitor net interest margin.
- Verify the reported interest-rate sensitivity estimates and assumptions, given the large modeled changes in net interest income.
- Monitor unrealized securities losses, their effect on equity, and management’s assessment of impairment as market rates and credit conditions change.
- Follow credit quality, including impaired and restructured loans, delinquency trends, charge-offs, and adequacy of the allowance as the portfolio expands.
- Assess earnings excluding the one-time loan-interest correction, pension costs, death-benefit income, and branch-sale gain to understand underlying performance.