Union Bankshares Inc Reports Operating Results (10-Q)

Author's Avatar
May 15, 2009
Union Bankshares Inc (UNB, Financial) filed Quarterly Report for the period ended 2009-03-31.

Union Bankshares is a two-bank holding company whose subsidiaries are Citizens Savings Bank & Trust Company and Union Bank. Citizens offers a full line of personal trust services to its customers. Union competes through Citizens for personal trust business with trust companies commercial banks having trust departments investment advisory firms brokerage firms mutual funds and insurance companies. Union Bankshares Inc has a market cap of $71.8 million; its shares were traded at around $16.03 with a P/E ratio of 14.3 and P/S ratio of 2.5. The dividend yield of Union Bankshares Inc stocks is 6.3%. Union Bankshares Inc had an annual average earning growth of 2.2% over the past 5 years.

Highlight of Business Operations:

In addition, as a result of the weakness of certain financial institutions, the FDIC has taken action that will result in increased FDIC insurance assessments for United States FDIC-insured financial institutions, including Union. Under the deposit insurance restoration plan approved by the FDIC in October 2008, the FDIC Board set a rate schedule to raise the insurance reserve ratio to 1.15 percent within five years. On February 27, 2009, the FDIC announced that the restoration plan horizon has been extended to seven years in light of the current significant strains on banks and the financial system and the likelihood of a severe recession. In addition, the FDIC announced a special assessment of up to 20 basis points to be assessed on deposits at June 30, 2009 and collected on September 30, 2009. The FDIC may also impose an emergency special assessment after June 30, 2009 of up to 10 basis points if the FDIC deems that an additional special assessment is necessary to maintain public confidence in federal deposit insurance. Based on the FDIC insurance premium schedule for 2009, we anticipate our premium, exclusive of the special assessment of up to 20 basis points, to be $552 thousand for 2009 compared to $87 thousand for 2008. The special assessment at the maximum 20 basis points based on our estimated deposit base at June 30, 2009 would be approximately $718 thousand. This special assessment amount is still under review and has not yet been finalized as the Senate has agreed to increase the FDICs Treasury borrowing authority, but if it was to occur as proposed, the total FDIC assessment for 2009 would be approximately $1.27 million.

The Company's net income was $1.267 million for the quarter ended March 31, 2009, compared with net income of $1.406 million for the same period in 2008, representing a $139 thousand, or 9.9%, decrease between years. The decrease was the cumulative result of an increase in other expenses of $126 thousand, of which $123 thousand is due to the increase in the FDIC insurance assessment, the increase in the provision for income taxes as the 2008 provision was low due to the receipt of an $184 thousand rehabilitation tax credit resulting from an affordable housing limited partnership investment, and a higher provision for loan losses for the first quarter of 2009, in the amount of $95 thousand versus $50 thousand for the first quarter of 2008. These increases in expenses were partially offset by an increase in net gains on sales of loans held for sale and the resulting increased income from the recognition of mortgage servicing rights as the Company sold the majority of qualified residential mortgage loans originated during the first quarter of 2009 to mitigate long term interest rate risk and to generate fee income.

The Company faced a challenging interest rate environment as the prime rate had been reduced seven times since January 1, 2008 from 7.25% to 3.25% on March 31, 2009. Total interest income decreased by $414 thousand, or 6.6% to $5.9 million in the first quarter of 2009 versus the $6.3 million in the first quarter of 2008, while the decrease in interest expense from $1.9 million in 2008 to $1.5 million in 2009 was $436 thousand between periods. The result of the changes in interest income and expense was that net interest income for the first quarter of 2009 was $4.4 million, up $22 thousand or 0.5% from the first quarter of 2008 of $4.3 million. During the first quarter of 2009, the Company's net interest margin decreased 40 basis points to 4.54%, from 4.94% for the first quarter of 2008. Despite the decreased interest rate margin, there was a slight increase in net interest income due to growth in the balance sheet. The Company's net interest spread declined 21 basis points to 4.20% for the first quarter of 2009, compared to 4.41% for the same period last year. The decline in the net interest spread was primarily the result of the decline in average interest rates earned on loans as the 400 basis point drop in the prime rate between January 1, 2008 and March 31, 2009 had an effect on the repricing of adjustable rate loans and the volume of refinancings, as customers took advantage of the lower rates. Further drops in the prime rate and/or increases in competitors deposit rates could be problematic as the individual instruments reprice.

The Company's total assets decreased from $440.1 million at December 31, 2008, to $421.8 million at March 31, 2009, a decrease of $18.3 million, or 4.2%. The decrease between periods is a normal seasonal decline which management believes may have been exacerbated by the tightening economy. Deposits decreased from $364.4 million at December 31, 2008 to $346.5 million at March 31, 2009, a decrease of $17.9 million, or 4.9%, with that decrease comprised of a drop of $13.3 million in commercial noninterest-bearing deposits and a drop of $14.7 million in overall Municipal deposits which are subject to great seasonality. These decreases were partially offset by an increase in consumer deposits with savings accounts growing $3.7 million and money market accounts growing $9.2 million. Total loans, including loans held for sale, decreased $4.5 million, or 1.3%, from $353.4 million at December 31, 2008 to $348.9 million at March 31, 2009. Total loans at March 31, 2009 are net of $18.0 million in residential real estate loans sold during the first quarter of 2009. Despite a weakening economy, loan demand is strong due to lower interest rates, a changing competitive environment due to the sale of a number of our competitors, financial market turmoil and the reluctance of some of our larger competitors to issue loans.

The provision for loan losses for the first quarter of 2009 was $95 thousand versus a $50 thousand provision for the first quarter of 2008. The $95 thousand provision was deemed appropriate for the first quarter of 2009 in light of higher net charge-offs for the quarter ended March 31, 2009, which were $127 thousand compared to net charge-offs of $27 thousand for the quarter ended March 31, 2008. There is continuing strong loan demand and an upward trend in the dollar amount of commercial real estate loans. Although there continues to be a softening of the economy, there was a decrease in loans 30 or more days past due between years as well as a decline in classified loans. For further details see, FINANCIAL CONDITION - "Allowance for Loan Losses" and "Asset Quality" sections below.

Net Interest Income. The largest component of the Company's operating income is net interest income, which is the difference between interest and dividend income received from interest-earning assets and the interest expense paid on interest-bearing liabilities. The Company's net interest income increased $22 thousand, or 0.5%, to $4.36 million for the three months ended March 31, 2009, from $4.34 million for the three months ended March 31, 2008. The net interest spread decreased 21 basis points to 4.20% for the three months ended March 31, 2009, from 4.41% for the three months ended March 31, 2008. The decline in the net interest spread was primarily the result of the drop in average interest rates earned on loans from 7.41% for the quarter ended March 31, 2008 to 6.37% for the quarter ended March 31, 2009. The prime rate was 7.25% on January 1, 2008, 5.25% by March 31, 2008 and 3.25% throughout the quarter ended March 31, 2009, which affected the repricing of adjustable rate loans as well as the volume of new loans and refinancing activity especially during the first quarter of 2009, as customers took advantage of the lower rates. The adverse effect of declining rates on the Company's net interest spread was mitigated somewhat by an 83 basis point decline in the average rate paid on deposits and borrowed funds in the first quarter of 2009 versus the same period last year. The net interest margin for the first quarter of 2009 decreased 41 basis points to 4.54% from the 2008 period at 4.95% reflecting the net effect of a slight increase in net interest income of $22 thousand and an increase of $39.2 million, or 10.8%, in average earning assets. Further decrease in the prime rate would not necessarily be beneficial to the Company in the near term, especially if funding rates did not follow a similar downward trend. See "OTHER FINANCIAL CONSIDERATIONS - Market Risk and Asset and Liability Management."

Read the The complete Report