Union Bankshares, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone fourth-quarter filing. Union Bankshares is a Vermont bank holding company; its sole subsidiary, Union Bank, serves northern Vermont and New Hampshire.
Financial performance and condition
| Metric | 2016 | 2015 |
|---|---|---|
| Net interest income | $24.8 million | $23.1 million |
| Net interest margin | 4.17% | 4.10% |
| Noninterest income | $10.1 million | $9.8 million |
| Noninterest expense | $24.2 million | $22.3 million |
| Provision for loan losses | $0.15 million | $0.55 million |
| Net income | $8.5 million | $7.9 million |
| EPS / dividends per share | $1.91 / $1.11 | $1.77 / $1.08 |
| Total assets | $691.4 million | $628.9 million |
| Loans, gross | $541.1 million | $506.1 million |
| Deposits | $597.7 million | $560.4 million |
| Borrowed funds | $31.6 million | $9.6 million |
| Stockholders’ equity | $56.3 million | $53.6 million |
- Net income increased 8.0%, supported by higher net interest income, higher noninterest income, and a $0.4 million decrease in loan-loss provision. Expense growth of 8.6% partly offset these gains. Return on average assets was 1.30%; return on average equity was 15.25%; the efficiency ratio was 67.97%.
- Net cash provided by operating activities was $7.6 million; investing activities used $40.7 million, while financing activities provided $54.4 million. Cash and cash equivalents increased to $39.3 million from $18.0 million.
- Liquidity resources included $59.8 million of unused FHLB capacity and $12.0 million of correspondent-bank federal funds lines. Management stated it believed liquidity was sufficient for reasonable needs.
- Union’s capital ratios at year-end included 13.02% total risk-based capital, 11.89% Tier 1 risk-based capital, and 8.17% leverage capital; the Bank was classified as well capitalized.
Changes versus prior year
- Assets grew 9.9%, loans 6.9%, and deposits 6.6%. Commercial real estate remained the largest loan category; commercial and commercial real estate loans together were approximately 55% of the portfolio.
- Borrowings rose $22.0 million, primarily as FHLB advances were used to fund loan growth and securities purchases. Noninterest-bearing deposits increased, while time deposits declined, partly reflecting municipal customers shifting balances to insured ICS money-market accounts.
- Credit indicators weakened in some respects: nonperforming loans increased to $4.4 million from $3.4 million, and nonperforming assets rose to 0.63% of assets from 0.53%. Allowance coverage of nonperforming loans fell to 119.66% from 154.93%. Net charge-offs remained low at 0.02% of average loans.
- Net interest margin rose seven basis points. The average yield on earning assets increased, while the average cost of interest-bearing liabilities edged down. Noninterest expenses increased, including salaries and benefits, equipment, and professional fees.
- For the fourth quarter, net income was $2.345 million and EPS was $0.53, compared with $1.927 million and $0.44 in fourth-quarter 2015.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management said the Bank was asset sensitive and expected to benefit in 2017 from the December 2016 rate increase and possible further increases. However, the disclosed 12-month simulation showed net interest income declines of 14% under a 200-basis-point rise and 21% under a 300-basis-point rise, against stated internal limits of 3.2% and 4.8%, respectively. Management cautioned that the model is not a forecast and depends on assumptions.
- Principal risks include geographic concentration in northern Vermont and New Hampshire; commercial real estate and construction credit exposure; interest-rate and liquidity risk; competition; regulatory change; cyber and third-party operational risks; and potential losses beyond the allowance. A weak winter season had pressured tourism borrowers, although management cited more normal snowfall and improving local economic indicators.
- Affordable-housing tax credits increased to $881,000 from $564,000 and contributed to the lower effective tax rate of 19.3%, versus 21.7%. The company also recorded $73,000 of additional life-insurance income related to a former director’s death benefit. The pension plan received a $750,000 contribution.
- Management reported no known material pending litigation, no current regulatory enforcement actions, and no material adverse examination comments. The independent auditor gave an unqualified opinion and concluded internal control over financial reporting was effective as of year-end.
Important facts for investors to verify
- Reconcile management’s stated asset sensitivity and expected benefit from rising rates with the modeled 14% and 21% decreases in 12-month net interest income; review the model assumptions and limits.
- Track nonperforming loans, troubled debt restructurings, classified credits, and allowance coverage as commercial real estate and construction exposure remains significant.
- Assess the sustainability and mix of deposit growth, including reliance on ICS balances, and monitor higher FHLB borrowings, maturities, and available collateral-based capacity.
- Review expense growth and the ongoing effects of technology and infrastructure spending, pension assumptions, and affordable-housing tax-credit investments.
- Consider that dividend payments depend substantially on subsidiary-bank distributions and remain subject to capital, regulatory, and board discretion.