Union Bankshares, Inc. — 2015 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2015; filed March 15, 2016. The company is a Vermont bank holding company operating Union Bank, a community bank serving northern Vermont and New Hampshire through 17 banking offices, loan centers and digital channels.
Financial results and condition
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net interest income | $23.1 million | $22.7 million | Up 1.9% |
| Noninterest income | $9.8 million | $8.9 million | Up 9.9% |
| Net income | $7.9 million | $7.7 million | Up 2.4% |
| Earnings per share | $1.77 | $1.73 | Up $0.04 |
| Return on average assets | 1.27% | 1.30% | Down 3 bps |
| Return on average equity | 14.80% | 14.88% | Down 8 bps |
| Net interest margin | 4.10% | 4.17% | Down 7 bps |
| Efficiency ratio | 66.25% | 67.40% | Improved |
Total assets were $628.9 million, up 0.8%. Gross loans, including loans held for sale, grew 3.1% to $506.1 million; deposits increased 1.5% to $560.4 million. Loans were concentrated in real estate: 87.8% of gross loans were real-estate-secured, and commercial and commercial real estate loans together represented about 50% of the portfolio. Average loans-to-deposits were 91.6%.
Provision for loan losses rose 59.4% to $550,000, while net charge-offs were negative $43,000 (net recoveries). The allowance for loan losses was $5.2 million, or 1.04% of loans not held for sale. Nonperforming assets fell to $3.4 million, or 0.53% of assets, from $4.9 million, or 0.78%, in 2014. Troubled debt restructurings increased to $2.7 million from $1.7 million.
Cash and cash equivalents declined to $18.0 million from $41.7 million. Operating activities provided $13.1 million; investing activities used $34.8 million, including a $5.0 million purchase of company-owned life insurance; financing activities used $2.1 million. Borrowed funds declined 36.7% to $9.6 million, including $7.9 million of FHLB advances. Management said liquidity was sufficient and reported access to additional FHLB capacity and $12.0 million of correspondent-bank federal funds lines.
Stockholders’ equity was $53.6 million, up 4.1%. Union’s year-end regulatory capital ratios included 12.2% Tier 1 risk-based capital, 13.4% total risk-based capital and 8.5% leverage capital; the Bank was classified as well capitalized. The annual dividend was $1.08 per share, up from $1.04; a $0.27 quarterly dividend was declared in January 2016.
Fourth-quarter context
Unaudited fourth-quarter 2015 net income was $1.927 million and EPS was $0.44, compared with $1.885 million and $0.43 in fourth-quarter 2014. The filing reports annual results as its primary performance period.
Material changes and management commentary
- Net interest income grew as average earning assets increased 3.69%, led by loan growth, but margin pressure continued: asset yields fell 10 bps while funding costs fell 4 bps. Management attributed the pressure to the prolonged low-rate environment and limited room to reduce deposit rates further.
- Noninterest income benefited from $131.7 million of residential mortgage sales, versus $94.9 million in 2014; gains on loan sales rose 36.9% to $2.9 million. The company said selling residential mortgages helps mitigate long-term interest-rate risk.
- Noninterest expense increased 3.3% to $22.3 million, including higher compensation, benefits, equipment and card costs. The provision for income taxes rose to $2.2 million; the effective tax rate increased to 21.7%, partly because affordable-housing tax credits declined.
- Commercial real estate, construction and commercial lending drove loan growth. Management cited improved regional unemployment rates but noted that a low-snow winter was putting strain on the local tourism industry and that it was monitoring borrower effects.
- The frozen defined-benefit pension plan’s net liability increased to $1.5 million from $803,000, reflecting weaker-than-expected investment performance, partly offset by a higher discount rate. The plan’s 2015 investment return was negative 4.19%.
Outlook, risks and contingencies
The filing gives no specific earnings, revenue or growth guidance. Management cautioned that flat rates could continue to erode asset yields while deposit costs have limited room to fall. It also described rising-rate sensitivity as a risk. Notably, the interest-rate section says rising rates would improve modeled net interest income, but its accompanying 12-month sensitivity table reports declines of 14% for a 200-basis-point rise and 21% for a 300-basis-point rise. The filing does not reconcile this apparent inconsistency.
Principal risks include geographic and real-estate concentration in northern Vermont and New Hampshire; commercial real estate and construction credit exposure; interest-rate and liquidity risk; competition for loans and deposits; regulatory and capital changes; cybersecurity, technology and third-party service-provider risks; and possible changes in local tourism conditions. Off-balance-sheet commitments totaled $107.6 million, principally unused credit lines and loan-origination commitments; these amounts are not necessarily expected cash outflows. The maximum contingent liability under the MPF mortgage risk-sharing program was $595,000, with $23,000 reserved.
Management reported no material pending legal proceedings, no regulatory enforcement actions, and no examination comments expected to materially affect the company. The independent auditor gave an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective. The filing reports no goodwill impairment at year-end.
Important facts for investors to verify
- Reconcile the stated positive rising-rate outlook with the sensitivity table’s projected 14% and 21% declines in net interest income.
- Track whether margin compression persists and whether loan growth continues to outpace deposit growth.
- Review credit quality, particularly the growth in troubled restructurings, the commercial real estate and construction exposures, and tourism-related borrowers.
- Assess the cash decline, deposit stability, available contingent funding and the maturity and cost of FHLB advances.
- Monitor pension-plan investment performance and its effect on the funded status and accumulated other comprehensive loss.
- Confirm dividend sustainability against earnings, capital needs and regulatory constraints; the annual payout ratio was 61.02%.