Union Bankshares, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are primarily with 2021. Union Bankshares is a Vermont bank holding company whose sole subsidiary, Union Bank, operates in northern Vermont and New Hampshire, providing community, commercial, municipal, mortgage, wealth-management and trust services.
Financial performance and condition
| Metric | 2022 | 2021 |
|---|---|---|
| Net income | $12.6 million | $13.2 million |
| Basic / diluted EPS | $2.81 / $2.79 | $2.94 / $2.92 |
| Net interest income | $39.4 million | $35.7 million |
| Net interest margin | 3.28% | 3.38% |
| Noninterest income | $9.0 million | $13.0 million |
| Noninterest expense | $33.2 million | $32.9 million |
| Operating cash flow | $29.0 million | $29.2 million |
| Total assets | $1.336 billion | $1.205 billion |
| Loans, gross | $959.3 million | $800.9 million |
| Deposits | $1.202 billion | $1.095 billion |
| Stockholders’ equity | $55.2 million | $84.3 million |
- Profitability and margins: Net income declined about 4.2%. Net interest income rose 10.4%, but margin narrowed 10 basis points. Return on average assets was 1.00% (1.16% in 2021); return on average equity was 19.65% (15.92%). The efficiency ratio improved to 67.84% from 73.13%.
- Cash flow: Investing activities used $207.6 million and financing activities provided $150.5 million. Cash and cash equivalents decreased $28.0 million to $37.9 million.
- Credit quality: No provision for loan losses was recorded in either year. The allowance was $8.3 million, or 0.87% of loans; nonperforming loans were $2.4 million, 0.25% of loans, versus $4.7 million and 0.59% in 2021.
- Liquidity and funding: The bank reported $50.0 million of FHLB advances at year-end, at a weighted average rate of 4.41%, and $76.9 million of remaining FHLB borrowing capacity. Retail brokered deposits were $33.0 million. Estimated uninsured deposits were $342.8 million, or 28.5% of deposits.
- Capital: Union was categorized as well capitalized. Its total risk-based capital ratio was 13.95%, Tier 1 risk-based ratio 12.94%, and leverage ratio 7.84%. Company total capital to risk-weighted assets was 13.98%.
Material changes versus 2021
- Loan growth was strong: gross loans increased 19.8%; net loans and loans held for sale rose 20.1%. Residential real estate and construction balances expanded, while commercial balances fell partly as PPP loans were forgiven.
- Deposits increased 9.8%, including a 43.4% increase in time deposits. The company used $50.0 million of FHLB advances at year-end and added $33.0 million of brokered deposits.
- Net gains on residential loan sales fell to $1.0 million from $5.0 million as sales volume dropped to $78.0 million from $216.8 million. MSR activity changed from $243,000 of net income to $465,000 of net expense.
- Higher net interest income was more than offset by lower noninterest income, contributing to lower net income. Interest expense rose to $4.5 million from $3.6 million.
- Rising rates drove a $47.8 million gross unrealized loss on available-for-sale securities at year-end, versus $4.3 million in 2021. The after-tax accumulated OCI loss increased to $37.4 million from $1.6 million, contributing to the decline in equity and book value per share, which fell to $12.25 from $18.77. Management said it did not consider the securities’ declines other-than-temporary impairment.
Outlook, risks and other notable items
- No specific earnings or revenue guidance is provided. Management described the balance sheet as asset-sensitive, so rising rates may support net interest income; however, it expected funding costs to continue increasing in 2023 as deposit competition and wholesale funding rates rise.
- Management expected customer deposits to grow in 2023 and reported plans for a North Conway, New Hampshire branch. It also declared a quarterly dividend of $0.36 per share in January 2023, up from $0.35 in prior quarters.
- Key risks include interest-rate changes and securities-value volatility; deposit outflows and higher funding costs; concentrated lending in northern Vermont and New Hampshire, including commercial real estate and tourism-related exposure; inflation and weakening borrower capacity; cybersecurity and third-party service-provider disruptions; and regulatory or deposit-insurance cost increases.
- CECL became effective for the company on January 1, 2023. Based on its year-end parallel calculation, management anticipated an immaterial initial impact to financial statements and regulatory capital, while warning that the allowance could become more volatile.
- Off-balance-sheet commitments totaled $230.2 million, principally unused lines of credit ($185.5 million) and commitments to originate loans ($39.2 million). Management stated it believed liquidity was sufficient. Ordinary-course legal matters were not expected to have a material effect.
- The financial statements received an unmodified audit opinion. Management and the auditor reported effective internal control over financial reporting; the auditor identified the allowance for loan losses as a critical audit matter.
Important facts for investors to verify
- How deposit retention, uninsured deposit balances, brokered funding and borrowing capacity evolve as rates and competition change.
- Whether loan growth—especially commercial real estate, construction and tourism-related lending—affects delinquencies, collateral values or future credit-loss provisions.
- Whether the sizable unrealized securities losses remain unrealized and how interest rates, liquidity needs or any securities sales affect capital and earnings.
- The actual CECL transition adjustment and subsequent allowance trends compared with management’s expectation of an immaterial initial impact.
- Whether deposit-cost increases outpace asset-yield repricing and alter net interest margin, earnings and dividend capacity.