Union Bankshares, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are primarily with FY2020. Union Bankshares is a Vermont-based bank holding company operating Union Bank, a community bank serving northern Vermont and New Hampshire.
Financial performance and condition
| Metric | FY2021 / year-end | FY2020 / prior year-end |
|---|---|---|
| Net income | $13.17 million | $12.81 million |
| Basic / diluted EPS | $2.94 / $2.92 | $2.86 / $2.85 |
| Net interest income | $35.71 million | $31.60 million |
| Net interest margin | 3.38% | 3.57% |
| Return on average assets / equity | 1.16% / 15.92% | 1.33% / 16.87% |
| Total assets | $1.205 billion | $1.094 billion |
| Total deposits | $1.095 billion | $994.3 million |
| Total stockholders’ equity | $84.3 million | $80.9 million |
- Net income increased about 2.9%. Higher net interest income and no loan-loss provision in 2021, versus a $2.2 million provision in 2020, were partly offset by lower noninterest income, higher expenses, and higher income taxes.
- Noninterest income fell 19.0% to $13.0 million, largely because loan-sale gains declined to $5.0 million from $8.2 million. Noninterest expenses rose 8.9% to $32.9 million. The efficiency ratio increased to 73.13% from 62.75%.
- Net interest income rose 13.0%, while margin declined 19 basis points. The average yield on earning assets fell 43 basis points to 3.71%; the average cost of interest-bearing liabilities declined 30 basis points to 0.44%.
- Loans and loans held for sale totaled $800.9 million, down 0.3%; investments totaled $269.0 million, up 151.8%. Deposit growth, including PPP proceeds and government stimulus funds, contributed to the larger securities portfolio and reduced reliance on wholesale funding.
- Operating cash flow was $29.2 million, compared with cash used of $7.1 million in 2020. Investing activities used $190.0 million and financing activities provided $104.0 million. Cash and cash equivalents ended the year at $65.9 million, down from $122.8 million.
- There were no borrowed funds at year-end, compared with $7.2 million in 2020. The company issued $16.5 million of subordinated notes in August 2021; they carry a 3.25% fixed rate through September 2026, then reset quarterly to three-month SOFR plus 263 basis points, and mature in 2031.
- Union Bank’s total risk-based capital ratio was 15.31% and its leverage ratio was 8.44%; the bank was classified as well capitalized. The allowance for loan losses was $8.34 million, or 1.04% of loans.
Material changes and notable items
- Year-end nonperforming assets increased to $4.75 million from $2.97 million; nonperforming assets were 0.39% of total assets versus 0.27%. Management characterized asset-quality ratios as favorable, but the allowance coverage of nonperforming loans declined to 175.57% from 283.16%.
- Commercial and commercial real estate loans were approximately 50% of the loan portfolio. Real-estate-secured lending increased as PPP balances declined with forgiveness; PPP loans outstanding fell to $13.6 million from $66.2 million.
- Unrealized losses on available-for-sale securities drove a $4.19 million after-tax other comprehensive loss, versus $1.65 million of other comprehensive income in 2020. Management reported no securities considered other-than-temporarily impaired.
- Residential loan sales declined to $216.8 million from $263.1 million. The company cited lower sale volumes and premiums for the reduction in gains.
- Customer deposits grew 10.1%. Estimated uninsured deposits were $353.0 million, or 32.2% of total deposits; municipal uninsured deposits were collateralized as described in the filing.
- Cash dividends paid were $1.32 per share for 2021. In January 2022, the board declared a quarterly dividend of $0.35 per share, up from $0.33.
Outlook, risks, and contingencies
Management provided no formal earnings or revenue guidance. It described the balance sheet as asset-sensitive: rising interest rates are expected to benefit net interest income, while falling rates may weigh on it. Management projected the cost of funds to remain consistent with 2021 in 2022, while noting that competition, customer behavior, and fintech providers could push deposit costs higher. It expected deposits to continue growing, but these expectations are subject to uncertainty.
- Key risks include the effects of COVID-19 and its variants on borrowers and operations; local economic and real-estate concentration; credit deterioration, especially in commercial real estate and tourism-related lending; interest-rate and deposit-mix changes; and inflation and higher energy costs affecting customers.
- The filing also highlights cybersecurity, technology and third-party service-provider disruption, competition, regulatory changes, liquidity and funding access, and the possibility that future credit losses exceed current reserves.
- Outstanding credit-related commitments and other disclosed off-balance-sheet exposures totaled $225.1 million, including $48.9 million of loan origination commitments and $168.4 million of unused credit lines. These amounts are not necessarily expected cash requirements because commitments may expire unused.
- The company reported no known pending legal proceedings expected to have a material effect. The independent auditor issued an unqualified opinion on the financial statements and identified the allowance for loan losses as a critical audit matter. The auditor did not attest to internal controls; management reported those controls effective at year-end.
Important facts for investors to verify
- Whether deposit growth persists as pandemic-related stimulus effects fade, and how the substantial uninsured-deposit balance behaves.
- Whether loan delinquencies and nonperforming assets continue to rise, particularly in commercial real estate and tourism-exposed borrowers, and whether the allowance remains adequate.
- How interest-rate changes affect asset yields, deposit pricing, net interest margin, and the fair value of the expanded securities portfolio.
- Whether higher operating expenses and reduced mortgage-sale gains continue to pressure the efficiency ratio and earnings.
- The terms, regulatory-capital treatment, and future interest-cost effects of the subordinated notes, including the post-2026 SOFR reset.
- The effect of the transition to CECL, which the company expected to implement in 2023, on reserves and earnings.