Union Bankshares, Inc. — 2020 Form 10-K
Business and reporting period. This annual report covers the fiscal year ended December 31, 2020, with year-end comparisons to 2019. Union Bankshares is a Vermont bank holding company whose subsidiary, Union Bank, serves northern Vermont and northern New Hampshire through community banking, commercial and retail lending, and trust and asset-management services. The company reported one business segment.
Financial performance and position
| Metric | 2020 | 2019 | Change / context |
|---|---|---|---|
| Net income | $12.8 million | $10.6 million | Up 20.3%; diluted EPS was $2.85 versus $2.38. |
| Net interest income | $31.6 million | $30.3 million | Up 4.4% on a fully tax-equivalent basis. |
| Net interest margin | 3.57% | 4.04% | Down 47 basis points; net interest spread fell to 3.40% from 3.85%. |
| Provision for loan losses | $2.2 million | $775 thousand | Higher provision reflected COVID-related economic uncertainty and increased qualitative reserves. |
| Noninterest income | $16.0 million | $10.5 million | Up 53.1%, principally due to gains on loan sales. |
| Noninterest expense | $30.2 million | $27.5 million | Up 9.9%, including higher compensation and equipment costs. |
| Total assets | $1.094 billion | $872.9 million | Up 25.3%. |
| Deposits | $994.3 million | $744.0 million | Up 33.6%; growth reflected PPP proceeds, government stimulus and reduced spending. |
| Gross loans and loans held for sale | $803.4 million | $677.7 million | Up 18.5%; included $66.2 million of PPP loans at year-end. |
| Borrowed funds | $7.2 million | $47.2 million | Down $40.0 million, principally from FHLB advance repayments. |
| Stockholders’ equity | $80.9 million | $71.8 million | Up 12.6%; 2020 cash dividends declared totaled $5.7 million. |
Cash flow and liquidity. Operating activities used $7.1 million in 2020, compared with providing $11.6 million in 2019; the filing’s cash-flow reconciliation includes substantial mortgage-loan originations and sales. Investing activities used $125.9 million, while financing activities provided $204.6 million, largely from deposit growth. Cash and cash equivalents increased $71.6 million to $122.8 million. The Bank reported $112.2 million of remaining FHLB borrowing capacity, a $15.0 million correspondent-bank federal funds line, and other contingent funding sources; management said liquidity was sufficient for expected needs.
Credit quality and capital. The allowance for loan losses rose to $8.3 million from $6.1 million. Nonperforming assets declined to $3.0 million from $3.5 million, and nonperforming loans were 0.36% of total loans versus 0.52%. The Bank’s total risk-based capital ratio was 13.79%, and its Tier 1 leverage ratio was 7.26%; it was categorized as well capitalized under applicable prompt-corrective-action standards.
Material changes versus 2019
- Residential mortgage sales rose to $263.1 million from $158.0 million, generating $8.2 million in gains versus $2.9 million. Low rates drove refinancing and mortgage activity; the company said loan sales also help manage long-term interest-rate risk.
- Net interest income increased, but asset yields fell faster than funding costs: average earning-asset yield declined to 4.14% from 4.77%, while average funding cost fell to 0.74% from 0.92%.
- COVID-related provision expense increased by $1.4 million. The company modified loans with outstanding balances of $175.5 million under pandemic-related relief; $37.6 million remained subject to modification terms at year-end.
- The company originated $69.8 million of PPP loans during 2020; $3.6 million had been forgiven by year-end. Reported PPP balances were $66.2 million. PPP interest income and recognized origination fees were $481 thousand and $953 thousand, respectively.
- Two full-service branches closed in May 2020; management stated the closures were planned and not caused by COVID-19.
Outlook, risks and unusual items
- Outlook: No quantified earnings or financial guidance was provided. Management expected the low-rate environment to persist into 2021 or beyond, potentially pressuring net interest income, while lower-rate deposit renewals could reduce funding costs. It expected significant PPP forgiveness during 2021, subject to program terms.
- COVID-19 and credit: Management described results as better than expected but emphasized uncertainty around borrower health, unemployment, collateral values and sectors including tourism, restaurants, hospitality and senior care. The company increased economic reserve factors and continues to monitor affected borrowers.
- Concentration and rates: Lending is concentrated in northern Vermont and New Hampshire, with substantial real-estate exposure; commercial and commercial-real-estate loans represented approximately 56% of the loan portfolio. Prolonged low rates, changing deposit mix and competition could further pressure margins or funding costs.
- Other risks: The filing identifies regulatory and capital requirements, cybersecurity and third-party system risks, competition, operational disruption, and uncertainty in loss-reserve estimates as material risks. It also notes that the company had not elected the community bank leverage ratio framework at year-end.
- Contingencies: Off-balance-sheet commitments totaled $200.1 million, including $132.5 million of unused lines and $61.4 million of loan-origination commitments; not all are expected to be drawn. The MPF program’s maximum contingent contractual liability was $747 thousand, with a $19 thousand reserve. Management reported no known pending legal matters expected to have a material effect.
- Unusual items: The company paid $66 thousand in penalties after prepaying FHLB advances. It recorded $240 thousand of gains on reference investments associated with its deferred-compensation plan. No investment-security impairment was identified; goodwill was not impaired.
- Audit and controls: The independent auditor gave an unqualified opinion on the financial statements. The allowance for loan losses was identified as a critical audit matter. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal control effectiveness under the smaller-reporting-company exemption.
Key facts for investors to verify
- Whether PPP loans are forgiven as expected, and the timing and amount of remaining PPP fee recognition.
- Whether pandemic-related loan modifications result in later delinquencies, charge-offs or additional allowance provisions, especially in tourism-linked and commercial real-estate exposures.
- Whether loan-sale gains and elevated mortgage volumes are sustainable, and how continued low rates affect net interest margin and earnings.
- Whether unusually strong deposit growth persists, including the stability and cost of reciprocal and brokered deposits, and how liquidity changes as pandemic-related balances normalize.
- Whether capital, asset quality and the $8.3 million allowance remain adequate as economic conditions and borrower performance evolve.