Union Bankshares, Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; comparative figures are for 2022. The company is a Vermont-based bank holding company operating Union Bank, a community bank serving northern Vermont and New Hampshire. Its audited financial statements received an unmodified opinion. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial performance and position
| Metric | 2023 | 2022 |
|---|---|---|
| Interest and dividend income | $57.1 million | $43.9 million |
| Net interest income | $37.8 million | $39.4 million |
| Net income | $11.3 million | $12.6 million |
| Basic / diluted EPS | $2.50 / $2.48 | $2.81 / $2.79 |
| Net interest margin | 2.88% | 3.28% |
| Net interest spread | 2.50% | 3.13% |
| Return on average assets / equity | 0.82% / 20.01% | 1.00% / 19.65% |
| Efficiency ratio | 72.83% | 67.84% |
| Total assets at year-end | $1,468.9 million | $1,336.5 million |
| Total deposits at year-end | $1,305.6 million | $1,201.9 million |
| Borrowed funds at year-end | $65.7 million | $50.0 million |
| Stockholders’ equity at year-end | $65.8 million | $55.2 million |
- Earnings and margins: Net income declined 10.8%. Net interest income fell $1.6 million as funding costs rose faster than asset yields: interest expense increased $14.7 million, partly offset by a $13.2 million increase in interest and dividend income. Noninterest income rose 4.8% to $9.9 million; noninterest expenses increased 5.2% to $35.4 million. The company recorded a $499,000 net credit-loss benefit and income tax expense of $1.6 million.
- Loans and credit: Gross loans, including loans held for sale, grew 7.5% to $1.03 billion. Real estate-secured loans were 88.4% of the portfolio; commercial and commercial real estate loans were approximately 43%. Nonperforming assets were 0.14% of assets, versus 0.18% in 2022. The loan allowance was $6.6 million, or 0.64% of loans, compared with $8.3 million, or 0.87%, in 2022.
- Cash flow: Operating activities provided $9.2 million, investing activities used $82.3 million, and financing activities provided $112.8 million. Cash and cash equivalents increased $39.8 million to $77.7 million.
- Liquidity and funding: Deposits increased 8.6%, with growth driven in part by wholesale funding. Year-end deposits included $103.0 million of retail brokered deposits and $50.2 million of purchased ICS deposits. Estimated uninsured deposits were $390.4 million, or 29.9% of total deposits. Borrowings included $55.7 million from the FHLB and a $10.0 million Federal Reserve Bank Term Funding Program advance. Management reported $135.9 million of remaining FHLB borrowing capacity and considered liquidity sufficient for reasonable needs.
- Capital and shareholder returns: Union Bank’s total risk-based capital ratio was 13.35%, and its leverage ratio was 7.62%; the bank was classified as well capitalized. Dividends paid were $1.44 per share, versus $1.40 in 2022. The company declared a $0.36-per-share quarterly dividend in January 2024.
Material changes versus 2022
- Higher rates and deposit competition increased average interest-bearing liability costs: the average rate paid rose to 1.81% from 0.52%, while the average yield on earning assets rose to 4.31% from 3.65%. The resulting margin compression was the principal earnings pressure.
- Average time deposits increased by $135.4 million, while average nontime deposits decreased by $77.6 million. The company also increased use of brokered and other wholesale funding.
- Total assets rose 9.9%; loans and loans held for sale rose 7.5%, and deposits rose 8.6%. Net cash from financing included increased time deposits and borrowing activity.
- Available-for-sale securities had $41.0 million of gross unrealized losses at year-end, down from $47.8 million in 2022. Accumulated other comprehensive loss improved to $32.0 million from $37.4 million. Management reported no credit-related impairment allowance on these securities.
- The company adopted CECL on January 1, 2023. Adoption reduced the loan allowance by $1.5 million and established a $1.5 million off-balance-sheet credit allowance; the net increase to opening retained earnings was $37,000. Accordingly, the 2023 credit-loss figures are not directly comparable with 2022’s incurred-loss accounting.
Outlook, risks, and unusual items
- Outlook: The filing provides no numerical earnings or revenue guidance. Management expected funding costs to continue increasing in 2024, citing higher-for-longer wholesale funding rates, and described continued focus on deposit gathering, margin optimization, and asset quality.
- Interest-rate and securities risks: A steeply inverted yield curve and deposit repricing pressured earnings. The large unrealized securities losses could become realized if securities must be sold to meet liquidity needs. The BTFP stopped making new loans after March 11, 2024.
- Credit and concentration risks: Lending is concentrated in northern Vermont and New Hampshire, with substantial real estate exposure and commercial lending risks. Inflation, local economic conditions, and tourism-related borrower performance could affect repayment and collateral values.
- Other risks: The filing highlights deposit outflows and funding costs, competition, regulatory and compliance changes, cybersecurity and third-party service-provider disruptions, fraud, and the possibility of higher credit losses. The auditor identified the allowance for credit losses as a critical audit matter because of the significant estimates and judgment involved.
- Contingencies and accounting: The company disclosed $229.8 million in commitments and other financial instruments with credit risk, including $192.1 million in unused lines of credit; these are not necessarily expected cash outflows. It reported no known pending legal matters expected to have a material effect. CECL adoption and securities-related OCI changes are notable reporting items.
Important facts for investors to verify
- How deposit retention, uninsured deposit levels, brokered and purchased deposits, and borrowing availability evolve after year-end.
- Whether deposit repricing and wholesale funding costs continue to compress net interest margin, and whether management provides updated outlook or guidance.
- Changes in available-for-sale securities’ unrealized losses, liquidity needs, and any securities sales or related realized losses.
- Loan performance and allowance adequacy, especially in commercial real estate, construction, and tourism-related exposures; review CECL assumptions and subsequent credit trends.
- Capital ratios, dividend capacity, and the effect of the $16.5 million subordinated notes, which reset from a fixed rate to SOFR plus 263 basis points beginning September 2026.