Union Bankshares, Inc. — FY 2019 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2019, with comparisons primarily to FY 2018. Union Bankshares is a Vermont bank holding company whose sole subsidiary, Union Bank, provides community banking and trust services through 20 offices in northern Vermont and New Hampshire. The filing was signed March 13, 2020.
Financial performance and condition
- Profit: Net income was $10.65 million, up from $7.07 million; diluted effects were immaterial and reported EPS was $2.38 versus $1.58. The comparison is affected by a $4.63 million pretax pension-plan termination expense in 2018. Excluding that item, 2018 net income was $10.80 million ($2.42 per share), so 2019 GAAP net income was lower on that adjusted comparison.
- Revenue and costs: Net interest income rose 6.2% to $30.39 million; noninterest income increased 9.0% to $10.32 million. Noninterest expense fell 6.2% to $27.46 million, principally because 2018 included pension expense. Provision for loan losses increased to $775,000 from $450,000. Income tax provision was $1.83 million; effective tax rate was 14.7%.
- Margins: Net interest margin was 4.05%, down from 4.08%; net interest spread declined to 3.86% from 3.95%. Average earning-asset yield rose, but deposit and borrowing costs also increased.
- Balance sheet: Assets grew 8.4% to $872.9 million. Gross loans, including loans held for sale, were $677.7 million, up 5.0%; deposits rose 5.3% to $744.0 million. Investment securities were $87.4 million. Stockholders’ equity increased 11.4% to $71.8 million.
- Funding and liquidity: Borrowed funds increased 69.5% to $47.2 million, mainly from FHLB advances. Year-end cash and cash equivalents were $51.1 million. The Bank reported $65.8 million of remaining FHLB borrowing capacity, plus other available funding lines; management stated liquidity was sufficient for reasonable needs. The loan-to-deposit ratio was 91.08%.
- Cash flow: Operating activities provided $11.8 million, investing activities used $49.1 million, and financing activities provided $51.1 million. Cash and cash equivalents increased $13.8 million to $51.1 million.
- Credit quality and capital: Nonperforming loans rose to $3.50 million from $1.96 million; nonperforming assets were 0.40% of assets versus 0.24%. Allowance for loan losses was $6.12 million, or 0.91% of loans not held for sale; net charge-offs were 0.06% of average loans. Union’s total risk-based capital ratio was 12.98% and leverage ratio 8.06%; the Bank was categorized as well capitalized.
Material changes versus FY 2018
- Two Vermont branches opened in 2019, contributing to loan and deposit growth as well as higher staffing, occupancy, and equipment costs.
- Loan-sale gains increased to $2.90 million as mortgage and commercial loan sales rose to $158.3 million from $116.7 million. Management cited higher sale premiums in the declining-rate environment and sales as a way to manage long-term interest-rate risk.
- The Fed lowered its target rate during 2019. Management said this pressured interest income, while deposit pricing remained competitive and funding costs rose.
- Investment securities’ net unrealized position improved to a $1.2 million gain from a $1.3 million loss. No securities were judged other-than-temporarily impaired.
- The defined benefit pension plan had been terminated and settled by the end of 2018; no related pension expense was recorded in 2019.
Outlook, risks and unusual items
The filing gives no quantified earnings or growth guidance. Management noted that further rate declines in 2020 could reduce loan and investment income, while expressing hope that deposit costs would ease. The filing also identifies the coronavirus pandemic as a possible source of financial-market and economic volatility; it does not quantify an expected impact. Management reported no material subsequent event affecting the presented financial statements, and disclosed a January 2020 quarterly dividend increase to $0.32 per share.
- Key risks include concentration in Vermont and New Hampshire, including real-estate-secured and commercial lending; about 50% of loans were commercial and commercial real estate.
- Other material risks include credit losses and reserve estimates, interest-rate and deposit-cost pressure, competition, reliance on deposits and wholesale funding, regulatory and capital requirements, cybersecurity and third-party system failures, and economic or market disruption.
- Commitments to extend credit and other disclosed off-balance-sheet exposures totaled $145.6 million; these amounts do not necessarily represent future cash requirements because commitments may expire undrawn.
- Management and the auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements. Management reported no material pending legal proceedings beyond ordinary-course matters.
Important facts for investors to verify
- Assess earnings against the pension-adjusted 2018 comparison, not just the reported year-over-year increase.
- Track whether nonperforming loans and charge-offs continue to rise, and whether the allowance remains adequate.
- Monitor net interest margin, deposit pricing, loan growth, and reliance on FHLB or brokered funding.
- Review the effects of new branches and loan-sale volumes on recurring profitability and operating costs.
- Evaluate the actual effects of subsequent economic conditions, including the coronavirus pandemic, on borrowers, collateral values, liquidity, and credit quality.