Business context and reporting period
Union Bankshares, Inc. is a Vermont bank holding company whose sole banking subsidiary, Union Bank, serves northern Vermont and northwestern New Hampshire through 16 banking offices. Its principal activities are community, commercial, municipal, mortgage, and trust banking. This Form 10-K covers the fiscal year ended December 31, 2013; comparisons are with 2012 unless stated otherwise. Figures below are consolidated.
Financial performance and condition
| Metric | 2013 | 2012 |
|---|---|---|
| Net interest income | $22.0 million | $21.7 million |
| Net income | $7.1 million | $6.8 million |
| EPS | $1.60 | $1.54 |
| Net interest margin | 4.21% | 4.27% |
| Return on average assets / equity | 1.25% / 15.46% | 1.22% / 16.35% |
| Operating cash flow | $17.8 million | $3.5 million |
- Revenue and earnings: Total interest and noninterest income was $33.0 million, down from $35.6 million. Net interest income rose 1.6%, as lower funding costs more than offset lower asset yields. The loan-loss provision declined 53.8% to $305,000. Noninterest income fell 19.2% to $8.5 million, mainly because gains on residential loan sales declined to $2.3 million from $3.6 million and 2012 included a one-time life-insurance death benefit. Noninterest expense decreased 7.9% to $21.2 million, largely reflecting lower pension expense and borrowing prepayment penalties.
- Margins and credit: Net interest margin declined six basis points. Net charge-offs were 0.07% of average loans not held for sale; nonperforming assets were 0.39% of total assets, down from 0.73%. The allowance for loan losses was $4.6 million, or 1.01% of loans not held for sale.
- Balance sheet and liquidity: Assets were $585.4 million, up 1.4%; loans were $465.0 million, up 2.2%; and deposits were $518.4 million, up 1.6%. Cash and cash equivalents declined to $30.7 million from $46.5 million. The bank reported $13.2 million of borrowings, including $11.8 million in FHLB advances. Management reported available additional FHLB borrowing capacity of $16.9 million and other unused credit lines; it considered liquidity adequate.
- Capital and shareholder returns: Equity was $49.8 million, up 10.6%. The company’s total risk-based capital ratio was 13.28%, Tier 1 risk-based ratio 12.04%, and leverage ratio 8.00%; the bank was classified as well capitalized. Dividends paid were $1.01 per share; the quarterly dividend was raised to $0.26 in October 2013.
Material changes versus 2012
- Net income increased 4.3%, while EPS rose from $1.54 to $1.60. Return on equity fell from 16.35% to 15.46% despite higher earnings.
- Funding costs fell materially, including following the 2012 repayment of $11.0 million in higher-cost FHLB advances; average interest expense declined $892,000. Asset yields also weakened, reducing interest income by $547,000 and compressing margin.
- Nonperforming loans fell to $1.7 million from $3.1 million; nonaccrual loans declined to $1.4 million from $2.8 million. Troubled debt restructurings declined to $1.2 million from $2.9 million.
- Cash from operations rose to $17.8 million, but investing activities used $35.0 million, primarily reflecting loan growth and net purchases of investment securities. Cash and cash equivalents consequently declined by $15.8 million.
- Other comprehensive income was $2.1 million, including a $3.1 million after-tax pension-plan gain, partly offset by a $1.0 million after-tax loss on available-for-sale securities. The pension plan moved from a $2.8 million net liability to a $2.0 million net asset, reflecting actuarial changes and investment gains.
Outlook, commentary, risks and contingencies
- Management described loan demand as steady overall, but said residential mortgage and construction demand weakened in the second half as long-term rates rose. The bank continued selling qualifying residential mortgages to manage interest-rate risk; 2013 sales were $123.1 million.
- The filing does not provide formal earnings guidance. Its interest-rate simulation for 2014 estimated net interest income of $22.8 million in a flat-rate scenario and $20.0 million with an immediate 400-basis-point increase; management cautioned that the model excludes management actions and is not a forecast. The Federal Reserve was expected to keep rates low until late 2015, as described in the filing.
- Key risks include prolonged low rates and margin pressure, competition—particularly from tax-advantaged credit unions—credit deterioration, real-estate collateral values, local tourism and economic conditions, deposit competition and runoff, regulatory changes, and cybersecurity/compliance obligations. Loans are concentrated in the local market and 87.1% of loans were real-estate secured.
- Available-for-sale securities had a $778,000 net unrealized loss at year-end; securities with $2.3 million of aggregate unrealized losses were assessed by management as not other-than-temporarily impaired. Further rate increases or credit deterioration could affect fair values.
- Off-balance-sheet commitments totaled $90.9 million, including $28.9 million to originate loans and $58.3 million in unused lines. The MPF mortgage program carried a maximum contingent contractual liability of $484,000, with $23,000 reserved. Management said ordinary-course legal proceedings were not expected to have a material effect; no material regulatory enforcement actions were reported.
- The defined-benefit pension plan was closed to new participants and frozen in 2012. Management estimated a $436,000 pension benefit for 2014; actual results depend on actuarial assumptions and plan asset performance.
Important facts for investors to verify
- Whether margin pressure, loan-sale gains, and deposit pricing trends persist; assess quarterly net interest margin and core fee income.
- Whether asset quality remains favorable, including nonperforming loans, criticized/substandard credits, charge-offs, and adequacy of the $4.6 million allowance.
- How interest-rate changes affect securities values, deposit behavior, loan repricing, and liquidity; compare actual outcomes with the disclosed simulation assumptions.
- Review the concentration of real-estate and local-market lending, the $90.9 million of commitments, and the MPF loss-sharing exposure.
- Confirm capital and dividend capacity under applicable rules. The filing reports management’s controls assessment as effective, but the external auditor did not attest to internal control over financial reporting.