Union Bankshares Inc 10-Q for FY2023 Q3
Union Bankshares Inc (UNB)
10-Q
2023-11-14
For: 2023-09-30
View Original
Added on
April 09, 2026
About this 10-Q
Union Bankshares Inc filed this 10-Q on November 14, 2023, covering the quarter ended September 30, 2023 (FY2023 Q3).
Headline figures
Quarter ended September 30, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Net income
- $2.53M
- down 32.6% from net income of $3.76M a year earlier
- Diluted EPS
- $0.55
- down 33.7% from $0.83 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2023
Commission file number: 001-15985
Registrant’s telephone number: 802 -888-6600
Former name, former address and former fiscal year, if changed since last report: Not applicable
Securities registered pursuant to section 12(b) of the Act:
| (Title of class) | (Trading Symbol) | (Exchanges registered on) | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | ||||||||
| ☒ | Smaller reporting company | ||||||||||
Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of October 27, 2023.
| Common Stock, $2 par value | shares | |||||||||||||
UNION BANKSHARES, INC.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
| PART II OTHER INFORMATION | |||||
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
| September 30, 2023 | December 31, 2022 | |||||||
| (Unaudited) | ||||||||
| Assets | (Dollars in thousands) | |||||||
| Cash and due from banks | $ | $ | ||||||
| Federal funds sold and overnight deposits | ||||||||
| Cash and cash equivalents | ||||||||
| Interest bearing deposits in banks | ||||||||
| Investment securities available-for-sale | ||||||||
| Other investments | ||||||||
| Total investments | ||||||||
| Loans held for sale | ||||||||
| Loans | ||||||||
| Allowance for credit losses on loans | ( | ( | ||||||
| Net deferred loan costs | ||||||||
| Net loans | ||||||||
| Premises and equipment, net | ||||||||
| Company-owned life insurance | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Liabilities | ||||||||
| Deposits | ||||||||
| Noninterest bearing | $ | $ | ||||||
| Interest bearing | ||||||||
| Time | ||||||||
| Total deposits | ||||||||
| Borrowed funds | ||||||||
| Subordinated notes | ||||||||
| Accrued interest and other liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Stockholders’ Equity | ||||||||
Common stock, $ issued at September 30, 2023 and | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
Treasury stock at cost; and | ( | ( | ||||||
| Accumulated other comprehensive loss | ( | ( | ||||||
| Total stockholders' equity | ||||||||
| Total liabilities and stockholders' equity | $ | $ | ||||||
See accompanying notes to unaudited interim consolidated financial statements.
Union Bankshares, Inc. Page 1
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||
| Interest and dividend income | (Dollars in thousands, except per share data) | |||||||||||||
| Interest and fees on loans | $ | $ | $ | $ | ||||||||||
| Interest on debt securities: | ||||||||||||||
| Taxable | ||||||||||||||
| Tax exempt | ||||||||||||||
| Dividends | ||||||||||||||
| Interest on federal funds sold and overnight deposits | ||||||||||||||
| Interest on interest bearing deposits in banks | ||||||||||||||
| Total interest and dividend income | ||||||||||||||
| Interest expense | ||||||||||||||
| Interest on deposits | ||||||||||||||
| Interest on borrowed funds | ||||||||||||||
| Interest on subordinated notes | ||||||||||||||
| Total interest expense | ||||||||||||||
| Net interest income | ||||||||||||||
| Credit loss benefit, net | ( | ( | ||||||||||||
| Net interest income after credit loss benefit | ||||||||||||||
| Noninterest income | ||||||||||||||
| Wealth management income | ||||||||||||||
| Service fees | ||||||||||||||
| Net gains on sales of investment securities available-for-sale | ||||||||||||||
| Net gains on sales of loans held for sale | ||||||||||||||
| Net (losses) gains on other investments | ( | ( | ( | |||||||||||
| Other income | ||||||||||||||
| Total noninterest income | ||||||||||||||
| Noninterest expenses | ||||||||||||||
| Salaries and wages | ||||||||||||||
| Employee benefits | ||||||||||||||
| Occupancy expense, net | ||||||||||||||
| Equipment expense | ||||||||||||||
| Other expenses | ||||||||||||||
| Total noninterest expenses | ||||||||||||||
| Income before provision for income taxes | ||||||||||||||
| Provision for income taxes | ||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||
| Basic earnings per common share | $ | $ | $ | $ | ||||||||||
| Diluted earnings per common share | $ | $ | $ | $ | ||||||||||
| Weighted average number of common shares outstanding | ||||||||||||||
| Weighted average common and potential common shares for diluted EPS | ||||||||||||||
| Dividends per common share | $ | $ | $ | $ | ||||||||||
See accompanying notes to unaudited interim consolidated financial statements.
Union Bankshares, Inc. Page 2
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||
| (Dollars in thousands) | ||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||
| Other comprehensive loss, net of tax: | ||||||||||||||
| Investment securities available-for-sale: | ||||||||||||||
| Net unrealized holding losses arising during the period on investment securities available-for-sale | ( | ( | ( | ( | ||||||||||
| Reclassification adjustment for net gains on sales of investment securities available-for-sale realized in net income | ( | |||||||||||||
| Total other comprehensive loss | ( | ( | ( | ( | ||||||||||
| Total comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||||
See accompanying notes to unaudited interim consolidated financial statements.
Union Bankshares, Inc. Page 3
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
| Three Month Periods Ended September 30, 2023 and 2022 | |||||||||||||||||||||||
| Common Stock | Accumulated other comprehensive loss | ||||||||||||||||||||||
| Shares, net of treasury | Amount | Additional paid-in capital | Retained earnings | Treasury stock | Total stockholders’ equity | ||||||||||||||||||
| (Dollars in thousands, except per share data) | |||||||||||||||||||||||
| Balances June 30, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | ( | ( | ||||||||||||||||
| Dividend reinvestment plan | — | — | — | ||||||||||||||||||||
Cash dividends declared ($ | — | — | — | ( | — | — | ( | ||||||||||||||||
| Stock based compensation expense | — | — | — | ||||||||||||||||||||
| Purchase of treasury stock | ( | — | — | — | ( | — | ( | ||||||||||||||||
| Balances, September 30, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||
| Balances June 30, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | ( | ( | ||||||||||||||||
| Dividend reinvestment plan | — | — | — | ||||||||||||||||||||
Cash dividends declared ($ | — | — | — | ( | — | — | ( | ||||||||||||||||
| Stock based compensation expense | — | — | — | ||||||||||||||||||||
| Balances, September 30, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||
| Nine Month Periods Ended September 30, 2023 and 2022 | |||||||||||||||||||||||
| Common Stock | Accumulated other comprehensive loss | ||||||||||||||||||||||
| Shares, net of treasury | Amount | Additional paid-in capital | Retained earnings | Treasury stock | Total stockholders’ equity | ||||||||||||||||||
| (Dollars in thousands, except per share data) | |||||||||||||||||||||||
| Balances, December 31, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||
| — | — | — | — | — | |||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | ( | ( | ||||||||||||||||
| Dividend reinvestment plan | — | — | — | ||||||||||||||||||||
Cash dividends declared ($ | — | — | — | ( | — | — | ( | ||||||||||||||||
| Stock based compensation expense | — | — | — | ||||||||||||||||||||
| Purchase of treasury stock | ( | — | — | — | ( | — | ( | ||||||||||||||||
| Balances, September 30, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||
| Balances, December 31, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | ( | ( | ||||||||||||||||
| Dividend reinvestment plan | — | — | — | ||||||||||||||||||||
Cash dividends declared ($ | — | — | — | ( | — | — | ( | ||||||||||||||||
| Stock based compensation expense | — | — | — | ||||||||||||||||||||
| Purchase of treasury stock | ( | — | — | — | ( | — | ( | ||||||||||||||||
| Balances, September 30, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||
See accompanying notes to unaudited interim consolidated financial statements.
Union Bankshares, Inc. Page 4
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash Flows From Operating Activities | (Dollars in thousands) | |||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation | ||||||||
| Credit loss benefit | ( | |||||||
| Deferred income tax provision | ||||||||
| Net amortization of premiums on investment securities | ||||||||
| Equity in losses of limited partnerships | ||||||||
| Stock based compensation expense | ||||||||
| Net increase in unamortized loan costs | ( | ( | ||||||
| Proceeds from sales of loans held for sale | ||||||||
| Origination of loans held for sale | ( | ( | ||||||
| Net gains on sales of loans held for sale | ( | ( | ||||||
| Net gains on disposals of premises and equipment | ( | |||||||
| Net gains on sales of investment securities available-for-sale | ( | |||||||
| Net (gains) losses on other investments | ( | |||||||
| Increase in accrued interest receivable | ( | ( | ||||||
| Amortization of debt issuance costs | ||||||||
| Increase in other assets | ( | ( | ||||||
| Increase in other liabilities | ||||||||
| Net cash provided by operating activities | ||||||||
| Cash Flows From Investing Activities | ||||||||
| Interest bearing deposits in banks | ||||||||
| Proceeds from maturities and redemptions | ||||||||
| Purchases | ( | ( | ||||||
| Investment securities available-for-sale | ||||||||
| Proceeds from sales | ||||||||
| Proceeds from maturities, calls and paydowns | ||||||||
| Purchases | ( | ( | ||||||
| Net purchases of other investments | ( | ( | ||||||
| Net increase in nonmarketable stock | ( | ( | ||||||
| Net increase in loans | ( | ( | ||||||
| Recoveries of loans charged off | ||||||||
| Net purchases of premises and equipment | ( | ( | ||||||
| Investments in limited partnerships | ( | ( | ||||||
| Proceeds from sales of premises and equipment | ||||||||
| Net cash used in investing activities | ( | ( | ||||||
Union Bankshares, Inc. Page 5
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash Flows From Financing Activities | (Dollars in thousands) | |||||||
| Advances on long-term borrowings | ||||||||
| Net (decrease) increase in short-term borrowings outstanding | ( | |||||||
| Net (decrease) increase in noninterest bearing deposits | ( | |||||||
| Net decrease in interest bearing deposits | ( | ( | ||||||
| Net increase in time deposits | ||||||||
| Purchase of treasury stock | ( | ( | ||||||
| Dividends paid | ( | ( | ||||||
| Net cash provided by financing activities | ||||||||
| Net decrease in cash and cash equivalents | ( | ( | ||||||
| Cash and cash equivalents | ||||||||
| Beginning of period | ||||||||
| End of period | $ | $ | ||||||
| Supplemental Disclosures of Cash Flow Information | ||||||||
| Interest paid | $ | $ | ||||||
| Income taxes paid | $ | $ | ||||||
| Supplemental Schedule of Noncash Investing Activities | ||||||||
| Investment in limited partnerships acquired by capital contributions payable | $ | $ | ||||||
| Dividends paid on Common Stock: | ||||||||
| Dividends declared | $ | $ | ||||||
| Dividends reinvested | ( | ( | ||||||
| $ | $ | |||||||
See accompanying notes to unaudited interim consolidated financial statements.
Union Bankshares, Inc. Page 6
UNION BANKSHARES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying unaudited interim consolidated financial statements of Union Bankshares, Inc. and Subsidiary (together, the Company) as of September 30, 2023, and for the three and nine months ended September 30, 2023 and 2022, have been prepared in conformity with GAAP for interim financial information, general practices within the banking industry, and the accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (2022 Annual Report), except as disclosed in the Summary of Significant Accounting Policies below. The Company's sole subsidiary is Union Bank. In the opinion of the Company’s management, all adjustments, consisting only of normal recurring adjustments and disclosures necessary for a fair presentation of the information contained herein, have been made. This information should be read in conjunction with the Company’s 2022 Annual Report. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2023, or any future interim period.
The Company is a “smaller reporting company” and as permitted under the rules and regulations of the SEC, has elected to provide its consolidated statements of income, comprehensive income, cash flows and changes in stockholders’ equity for a two year, rather than three year, period. The Company has also elected to provide certain other scaled disclosures in this report, as permitted for smaller reporting companies. Certain amounts in the 2022 consolidated financial statements have been reclassified to conform to the current year presentation.
In addition to the definitions set forth elsewhere in this report, the acronyms, abbreviations and capitalized terms identified below are used throughout this Form 10-Q, including Part I. "Financial Information" and Part II. "Other Information". The following is provided to aid the reader and provide a reference page when reviewing this Form 10-Q.
| ACL: | Allowance for credit losses | HUD: | U.S. Department of Housing and Urban Development | ||||||||
| AFS: | Available-for-sale | ICS: | Insured Cash Sweeps of IntraFi | ||||||||
| ASC: | Accounting Standards Codification | IntraFi: | IntraFi Network LLC | ||||||||
| ASU: | Accounting Standards Update | MBS: | Mortgage-backed security | ||||||||
| Board: | Board of Directors | MSRs: | Mortgage servicing rights | ||||||||
| bp or bps: | Basis point(s) | OAO: | Other assets owned | ||||||||
| CDARS: | Certificate of Deposit Accounts Registry Service of IntraFi | OCI: | Other comprehensive income (loss) | ||||||||
| Company: | Union Bankshares, Inc. and Subsidiary | OREO: | Other real estate owned | ||||||||
| CECL: | Current Expected Credit Losses | RD: | USDA Rural Development | ||||||||
| DCF: | Discounted cash flow | RSU: | Restricted Stock Unit | ||||||||
| DRIP: | Dividend Reinvestment Plan | SBA: | U.S. Small Business Administration | ||||||||
| FASB: | Financial Accounting Standards Board | SEC: | U.S. Securities and Exchange Commission | ||||||||
| FDIC: | Federal Deposit Insurance Corporation | TDR: | Troubled-debt restructuring | ||||||||
| FHA: | U.S. Federal Housing Administration | Union: | Union Bank, the sole subsidiary of Union Bankshares, Inc | ||||||||
| FHLB: | Federal Home Loan Bank of Boston | USDA: | U.S. Department of Agriculture | ||||||||
| FRB: | Federal Reserve Board | VA: | U.S. Veterans Administration | ||||||||
| FHLMC/Freddie Mac: | Federal Home Loan Mortgage Corporation | 2014 Equity Plan: | 2014 Equity Incentive Plan, as amended | ||||||||
| GAAP: | Generally Accepted Accounting Principles in the United States | 2022 Annual Report: | Annual Report on Form 10-K for the year ended December 31, 2022 | ||||||||
| HTM: | Held-to-maturity | ||||||||||
Summary of Significant Accounting Policies
The disclosures below supplement and update the accounting policies previously disclosed in Note 1. Significant Accounting Policies in the Company’s 2022 Annual Report. The updates reflect the adoption of the FASB ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, more commonly referred to as Current Expected Credit Losses (CECL), effective January 1, 2023.
Union Bankshares, Inc. Page 7
The Company adopted CECL using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with the incurred loss methodology under previously applicable GAAP.
Allowance for Credit Losses on AFS Debt Securities: Upon adoption of CECL, effective January 1, 2023, for AFS debt securities in an unrealized loss position, management first assesses whether it intends to sell, or if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through earnings. For AFS debt securities that do not meet the above criteria, management evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security and the issuer, among other factors. If this assessment indicates that a credit loss exists, management compares the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an ACL is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income (loss), net of applicable taxes.
A change in the ACL on AFS debt securities is recorded as expense (credit) within the Credit loss expense on the consolidated statement of income. Losses are charged against the ACL when management believes the uncollectibility of an AFS debt security is confirmed based on the above described analysis. As of September 30, 2023 and CECL adoption date of January 1, 2023, there was no ACL carried on the Company's AFS debt securities. Refer to Note 5 of the consolidated financial statements for further discussion.
Allowance for Credit Losses on Loans: The ACL on loans is a significant accounting estimate used in the preparation of the Company's consolidated financial statements. The level of the ACL on loans represents management's estimate of expected credit losses over the expected life of the loans at the balance sheet date. The expected life of the loans is based on the contractual term of the loans adjusted for estimated prepayments. The contractual life is calculated based on the maturity date and excludes expected extensions, renewals, and modifications.
Upon adoption of CECL on January 1, 2023, the Company replaced the incurred loss model that recognizes losses when it becomes probable that a credit loss will be incurred, with a requirement to recognize lifetime expected credit losses based on historical experience and current and reasonably supportable forecasted conditions to reflect the full amount of expected credit losses. The ACL on loans is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the ACL on loans when they are deemed uncollectible. The ACL on loans is comprised of reserves measured on a collective (pool) basis based on a lifetime loss-rate model when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis, generally larger non-accruing commercial loans.
The Company uses the DCF method to estimate expected credit losses for all loan pools. For each of the loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, curtailments, time to recovery, and loss rates. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on historical benchmark data.
The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime loss rates. This analysis also determines how expected loss rates will react to forecasted levels of the loss drivers. For all loan pools utilizing the DCF method, management utilizes and forecasts national unemployment as a loss driver.
For all DCF models, management has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over four quarters on a straight-line basis. Management leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the four -quarter forecast period.
The combination of adjustments for credit expectations (default and loss) and timing expectations (prepayment, curtailment, and time to recovery) produces an expected cash flow stream at the instrument level that represents the sum of expected losses to determine the estimated ACL on loans.
The ACL on loans evaluation also considers various qualitative factors, including changes in policy and/or underwriting standards, actual or expected changes in economic trends and conditions, changes in the nature and volume of the portfolio, changes in credit and lending staff/administration, problem loan trends, credit risk concentrations, loan review results, changes in the value of underlying collateral for loans, and changes in the regulatory and business environment.
Certain loans are individually evaluated for estimated credit losses, including those greater than $500,000 that are classified as substandard or doubtful and are on nonaccrual or that have other unique characteristics differing from the segment. Specific
Union Bankshares, Inc. Page 8
reserves are established when appropriate for such loans based on the present value of expected future cash flows of the loan or the estimated realizable value of the collateral, if any.
Management may also adjust its assumptions to account for differences between expected and actual losses from period-to-period. The variability of management's assumptions could alter the ACL on loans materially and impact future results of operations and financial condition. The loss estimation models and methods used to determine the ACL are continually refined and enhanced.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures: The ACL on off-balance sheet credit exposures is a component of Accrued interest and other liabilities on the Company's consolidated balance sheets and represents the estimate of probable credit losses inherent in unfunded commitments to extend credit as of the balance sheet date. Unfunded commitments to extend credit include unused portions of lines of credit, commitments to originate loans and standby and commercial letters of credit. The process used to determine the ACL for these exposures is consistent with the process for determining the ACL on loans, as adjusted for estimated funding probabilities or loan equivalency factors. A charge or credit to Credit loss expense on the consolidated statements of income is made to account for the change in the ACL on off-balance sheet exposures between reporting periods.
Accrued Interest: Upon adoption of CECL on January 1, 2023, the Company elected to present accrued interest receivable balances in Other assets on the consolidated balance sheets and exclude accrued interest from the ACL on loans and AFS debt securities. The Company will continue to write-off accrued interest receivable by reversing interest income when a security or loan is placed in nonaccrual, which is generally when payments on a security or loan are 90 days or more past due.
Union Bankshares, Inc. Page 9
Impact of Adoption:
The following table illustrates the adoption of ASU No. 2013-16 on January 1, 2023. As noted above, there was no ACL on AFS debt securities required to be recorded upon adoption of the ASU.
| Pre-CECL Adoption | Reclassification to CECL Portfolio Segmentation | Pre-CECL Adoption Portfolio Segmentation | Post-CECL Adoption | Impact of CECL Adoption | |||||||||||||
| Assets | (Dollars in thousands) | ||||||||||||||||
| Loans | |||||||||||||||||
| Residential real estate | $ | $ | ( | $ | — | $ | — | $ | — | ||||||||
| Non-revolving residential real estate | |||||||||||||||||
| Revolving residential real estate | |||||||||||||||||
| Construction real estate | ( | — | — | — | |||||||||||||
| Commercial construction real estate | |||||||||||||||||
| Residential construction real estate | |||||||||||||||||
| Commercial real estate | ( | — | — | ||||||||||||||
| Non-residential commercial real estate | |||||||||||||||||
| Multi-family residential real estate | |||||||||||||||||
| Commercial | |||||||||||||||||
| Consumer | |||||||||||||||||
| Municipal | |||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | ||||||||||||
| ACL on loans | |||||||||||||||||
| Residential real estate | $ | $ | ( | $ | — | $ | — | $ | — | ||||||||
| Non-revolving residential real estate | ( | ||||||||||||||||
| Revolving residential real estate | |||||||||||||||||
| Construction real estate | ( | — | — | — | |||||||||||||
| Commercial construction real estate | |||||||||||||||||
| Residential construction real estate | ( | ||||||||||||||||
| Commercial real estate | ( | — | — | — | |||||||||||||
| Non-residential commercial real estate | ( | ||||||||||||||||
| Multi-family residential real estate | ( | ||||||||||||||||
| Commercial | |||||||||||||||||
| Consumer | ( | ||||||||||||||||
| Municipal | ( | ||||||||||||||||
| Unallocated | ( | ||||||||||||||||
| Total ACL on loans | $ | $ | $ | $ | $ | ( | |||||||||||
| Liabilities | |||||||||||||||||
| ACL on off-balance sheet credit exposures | $ | $ | $ | ||||||||||||||
| Retained earnings | |||||||||||||||||
| Decrease in ACL on loans | $ | ||||||||||||||||
| Increase in ACL on off-balance sheet credit exposures | ( | ||||||||||||||||
| Increase to retained earnings | $ | ||||||||||||||||
Union Bankshares, Inc. Page 10
Note 2. Legal Contingencies
Note 3. Per Share Information
The following table presents the reconciliation between the calculation of basic EPS and diluted EPS for the three and nine months ended September 30, 2023 and 2022:
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||
| (Dollars in thousands, except per share data) | |||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||
| Weighted average common shares outstanding for basic EPS | |||||||||||||||||
| Dilutive effect of stock-based awards (1) | |||||||||||||||||
| Weighted average common and potential common shares for diluted EPS | |||||||||||||||||
| Earnings per common share: | |||||||||||||||||
| Basic EPS | $ | $ | $ | $ | |||||||||||||
| Diluted EPS | $ | $ | $ | $ | |||||||||||||
(1)Dilutive effect of stock based awards represents the effect of assumed vesting of all outstanding equity compensation awards, which currently consist solely of restricted stock units. Unvested awards do not have dividend or dividend equivalent rights.
Note 4. Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The guidance in the ASU requires that expected credit losses for financial assets held at the reporting date that are accounted for at amortized cost be measured and recognized based on historical experience and current and reasonably supportable forecasted conditions to reflect the full amount of expected credit losses. A modified version of these requirements also applies to debt securities classified as AFS. The ASU became effective for the Company beginning with the 2023 fiscal year. The impact of the ASU on the Company's consolidated financial statements is discussed in Note 1, Summary of Significant Accounting Policies.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, and has issued subsequent amendments thereto, which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2024. The transition away from LIBOR is not expected to have a material impact on the Company's consolidated financial statements.
In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings (TDRs) and Vintage Disclosures. The guidance amends ASC 326 to eliminate the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancing and restructuring activities by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying TDR recognition and measurement guidance, creditors will determine whether a modification results in a new loan or continuation of an existing loan. These amendments are also intended to enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, the amendments to ASC 326 require that an entity disclose current-period gross write-offs by year of origination within the vintage disclosures, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination. The guidance is only for entities that have adopted the amendments in ASU No. 2016-13 for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company
Union Bankshares, Inc. Page 11
adopted ASU No. 2022-02 effective January 1, 2023. The adoption of the provisions contained within ASU No. 2022-02 did not have a material impact on the consolidated financial statements.
In March 2023, the FASB issued ASU No. 2023-02, Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. ASU No. 2014-01, Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects, previously introduced the option to apply the proportional amortization method to account for investments made primarily for the purpose of receiving income tax credits and other income tax benefits when certain requirements are met; however, this guidance limited the proportional amortization method to investments in low-income-housing tax credit (LIHTC) structures. The proportional amortization method results in the cost of the investment being amortized in proportion to the income tax credits and other income tax benefits received, with the amortization of the investment and the income tax credits being presented net in the income statement as a component of income tax expense (benefit). Equity investments in other tax credit structures are typically accounted for using the equity method, which results in investment income, gains and losses, and tax credits being presented gross on the income statement in their respective line items. The amendments in this update permit reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. The amendments in this update are effective for the Company for fiscal years beginning after December 31, 2023, including interim periods within those fiscal years. Early adoption is permitted in any interim period. If early adoption is elected, adoption must be as of the beginning of the fiscal year that includes the interim period of adoption. The amendments in this update must be applied on either a modified retrospective or a retrospective basis. The Company has not elected early adoption and is currently evaluating the impact of this standard for its tax equity investments and the impact to noninterest income, noninterest expense, and income tax expense within the consolidated financial statements.
Note 5. Investment Securities
Debt securities AFS as of the balance sheet dates consisted of the following:
| September 30, 2023 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||
| (Dollars in thousands) | ||||||||||||||
| U.S. Government-sponsored enterprises | $ | $ | $ | ( | $ | |||||||||
| Agency mortgage-backed | ( | |||||||||||||
| State and political subdivisions | ( | |||||||||||||
| Corporate | ( | |||||||||||||
| Total | $ | $ | $ | ( | $ | |||||||||
| December 31, 2022 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||
| (Dollars in thousands) | ||||||||||||||
| U.S. Government-sponsored enterprises | $ | $ | $ | ( | $ | |||||||||
| Agency mortgage-backed | ( | |||||||||||||
| State and political subdivisions | ( | |||||||||||||
| Corporate | ( | |||||||||||||
| Total | $ | $ | $ | ( | $ | |||||||||
There were no 874 thousand and $433 thousand were pledged as collateral for public unit deposits or for other purposes as required or permitted by law at September 30, 2023 and December 31, 2022, respectively.
Union Bankshares, Inc. Page 12
The amortized cost and estimated fair value of debt securities by contractual scheduled maturity as of September 30, 2023 were as follows:
| Amortized Cost | Fair Value | |||||||
| Available-for-sale | (Dollars in thousands) | |||||||
| Due in one year or less | $ | $ | ||||||
| Due from one to five years | ||||||||
| Due from five to ten years | ||||||||
| Due after ten years | ||||||||
| Agency mortgage-backed | ||||||||
| Total debt securities available-for-sale | $ | $ | ||||||
Actual maturities may differ for certain debt securities that may be called by the issuer prior to the contractual maturity. Actual maturities usually differ from contractual maturities on agency MBS because the mortgages underlying the securities may be prepaid, usually without any penalties. Therefore, these agency MBS are shown separately and are not included in the contractual maturity categories in the above maturity summary.
Information pertaining to all AFS debt securities with gross unrealized losses, for which an ACL has not been recorded, as of the balance sheet dates, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:
| September 30, 2023 | Less Than 12 Months | 12 Months and over | Total | ||||||||||||||||||||||||||
| Number of Securities | Fair Value | Gross Unrealized Losses | Number of Securities | Fair Value | Gross Unrealized Losses | Number of Securities | Fair Value | Gross Unrealized Losses | |||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||
| U.S. Government- sponsored enterprises | $ | $ | ( | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||
| Agency mortgage-backed | ( | ( | ( | ||||||||||||||||||||||||||
| State and political subdivisions | ( | ( | ( | ||||||||||||||||||||||||||
| Corporate | ( | ( | |||||||||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||
| December 31, 2022 | Less Than 12 Months | 12 Months and over | Total | ||||||||||||||||||||||||||
| Number of Securities | Fair Value | Gross Unrealized Losses | Number of Securities | Fair Value | Gross Unrealized Losses | Number of Securities | Fair Value | Gross Unrealized Losses | |||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||
| U.S. Government- sponsored enterprises | $ | $ | ( | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||
| Agency mortgage-backed | ( | ( | ( | ||||||||||||||||||||||||||
| State and political subdivisions | ( | ( | ( | ||||||||||||||||||||||||||
| Corporate | ( | ( | ( | ||||||||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||
AFS debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. For AFS debt securities in an unrealized loss position, management first assesses whether it intends to sell, or it is more likely than not that the Company will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through earnings. For AFS debt securities that do not meet the above criteria, management evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the
Union Bankshares, Inc. Page 13
security and the issuer, among other factors. If this assessment indicates that a credit loss exists, management compares the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an ACL is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. For AFS debt securities, any decline in fair value that has not been recorded through an ACL is recognized in other comprehensive income (loss), net of applicable taxes.
No ACL for AFS debt securities was recorded at adoption of ASU No. 2016-13 or at September 30, 2023. Accrued interest receivable on AFS debt securities totaled $1.1 million and $984 thousand at September 30, 2023 and December 31, 2022, respectively, and is excluded from the estimate of credit losses. Under previously applicable GAAP, no ACL for AFS debt securities was required at December 31, 2022.
There were no sales of securities for the three and nine months ended September 30, 2023 or for the three months ended September 30, 2022. The following table presents the proceeds from sales and calls resulting in gross realized gains and gross realized losses from the disposition of AFS securities for the nine months ended September 30, 2022:
| For The Nine Months Ended September 30, | ||||||||||||||
| 2022 | ||||||||||||||
| (Dollars in thousands) | ||||||||||||||
| Proceeds from sales | $ | |||||||||||||
| Proceeds from calls | ||||||||||||||
| Gross gains | ||||||||||||||
| Gross losses | ( | |||||||||||||
| Net gains on sales of investment securities AFS | $ | |||||||||||||
Note 6. Loans
Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their unpaid principal balances, adjusted for any charge-offs, the ACL, and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.
Loan interest income is accrued daily on outstanding balances. The following accounting policies, related to accrual and nonaccrual loans, apply to all portfolio segments and loan classes, which the Company considers to be the same. The accrual of interest is normally discontinued when a loan is specifically determined to be impaired and/or management believes, after considering collection efforts and other factors, that the borrower's financial condition is such that collection of interest is doubtful. In general, loans that are 90 days or more past due are placed in nonaccrual, unless there are circumstances that cause management to believe the collection of interest is not doubtful. Generally, any unpaid interest previously accrued on those loans is reversed against current period interest income. A loan may be restored to accrual status when its financial status has significantly improved and there is no principal or interest past due. A loan may also be restored to accrual status if the borrower makes six consecutive monthly payments or the lump sum equivalent. Income on nonaccrual loans is generally not recognized unless a loan is returned to accrual status or after all principal has been collected. Interest payments received on such loans are generally applied as a reduction of the loan principal balance. Delinquency status is determined based on contractual terms for all portfolio segments and loan classes. Loans past due 30 days or more are considered delinquent. Loans are considered in process of foreclosure when a judgment of foreclosure has been issued by the court.
Loan origination fees and direct loan origination costs are deferred and amortized as an adjustment of the related loan's yield using methods that approximate the interest method. The Company generally amortizes these amounts over the estimated average life of the related loans.
Effective with the adoption of CECL on January 1, 2023, the Company evaluates the risk characteristics of its loans based on regulatory call report code with segmentation based on the underlying collateral or purpose for certain loan types. Prior to the adoption of CECL, under the incurred loss model, the Company evaluated the risk characteristics of its loans based on the underlying collateral securing the loans.
Union Bankshares, Inc. Page 14
The composition of Net loans as of the balance sheet dates, by regulatory call report code segmentation based on underlying collateral or purpose for certain loan types, was as follows:
| September 30, 2023 | December 31, 2022 | |||||||
| (Dollars in thousands) | ||||||||
| Residential real estate | ||||||||
| Non-revolving residential real estate | $ | $ | ||||||
| Revolving residential real estate | ||||||||
| Construction real estate | ||||||||
| Commercial construction real estate | ||||||||
| Residential construction real estate | ||||||||
| Commercial real estate | ||||||||
| Non-residential commercial real estate | ||||||||
| Multi-family residential real estate | ||||||||
| Commercial | ||||||||
| Consumer | ||||||||
| Municipal | ||||||||
| Gross loans | ||||||||
| ACL on loans | ( | ( | ||||||
| Net deferred loan costs | ||||||||
| Net loans | $ | $ | ||||||
Qualifying residential first mortgage loans and certain commercial real estate loans with an aggregate carrying value of $350.4 million and $272.9 million were pledged as collateral for borrowings from the FHLB under a blanket lien at September 30, 2023 and December 31, 2022, respectively.
Accrued interest receivable on loans totaled $3.2 million and $3.1 million at September 30, 2023 and December 31, 2022, respectively, and is excluded from the estimate of credit losses described in Note 7.
Note 7. Allowance for Credit Losses on Loans and Off-Balance Sheet Credit Exposures
Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported under the incurred loss model in accordance with previously applicable GAAP as described in the 2022 Annual Report.
The level of the ACL on loans represents management's estimate of expected credit losses over the expected life of the loans at the balance sheet date. For all loan classes, loan losses are charged against the ACL on loans when management believes the loan balance is uncollectible or in accordance with federal guidelines. Subsequent recoveries, if any, are credited to the ACL on loans.
Upon adoption of CECL on January 1, 2023, the Company replaced the incurred loss model that recognizes losses when it becomes probable that a credit loss will be incurred, with a requirement to recognize lifetime expected credit losses based on historical experience and current and reasonably supportable forecasted conditions to reflect the full amount of expected credit losses. The ACL on loans is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. The ACL on loans is comprised of reserves measured on a collective (pool) basis based on a lifetime loss-rate model when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis, generally larger non-accruing commercial loans.
Risk characteristics relevant to each portfolio segment are as follows:
•Residential real estate - Loans in this segment are collateralized by owner-occupied 1-4 family residential real estate, second and vacation homes, 1-4 family investment properties, home equity and second mortgage loans. Repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, could have an effect on the credit quality of this segment.
•Construction real estate - Loans in this segment include residential and commercial construction properties, commercial real estate development loans (while in the construction phase of the projects), land and land development loans.
Union Bankshares, Inc. Page 15
Repayment is dependent on the credit quality of the individual borrower and/or the underlying cash flows generated by the properties being constructed. The overall health of the economy, including unemployment rates, housing prices, vacancy rates and material costs, could have an effect on the credit quality of this segment.
•Commercial real estate - Loans in this segment are primarily properties occupied by businesses or income-producing properties. The underlying cash flows generated by the properties may be adversely impacted by a downturn in the economy as evidenced by a general slowdown in business or increased vacancy rates which, in turn, could have an effect on the credit quality of this segment. Management requests business financial statements at least annually and monitors the cash flows of these loans.
•Commercial - Loans in this segment are made to businesses and are generally secured by non-real estate assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer or business spending, could have an effect on the credit quality of this segment.
•Consumer - Loans in this segment are made to individuals for personal expenditures, such as an automobile purchase, and include unsecured loans. Repayment is primarily dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment, could have an effect on the credit quality of this segment.
•Municipal - Loans in this segment are made to municipalities located within the Company's service area. Repayment is primarily dependent on taxes or other funds collected by the municipalities. Management considers there to be minimal risk surrounding the credit quality of this segment.
Changes in the ACL on loans, by class of loans, for the three and nine months ended September 30, 2023 were as follows:
| For The Three Months Ended September 30, 2023 | Balance, June 30, 2023 | Charge-Offs | Recoveries | Credit Loss Expense (Benefit) | Balance, September 30, 2023 | |||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Non-revolving residential real estate | $ | $ | $ | $ | $ | |||||||||||||||
| Revolving residential real estate | ||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||
| Commercial construction real estate | ( | |||||||||||||||||||
| Residential construction real estate | ||||||||||||||||||||
| Construction real estate | ( | |||||||||||||||||||
| Non-residential commercial real estate | ( | |||||||||||||||||||
| Multi-family residential real estate | ||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||
| Commercial | ||||||||||||||||||||
| Consumer | ( | |||||||||||||||||||
| Municipal | ||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | $ | ||||||||||||||
Union Bankshares, Inc. Page 16
| For the Nine Months Ended September 30, 2023 | Balance, December 31, 2022 | Impact of Adoption of ASU No. 2016-13 | Charge-Offs | Recoveries | Credit Loss Expense (Benefit) | Balance, September 30, 2023 | ||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Non-revolving residential real estate | $ | $ | ( | $ | $ | $ | $ | |||||||||||||
| Revolving residential real estate | ||||||||||||||||||||
| Residential real estate | ( | |||||||||||||||||||
| Commercial construction real estate | ( | |||||||||||||||||||
| Residential construction real estate | ( | |||||||||||||||||||
| Construction real estate | ( | |||||||||||||||||||
| Non-residential commercial real estate | ( | ( | ||||||||||||||||||
| Multi-family residential real estate | ( | |||||||||||||||||||
| Commercial real estate | ( | ( | ||||||||||||||||||
| Commercial | ( | |||||||||||||||||||
| Consumer | ( | ( | ||||||||||||||||||
| Municipal | ( | |||||||||||||||||||
| Unallocated | ( | |||||||||||||||||||
| Total | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||
Changes in the ACL on loans, by class of loans under the incurred loss methodology, for the three and nine months ended September 30, 2022 were as follows:
| For The Three Months Ended September 30, 2022 | Balance, June 30, 2022 | Charge-Offs | Recoveries | Credit Loss Expense (Benefit) | Balance, September 30, 2022 | ||||||||||||
| (Dollars in thousands | |||||||||||||||||
| Residential real estate | $ | $ | $ | $ | $ | ||||||||||||
| Construction real estate | |||||||||||||||||
| Commercial real estate | ( | ||||||||||||||||
| Commercial | ( | ||||||||||||||||
| Consumer | |||||||||||||||||
| Municipal | |||||||||||||||||
| Unallocated | ( | ||||||||||||||||
| Total | $ | $ | $ | $ | $ | ||||||||||||
| For the Nine Months Ended September 30, 2022 | Balance, December 31, 2021 | Charge-Offs | Recoveries | Credit Loss Expense (Benefit) | Balance, September 30, 2022 | ||||||||||||
| (Dollars in thousands | |||||||||||||||||
| Residential real estate | $ | $ | $ | $ | $ | ||||||||||||
| Construction real estate | |||||||||||||||||
| Commercial real estate | ( | ||||||||||||||||
| Commercial | ( | ||||||||||||||||
| Consumer | ( | ( | |||||||||||||||
| Municipal | |||||||||||||||||
| Unallocated | ( | ||||||||||||||||
| Total | $ | $ | ( | $ | $ | $ | |||||||||||
Union Bankshares, Inc. Page 17
The Company's ACL on off-balance sheet credit exposures is recognized as a liability within Accrued interest and other liabilities on the consolidated balance sheet, with adjustments to the ACL recognized in Credit loss expense in the consolidated statement of income. In accordance with previously applicable GAAP, there was no ACL on off-balance sheet credit exposures required during the three and nine months ended September 30, 2022. The Company's activity in the ACL on off-balance sheet credit exposures for the three and nine months ended September 30, 2023 was as follows:
| For The Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||
| 2023 | 2023 | |||||||
| ACL on Off-Balance Sheet Credit Exposures | (Dollars in thousands) | |||||||
| Balance, Beginning of Period | $ | $ | ||||||
| Impact of adoption of ASU No. 2016-13 | ||||||||
| Credit loss benefit | ( | ( | ||||||
| Balance, September 30, 2023 | $ | $ | ||||||
Risk and collateral ratings are assigned to loans and are subject to ongoing monitoring by lending and credit personnel, with such ratings updated annually or more frequently if warranted. The following is an overview of the Company's loan rating system:
1-3 Rating - Pass
Risk-rating grades "1" through "3" comprise those loans ranging from those with lower than average credit risk, defined as borrowers with high liquidity, excellent financial condition, strong management, favorable industry trends or loans secured by highly liquid assets, through those with marginal credit risk, defined as borrowers that, while creditworthy, exhibit some characteristics requiring special attention by the account officer.
4-4.5 Rating - Satisfactory/Monitor
Borrowers exhibit potential credit weaknesses or downward trends warranting management's attention. While potentially weak, these borrowers are currently marginally acceptable; no loss of principal or interest is envisioned. When warranted, these credits may be monitored on the watch list.
5-7 Rating - Substandard
Borrowers exhibit well defined weaknesses that jeopardize the orderly liquidation of debt. The loan may be inadequately protected by the net worth and paying capacity of the obligor and/or the underlying collateral is inadequate.
Union Bankshares, Inc. Page 18
The following table summarizes the Company's loans by year of origination and by loan ratings applied by management to the Company's loans by class as of September 30, 2023:
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving | Total | |||||||||||||||||||
| Residential Real Estate | (Dollars in thousands) | |||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Satisfactory/Monitor | ||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||
| Non-revolving residential real estate | ||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||
| Satisfactory/Monitor | ||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||
| Revolving residential real estate | ||||||||||||||||||||||||||
| Construction Real Estate | ||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||
| Satisfactory/Monitor | ||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||
| Commercial construction real estate | ||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||
| Satisfactory/Monitor | ||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||
| Residential construction real estate | ||||||||||||||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||
| Satisfactory/Monitor | ||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||
| Non-residential commercial real estate | ||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||
| Satisfactory/Monitor | ||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||
| Multi-family residential real estate | ||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||
| Satisfactory/Monitor | ||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||
| Satisfactory/Monitor | ||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||
| Satisfactory/Monitor | ||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||
| Municipal | ||||||||||||||||||||||||||
| Total Loans | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Gross charge-offs for the three months ended September 30, 2023 consisted of one consumer loan totaling $4 thousand that was originated in 2022 and gross charge-offs for the nine months ended September 30, 2023 consisted of two consumer loans totaling $8 thousand that were originated in 2022.
Union Bankshares, Inc. Page 19
The following table summarizes the loan ratings applied by management to the Company's loans by class, under the incurred loss methodology, as of December 31, 2022:
| December 31, 2022 | Residential Real Estate | Construction Real Estate | Commercial Real Estate | Commercial | Consumer | Municipal | Total | ||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Satisfactory/Monitor | |||||||||||||||||||||||
| Substandard | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
A summary of current and past due loans as of September 30, 2023 follows:
| September 30, 2023 | 30-59 Days | 60-89 Days | 90 Days and Over | Total Past Due | Current | Total | ||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||
| Non-revolving residential real estate | $ | $ | $ | $ | $ | $ | ||||||||||||||
| Revolving residential real estate | ||||||||||||||||||||
| Construction real estate | ||||||||||||||||||||
| Commercial construction real estate | ||||||||||||||||||||
| Residential construction real estate | ||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||
| Non-residential commercial real estate | ||||||||||||||||||||
| Multi-family residential real estate | ||||||||||||||||||||
| Commercial | ||||||||||||||||||||
| Consumer | ||||||||||||||||||||
| Municipal | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||
A summary of current and past due loans as of December 31, 2022, under the incurred loss methodology, follows:
| December 31, 2022 | 30-59 Days | 60-89 Days | 90 Days and Over | Total Past Due | Current | Total | ||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Residential real estate | $ | $ | $ | $ | $ | $ | ||||||||||||||
| Construction real estate | ||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||
| Commercial | ||||||||||||||||||||
| Consumer | ||||||||||||||||||||
| Municipal | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||
Union Bankshares, Inc. Page 20
A summary of nonaccrual loans as of September 30, 2023 follows:
| September 30, 2023 | Nonaccrual | Nonaccrual With No Allowance for Credit Losses | 90 Days and Over and Accruing | ||||||||
| Residential real estate | (Dollars in thousands) | ||||||||||
| Non-revolving residential real estate | $ | $ | $ | ||||||||
| Revolving residential real estate | |||||||||||
| Commercial real estate | |||||||||||
| Non-residential commercial real estate | |||||||||||
| Total | $ | $ | $ | ||||||||
A summary of nonaccrual loans as of December 31, 2022, under the incurred loss methodology, follows:
| December 31, 2022 | Nonaccrual | Nonaccrual With No Allowance for Credit Losses | 90 Days and Over and Accruing | ||||||||
| (Dollars in thousands) | |||||||||||
| Residential real estate | $ | $ | $ | ||||||||
| Construction real estate | |||||||||||
| Commercial real estate | |||||||||||
| Total | $ | $ | $ | ||||||||
There were no loans in process of foreclosure at September 30, 2023 and one residential real estate loan totaling $28 thousand in process of foreclosure at December 31, 2022. Aggregate interest on nonaccrual loans not recognized was $120 thousand as of September 30, 2023 and $59 thousand as of December 31, 2022.
Loans that do not share risk characteristics are evaluated on an individual basis. Loans that are individually evaluated and collateral dependent represent loans that the Company has determined foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the loan to be provided substantially through the sale of the collateral. For these loans, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan at the measurement date.
The following table presents collateral dependent loans by loan class and collateral type as of the balance sheet dates:
| September 30, 2023 | December 31, 2022 | |||||||||||||||||||
| Real Estate | Real Estate | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Non-residential commercial real estate | $ | $ | ||||||||||||||||||
For periods prior to the adoption of CECL, loans were evaluated for impairment and may have been classified as impaired when management believed it was probable that the Company would not collect all the contractual interest and principal payments as scheduled in the loan agreement. Under previously applicable GAAP, a specific reserve amount was allocated to the ACL for individual loans that had been classified as impaired based on management's estimate of the fair value of the collateral for collateral dependent loans, an observable market price, or the present value of anticipated future cash flows. The Company accounted for the change in present value attributable to the passage of time in the ACL. Large groups of smaller balance homogeneous loans were collectively evaluated for impairment. Accordingly, the Company did not separately identify individual consumer, real estate or small balance commercial loans for impairment evaluation, unless such loans were subject to a restructuring agreement or had been identified as impaired as part of a larger customer relationship. Based on an evaluation of the Company's historical loss experience on substandard commercial loans, management established the commercial loan threshold for individual impairment evaluation as commercial loan relationships with aggregate balances greater than $500 thousand.
Union Bankshares, Inc. Page 21
The following table provides information with respect to impaired loans by class of loan as of and for the year ended December 31, 2022, prior to the adoption of CECL:
| December 31, 2022 | For The Year Ended December 31, 2022 | ||||||||||||||||
| Recorded Investment (1) | Principal Balance (1) | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Residential real estate | $ | $ | $ | ||||||||||||||
| Commercial real estate | |||||||||||||||||
| With an allowance recorded | |||||||||||||||||
| Residential real estate | — | ||||||||||||||||
| Construction real estate | — | ||||||||||||||||
| Commercial real estate | — | ||||||||||||||||
| Commercial | — | ||||||||||||||||
| With no allowance recorded | — | ||||||||||||||||
| Residential real estate | $ | $ | |||||||||||||||
| Construction real estate | |||||||||||||||||
| Commercial real estate | |||||||||||||||||
| Commercial | |||||||||||||||||
| Total | $ | $ | $ | $ | $ | ||||||||||||
____________________
(1)Does not reflect government guaranties on impaired loans as of December 31, 2022 totaling $423 thousand.
Occasionally, the Company modifies loans to borrowers experiencing financial difficulty by providing interest rate reductions, term extensions, payment deferrals or principal forgiveness. When principal forgiveness is provided, the amount of forgiveness is charged off against the ACL on loans. There were no new loan modifications to borrowers experiencing financial difficulty during the three months ended September 30, 2023. The following tables summarize loan modifications to borrowers experiencing financial difficulty by loan class, type of modification and the financial effect of the modifications as of and for the nine months ended September 30, 2023:
| Interest Rate Reduction | |||||||||||||||||||||||
| Amortized Cost Basis | % of Loan Class | Financial Effect | |||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Non-residential commercial real estate | $ | % | Reduced weighted average contractual interest rate from | ||||||||||||||||||||
| Multi-family residential real estate | % | Reduced weighted average contractual interest rate from | |||||||||||||||||||||
| Payment Delay | |||||||||||||||||||||||
| Amortized Cost Basis | % of Loan Class | Financial Effect | |||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Non-residential commercial real estate | $ | % | Modification allowed for | ||||||||||||||||||||
Union Bankshares, Inc. Page 22
The following table presents the performance of loans as of September 30, 2023 that have been modified in the last twelve months:
| September 30, 2023 | Current | Past Due 30-89 Days | Past Due 90 Days and Over | ||||||||
| (Dollars in thousands) | |||||||||||
| Non-residential commercial real estate | $ | $ | $ | ||||||||
| Multi-family residential real estate | |||||||||||
There were no
At September 30, 2023, the Company was not committed to lend any additional funds to borrowers experiencing financial difficulty for which the Company modified the terms of the loans in the form of principal forgiveness, an interest rate reduction, an other-than-insignificant payment delay, or a term extension.
Note 8. Stock Based Compensation
Under the Union Bankshares, Inc. 2014 Equity Incentive Plan, as amended in May 2022, a total of 150,000 shares of the Company’s common stock have been reserved since inception of the Plan for equity awards of incentive stock options, nonqualified stock options, restricted stock and RSUs to eligible officers and (except for awards of incentive stock options) nonemployee directors. Shares available for issuance of awards under the 2014 Equity Plan consist of unissued shares of the Company’s common stock and/or shares held in treasury. As of September 30, 2023, there were outstanding grants of RSUs under the 2014 Equity Plan as noted in the table below.
RSUs. Each outstanding RSU represents the right to receive one share of the Company's common stock upon satisfaction of applicable vesting conditions. The general terms of the awards are described in the Company's 2022 Annual Report. Prior to vesting, the RSUs do not earn dividends or dividend equivalents, nor do they bear any voting rights.
The following table summarizes the RSUs awarded to Company executives in 2021, 2022 and 2023, and the number of such RSUs remaining unvested as of September 30, 2023:
| Number of RSUs Granted | Weighted Average Grant Date Fair Value | Number of Unvested RSUs | |||||||||
| 2021 Award | $ | ||||||||||
| 2022 Award | |||||||||||
| 2023 Award | |||||||||||
| Total | |||||||||||
Unrecognized compensation expense related to the unvested RSUs as of September 30, 2023 and 2022 was $461 thousand and $372 thousand, respectively, and $297 thousand as of December 31, 2022.
On May 17, 2023, the Company's board of directors, as a component of total director compensation, granted an aggregate of 3,872 RSUs to the Company's non-employee directors. Each RSU represents the right to receive one share of the Company's common stock upon satisfaction of applicable vesting conditions. The RSUs will vest in May 2024, subject to continued board service through the vesting date, other than in the case of the director's death or disability. Prior to vesting, the RSUs do not earn dividends or dividend equivalents, nor do they bear any voting rights. Unrecognized director compensation expense related to the unvested RSUs as of September 30, 2023 was $53 thousand.
Note 9. Subordinated Notes
Union Bankshares, Inc. Page 23
The Company used the proceeds primarily to provide additional Tier 1 capital to the Company's wholly-owned subsidiary, Union Bank, to support its growth and for other general corporate purposes.
The unamortized issuance costs of the Notes were $270 thousand and $295 thousand at September 30, 2023 and December 31, 2022, respectively. The Company recorded $8 25
Note 10. Other Comprehensive Income (Loss)
As of the balance sheet dates, the components of Accumulated OCI, net of tax, were:
| September 30, 2023 | December 31, 2022 | |||||||
| (Dollars in thousands) | ||||||||
| Net unrealized losses on investment securities AFS | $ | ( | $ | ( | ||||
The following tables disclose the tax effects allocated to each component of OCI for the three and nine months ended September 30:
| Three Months Ended | ||||||||||||||||||||
| September 30, 2023 | September 30, 2022 | |||||||||||||||||||
| Before-Tax Amount | Tax Benefit | Net-of-Tax Amount | Before-Tax Amount | Tax Benefit | Net-of-Tax Amount | |||||||||||||||
| Investment securities AFS: | (Dollars in thousands) | |||||||||||||||||||
| Net unrealized holding losses arising during the period on investment securities AFS | $ | ( | $ | $ | ( | $ | ( | $ | $ | ( | ||||||||||
| Total other comprehensive loss | $ | ( | $ | $ | ( | $ | ( | $ | $ | ( | ||||||||||
| Nine Months Ended | ||||||||||||||||||||
| September 30, 2023 | September 30, 2022 | |||||||||||||||||||
| Before-Tax Amount | Tax Benefit | Net-of-Tax Amount | Before-Tax Amount | Tax Benefit/Expense | Net-of-Tax Amount | |||||||||||||||
| Investment securities AFS: | (Dollars in thousands) | |||||||||||||||||||
| Net unrealized holding losses arising during the period on investment securities AFS | $ | ( | $ | $ | ( | $ | ( | $ | $ | ( | ||||||||||
| Reclassification adjustment for net gains on investment securities AFS realized in net income | ( | ( | ||||||||||||||||||
| Total other comprehensive loss | $ | ( | $ | $ | ( | $ | ( | $ | $ | ( | ||||||||||
Union Bankshares, Inc. Page 24
There were no reclassification adjustments from OCI for the three months ended September 30, 2023 and 2022. The following table discloses information concerning reclassification adjustments from OCI for the nine months ended September 30, 2023 and 2022:
| Nine Months Ended | |||||||||||||||||
| Reclassification Adjustment Description | September 30, 2023 | September 30, 2022 | Affected Line Item in Consolidated Statement of Income | ||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Investment securities AFS: | |||||||||||||||||
| Net gains on investment securities AFS | $ | $ | ( | Net gains on sales of investment securities AFS | |||||||||||||
| Tax expense | Provision for income taxes | ||||||||||||||||
| Total reclassifications | $ | $ | ( | Net income | |||||||||||||
Note 11. Fair Value Measurement
The Company utilizes FASB ASC Topic 820, Fair Value Measurement, as guidance for accounting for assets and liabilities carried at fair value. This standard defines fair value as the price that would be received, without adjustment for transaction costs, to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is a market based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The guidance in FASB ASC Topic 820 establishes a three-level fair value hierarchy, which prioritizes the inputs used in measuring fair value. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The three levels of the fair value hierarchy are:
•Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
•Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;
•Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
The following is a description of the valuation methodologies used for the Company’s assets that are measured on a recurring basis at estimated fair value:
Investment securities AFS: Certain U.S. Treasury notes have been valued using unadjusted quoted prices from active markets and therefore have been classified as Level 1. However, the majority of the Company’s AFS securities have been valued utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include market maker bids, quotes and pricing models. Inputs to the pricing models include recent trades, benchmark interest rates, spreads and actual and projected cash flows.
Mutual funds: Mutual funds have been valued using unadjusted quoted prices from active markets and therefore have been classified as Level 1.
Union Bankshares, Inc. Page 25
Assets measured at fair value on a recurring basis at September 30, 2023 and December 31, 2022, segregated by fair value hierarchy level, are summarized below:
| Fair Value Measurements | ||||||||||||||
| Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||
| September 30, 2023: | (Dollars in thousands) | |||||||||||||
| Debt securities AFS: | ||||||||||||||
| U.S. Government-sponsored enterprises | $ | $ | $ | $ | ||||||||||
| Agency mortgage-backed | ||||||||||||||
| State and political subdivisions | ||||||||||||||
| Corporate | ||||||||||||||
| Total debt securities | $ | $ | $ | $ | ||||||||||
| Other investments: | ||||||||||||||
| Mutual funds | $ | $ | $ | $ | ||||||||||
| December 31, 2022: | ||||||||||||||
| Debt securities AFS: | ||||||||||||||
| U.S. Government-sponsored enterprises | $ | $ | $ | $ | ||||||||||
| Agency mortgage-backed | ||||||||||||||
| State and political subdivisions | ||||||||||||||
| Corporate | ||||||||||||||
| Total debt securities | $ | $ | $ | $ | ||||||||||
| Other investments: | ||||||||||||||
| Mutual funds | $ | $ | $ | $ | ||||||||||
There were no transfers in or out of Levels 1 and 2 during the three and nine months ended September 30, 2023 or the year ended December 31, 2022, nor were there any Level 3 assets at any time during these periods. Certain other assets and liabilities are measured at fair value on a nonrecurring basis, that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Assets and liabilities measured at fair value on a nonrecurring basis in periods after initial recognition, such as collateral dependent individually evaluated loans, MSRs and OREO, were not considered material at September 30, 2023 or December 31, 2022. The Company has not elected to apply the fair value method to any financial assets or liabilities other than those situations where other accounting pronouncements require fair value measurements.
FASB ASC Topic 825, Financial Instruments, requires disclosure of the estimated fair value of financial instruments. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Management’s estimates and assumptions are inherently subjective and involve uncertainties and matters of significant judgment. Changes in assumptions could dramatically affect the estimated fair values.
Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments may be excluded from disclosure requirements. Thus, the aggregate fair value amounts presented may not necessarily represent the actual underlying fair value of such instruments of the Company.
Union Bankshares, Inc. Page 26
As of the balance sheet dates, the estimated fair values and related carrying amounts of the Company's significant financial instruments were as follows:
| September 30, 2023 | |||||||||||||||||
| Fair Value Measurements | |||||||||||||||||
| Carrying Amount | Estimated Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Financial assets | |||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | ||||||||||||
| Interest bearing deposits in banks | |||||||||||||||||
| Investment securities | |||||||||||||||||
| Loans held for sale | |||||||||||||||||
| Loans, net | |||||||||||||||||
| Residential real estate | |||||||||||||||||
| Construction real estate | |||||||||||||||||
| Commercial real estate | |||||||||||||||||
| Commercial | |||||||||||||||||
| Consumer | |||||||||||||||||
| Municipal | |||||||||||||||||
| Accrued interest receivable | |||||||||||||||||
| Nonmarketable equity securities | N/A | N/A | N/A | N/A | |||||||||||||
| Financial liabilities | |||||||||||||||||
| Deposits | |||||||||||||||||
| Noninterest bearing | $ | $ | $ | $ | $ | ||||||||||||
| Interest bearing | |||||||||||||||||
| Time | |||||||||||||||||
| Long-term borrowed funds | |||||||||||||||||
| Subordinated notes | |||||||||||||||||
| Accrued interest payable | |||||||||||||||||
Union Bankshares, Inc. Page 27
| December 31, 2022 | |||||||||||||||||
| Fair Value Measurements | |||||||||||||||||
| Carrying Amount | Estimated Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Financial assets | |||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | ||||||||||||
| Interest bearing deposits in banks | |||||||||||||||||
| Investment securities | |||||||||||||||||
| Loans held for sale | |||||||||||||||||
| Loans, net | |||||||||||||||||
| Residential real estate | |||||||||||||||||
| Construction real estate | |||||||||||||||||
| Commercial real estate | |||||||||||||||||
| Commercial | |||||||||||||||||
| Consumer | |||||||||||||||||
| Municipal | |||||||||||||||||
| Accrued interest receivable | |||||||||||||||||
| Nonmarketable equity securities | N/A | N/A | N/A | N/A | |||||||||||||
| Financial liabilities | |||||||||||||||||
| Deposits | |||||||||||||||||
| Noninterest bearing | $ | $ | $ | $ | $ | ||||||||||||
| Interest bearing | |||||||||||||||||
| Time | |||||||||||||||||
| Short-term borrowed funds | |||||||||||||||||
| Subordinated notes | |||||||||||||||||
| Accrued interest payable | |||||||||||||||||
The carrying amounts in the preceding tables are included in the consolidated balance sheets under the applicable captions. Accrued interest receivable and nonmarketable equity securities are included in Other assets in the consolidated balance sheets.
Note 12. Subsequent Events
Subsequent events represent events or transactions occurring after the balance sheet date but before the financial statements are issued. Financial statements are considered “issued” when they are widely distributed to shareholders and others for general use and reliance in a form and format that complies with GAAP. Events occurring subsequent to September 30, 2023 have been evaluated as to their potential impact to the consolidated financial statements.
On October 18, 2023, the Company declared a regular quarterly cash dividend of $0.36
Union Bankshares, Inc. Page 28
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis focuses on those factors that, in management's view, had a material effect on the financial position of the Company as of September 30, 2023 and December 31, 2022, and its results of operations for the three and nine months ended September 30, 2023 and 2022. This discussion is being presented to provide a narrative explanation of the consolidated financial statements and should be read in conjunction with the consolidated financial statements and related notes and with other financial data appearing elsewhere in this filing and with the Company's 2022 Annual Report. In the opinion of the Company's management, the interim unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments and disclosures necessary to fairly present the Company's consolidated financial position and results of operations for the interim periods presented. Management is not aware of the occurrence of any events after September 30, 2023 which would materially affect the information presented.
Please refer to Note 1 in the Company's unaudited interim consolidated financial statements at Part I, Item 1 of this Report for definitions of acronyms, abbreviations and capitalized terms used throughout the following discussion and analysis.
CAUTIONARY ADVICE ABOUT FORWARD LOOKING STATEMENTS
The Company, "we," "us," "our," may from time to time make written or oral statements that are considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include financial projections, statements of plans and objectives for future operations, estimates of future economic performance or conditions and assumptions relating thereto. The Company may include forward-looking statements in its filings with the SEC, in its reports to stockholders, including this quarterly report, in press releases, other written materials, and in statements made by senior management to analysts, rating agencies, institutional investors, representatives of the media and others.
Forward-looking statements are based on the current assumptions underlying the statements and other information with respect to the beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions of management and the financial condition, results of operations, future performance and business are only expectations of future results. Although the Company believes that the expectations reflected in the Company’s forward-looking statements are reasonable when made, the Company’s actual results could differ materially from those projected in the forward-looking statements as a result of, among other factors, changes in interest rates; competitive pressures from other financial institutions; general economic conditions on a national basis or in the local markets in which the Company operates; downgrades of U.S. government securities; eroding public confidence in the banking system; changes in consumer behavior due to changing political, business and economic conditions, including concerns about inflation, or legislative or regulatory initiatives; changes in the value of securities and other assets in the Company’s investment portfolio; increases in loan and lease default and charge-off rates; the adequacy of the ACL; decreases in deposit levels that necessitate increases in borrowing to fund loans and investments; operational risks including, but not limited to, cybersecurity incidents, fraud, natural disasters and future pandemics; changes in regulation, war, terrorism, civil unrest; changes in economic assumptions and adverse economic developments; the risk that goodwill and intangibles recorded in the Company’s financial statements will become impaired; changes in assumptions used in making such forward-looking statements; and the other risks and uncertainties detailed in the Company’s 2022 Annual Report.
In addition to the uncertainties detailed in the Company's 2022 Annual Report the banking industry has experienced significant volatility during 2023 with industry concerns related to liquidity, deposit outflows, unrealized securities losses, and interest rates.
When evaluating forward-looking statements to make decisions about the Company and our stock, investors and others are cautioned to consider these and other risks and uncertainties, and are reminded not to place undue reliance on such statements. Investors should not consider the foregoing list of factors to be a complete list of risks or uncertainties. Forward-looking statements speak only as of the date they are made and the Company undertakes no obligation to update them to reflect new or changed information or events, except as may be required by federal securities laws.
Non-GAAP Financial Measures
Under SEC Regulation G, public companies making disclosures containing financial measures that are not in accordance with GAAP must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure, as well as a statement of the company’s reasons for utilizing the non-GAAP financial measure. The SEC has exempted from the definition of non-GAAP financial measures certain commonly used financial measures that are not based on GAAP. However, two non-GAAP financial measures commonly used by financial institutions, namely tax-equivalent net interest income and tax-equivalent net interest
Union Bankshares, Inc. Page 29
margin (as presented in the tables in the section labeled Yields Earned and Rates Paid), have not been specifically exempted by the SEC, and may therefore constitute non-GAAP financial measures under Regulation G. We are unable to state with certainty whether the SEC would regard those measures as subject to Regulation G. Management believes that these non-GAAP financial measures are useful in evaluating the Company’s financial performance and facilitate comparisons with the performance of other financial institutions. However, that information should be considered supplemental in nature and not as a substitute for related financial information prepared in accordance with GAAP.
CRITICAL ACCOUNTING POLICIES
The Company has established various accounting policies which govern the application of GAAP in the preparation of the Company's consolidated financial statements. Certain accounting policies involve significant judgments and assumptions by management which have a material impact on the reported amount of assets, liabilities, capital, revenues and expenses and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The SEC has defined a company's critical accounting policies as the ones that are most important to the portrayal of the company's financial condition and results of operations, and which require management to make its most difficult and subjective judgments, often as a result of the need to make estimates on matters that are inherently uncertain. Based on this definition, management has identified the accounting policies and judgments most critical to the Company. They include establishing the amount of ACL and valuing our intangible assets. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from estimates and have a material impact on the carrying value of assets, liabilities, or capital, and/or the results of operations of the Company.
Please refer to the Company's 2022 Annual Report and the Summary of Significant Accounting Policies in Note 1 to the unaudited consolidated financial statements contained in this report for a more in-depth discussion of the Company's critical accounting policies and adoption of CECL. There have been no changes to the Company's critical accounting policies, other than those described in Note 1 to the unaudited interim consolidated financial statements since the filing of the 2022 Annual Report.
OVERVIEW
The Company, like others, has experienced earnings pressure due to the prolonged and steep yield curve inversion. The sharp increases in short term rates has had a significant impact on the Company's funding costs due to customer expectation of higher rates on deposit accounts and increased utilization of wholesale funding at higher costs. The Company’s financial position remains strong, supported by a diverse deposit base, a strong liquidity position, excellent asset quality, and regulatory capital in excess of all required levels. The Company continues to focus on gathering deposits, optimization of the net interest margin and maintaining strong asset quality.
As was previously reported, Union’s Jeffersonville and Johnson branch offices suffered flood damage during extreme weather in July of 2023. The Jeffersonville branch has been restored and is operational while we are choosing to upgrade the Johnson facility to improve customer access as well as operational and energy efficiency. While customers and our community have lingering impacts from the extensive flooding, the Company has not suffered material financial impacts. Some Vermont communities, notably Montpelier, the capital city of Vermont, will require years to fully recover.
Union opened a commercial loan production office in North Conway, New Hampshire in 2019. Since that time, we have originated approximately $115 million in commercial loans in the White Mountain Valley region. This success encouraged management to develop a full-service banking office to support the loan origination side of the business with deposit services. A new full-service bank branch located on the North South Road in North Conway opened at the end of October 2023.
The Company's earnings have been impacted by the inverted yield curve, as deposit and funding costs have risen at a faster pace than assets have repriced, which has resulted in compression of the net interest margin and spread. The net interest margin was 2.95% for the nine months ended September 30, 2023 compared to 3.29% for the nine months ended September 30, 2022, while the net interest spreads for the same periods were 2.59% and 3.18%, respectively. We continue to manage the net interest margin and spread, by remaining disciplined on loan and deposit pricing, utilizing brokered and retail CDs when appropriate to reduce our exposure to high short-term interest rates, and maximizing our balance sheet collateral (i.e. loans and investment securities) to obtain wholesale funding in a cost effective way to fund loan growth.
Consolidated net income decreased $1.2 million, or 32.6%, to $2.5 million for the third quarter of 2023 compared to $3.8 million for the third quarter of 2022 due to the combined effects of a decrease of $1.3 million in net interest income, a decrease of $73 thousand in noninterest income, and an increase of $487 thousand in noninterest expenses, partially offset by $139 thousand of credit loss benefit, and a decrease of $487 thousand in income tax expense.
Union Bankshares, Inc. Page 30
Consolidated net income decreased $963 thousand, or 10.5%, to $8.2 million for the nine months ended September 30, 2023 compared to $9.2 million for the nine months ended September 30, 2022 due to the combined effects of a decrease in net interest income of $333 thousand and an increase in noninterest expenses of $1.6 million, partially offset by an increase in noninterest income of $186 thousand, a credit loss benefit of $161 thousand and a reduction in income tax expense of $625 thousand.
At September 30, 2023, the Company had total consolidated assets of $1.40 billion, including gross loans and loans held for sale (total loans) of $1.03 billion, deposits of $1.22 billion, borrowed funds of $90.7 million, subordinated notes of $16.2 million and stockholders' equity of $49.2 million.
The Company's total capital decreased to $49.2 million at September 30, 2023 from $55.2 million at December 31, 2022. This decrease primarily reflects an increase of $9.6 million in accumulated other comprehensive loss due to a decrease in the fair market value of the Company's AFS investment securities, regular cash dividends declared of $4.9 million, partially offset by net income of $8.2 million for the first nine months of 2023. (See Capital Resources on page 46.) These changes also resulted in a decrease in the Company's book value per share to $10.92 at September 30, 2023 from $12.25 as of December 31, 2022.
The following unaudited per share information and key ratios depict several measurements of performance or financial condition at or for the three and nine months ended September 30, 2023 and 2022, respectively:
| Three Months Ended or At September 30, | Nine Months Ended or At September 30, | |||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||
| Return on average assets (1) | 0.73 | % | 1.18 | % | 0.80 | % | 0.98 | % | ||||||
| Return on average equity (1) | 17.65 | % | 24.19 | % | 18.82 | % | 17.78 | % | ||||||
| Net interest margin (1)(2) | 2.76 | % | 3.40 | % | 2.95 | % | 3.29 | % | ||||||
| Efficiency ratio (3) | 75.37 | % | 64.14 | % | 73.17 | % | 68.65 | % | ||||||
| Net interest spread (4) | 2.34 | % | 3.26 | % | 2.59 | % | 3.18 | % | ||||||
| Loan to deposit ratio | 84.11 | % | 78.67 | % | 84.11 | % | 78.67 | % | ||||||
| Net loan charge-offs to average loans not held for sale (1) | — | % | — | % | — | % | — | % | ||||||
| ACL on loans to loans not held for sale | 0.67 | % | 0.89 | % | 0.67 | % | 0.89 | % | ||||||
| Nonperforming assets to total assets (5) | 0.15 | % | 0.13 | % | 0.15 | % | 0.13 | % | ||||||
| Equity to assets | 3.53 | % | 3.82 | % | 3.53 | % | 3.82 | % | ||||||
| Total capital to risk weighted assets | 13.19 | % | 13.69 | % | 13.19 | % | 13.69 | % | ||||||
| Book value per share | $ | 10.92 | $ | 11.06 | $ | 10.92 | $ | 11.06 | ||||||
| Basic earnings per share | $ | 0.56 | $ | 0.84 | $ | 1.82 | $ | 2.04 | ||||||
| Diluted earnings per share | $ | 0.55 | $ | 0.83 | $ | 1.81 | $ | 2.03 | ||||||
| Dividends paid per share | $ | 0.36 | $ | 0.35 | $ | 1.08 | $ | 1.05 | ||||||
| Dividend payout ratio (6) | 64.29 | % | 41.67 | % | 59.34 | % | 51.47 | % | ||||||
__________________
(1)Annualized.
(2)The ratio of tax equivalent net interest income to average earning assets. See pages 33 and 34 for more information.
(3)The ratio of noninterest expenses to tax equivalent net interest income and noninterest income, excluding securities gains (losses).
(4)The difference between the average yield on earning assets and the average rate paid on interest bearing liabilities. See pages 33 and 34 for more information.
(5)Nonperforming assets are loans or investment securities that are in nonaccrual or 90 or more days past due as well as OREO or OAO.
(6)Cash dividends declared and paid per share divided by consolidated net income per share.
RESULTS OF OPERATIONS
Net Interest Income. The largest component of the Company’s operating income is net interest income, which is the difference between interest and dividend income received from earning assets and interest expense paid on interest bearing liabilities. Net interest income is affected by various factors including, but not limited to changes in interest rates, loan and deposit pricing strategies, funding strategies, the volume and mix of interest earning assets and interest bearing liabilities, and the level of
Union Bankshares, Inc. Page 31
nonperforming assets. Net interest margin is calculated as the net interest income on a fully tax equivalent basis as a percentage of average earning assets.
Interest earned on average earning assets for the three months ended September 30, 2023 was $14.8 million compared to $11.5 million for the three months ended September 30, 2022, an increase of $3.4 million, or 29.5%. The average earning asset base increased $117.5 million between periods and the average yield on average earning assets increased 70 bps to 4.43% for the three months ended September 30, 2023 compared to 3.73% for the three months ended September 30, 2022.
The average yield on federal funds sold and overnight deposits increased 207 bps between the three month comparison periods due to an increase in the interest rate paid on balances maintained in Union's master account at the FRB. Interest income on investment securities increased $347 thousand between the three month comparison periods due to an increase of $16.9 million in the average balance of the portfolio and an increase of 41 bps in the average yield.
Interest income on loans increased $2.8 million between the three month comparison periods due to an increase in the average volume of loans outstanding of $90.7 million and an increase of 72 bps in the average yield. Loan demand has remained stable during 2023 despite increases in interest rates and low housing inventory.
Average interest bearing liabilities increased $214.5 million between the three month comparison periods due to growth in customer time deposit balances, utilization of brokered deposits included in time deposits, and an increase in borrowed funds. The average rate paid on interest bearing liabilities increased 162 bps to 2.09% for the third quarter of 2023 compared to 0.47% for the third quarter of 2022. Interest expense increased $4.7 million, to $5.7 million the three months ended September 30, 2023 compared to $1.0 million the three months ended September 30, 2022. Higher rates paid on customer deposit accounts and utilization of higher cost funding of brokered deposits and advances from the FHLB were drivers of the increase in interest expense.
The net interest spread decreased 92 bps to 2.34% for the third quarter of 2023, from 3.26% for the same period last year, reflecting the net effect of the 162 bps increase in the average rate paid on interest bearing liabilities, which was only partially offset by the 70 bps increase in the average yield earned on interest earning assets between periods. The net interest margin decreased 64 bps during the third quarter of 2023 compared to the same period last year as a result of the changes discussed above.
Net interest income was $28.7 million, on a fully tax equivalent basis for the nine months ended September 30, 2023 compared to $29.1 million for the nine months ended September 30, 2022, a decrease of $333 thousand, or 1.15%. The average volume of earning assets increased $134.4 million and the average yield on earning assets increased 68 bps to 4.25% compared to 3.57% for the comparison period. Interest income on investment securities increased $1.1 million between the nine month comparison periods due to an increase of $21.4 million in the average balance of the portfolio and an increase of 42 bps in the average yield. Average loans increased $131.2 million, or 15.42%, to $982.1 million for the nine months ended September 30, 2023. The increases in average loan volume and average yield resulted in a $8.4 million increase in interest income on loans between periods.
The average cost of funds increased 127 bps to 1.66% for the nine months ended September 30, 2023 compared to 0.39% for the nine months ended September 30, 2022. Interest expense increased $10.4 million, to $13.0 million for the nine months ended September 30, 2023 compared to $2.5 million for the nine months ended September 30, 2022. The increases in the average cost of funds and in interest expense were due to an increase of $190.4 million in the average balance of interest bearing liabilities and increases in average rates paid in all liability categories between periods. Management expects the average cost of funds to continue to increase over the next quarter as customers may continue to expect higher rates on their deposit accounts in light of the recent increases in prevailing interest rates, and as the Company continues to rely on higher cost wholesale funding.
During the first nine months of 2023, Union, like many other financial institutions, offered higher rate paying time deposit specials to attract new deposit dollars and retain existing customer deposits. Although some new money was obtained, a shift of funds from non-maturity deposits to time deposit specials occurred. Interest expense on time deposits increased $5.4 million to $5.9 million for the nine months ended September 30, 2023 compared to $497 thousand for the nine months ended September 30, 2022 due to increases in the average volume of $132.5 million and 263 bps in the average rate paid. Despite a decrease of $40.8 million in the average balance of savings/money market accounts, interest expense increased $1.5 million between the nine month comparison periods due to an increase of 53 bps in the average rate paid.
The net interest spread decreased 59 bps to 2.59% for the nine months ended September 30, 2023, from 3.18% for the same period last year, reflecting the net effect of the 127 bps increase in the average rate paid on interest bearing liabilities, partially offset by the 68 bps increase in the average yield earned on interest earning assets between periods. The net interest margin decreased 34 bps for the nine months ended September 30, 2023 compared to the same period last year as a result of the changes discussed above.
Union Bankshares, Inc. Page 32
The following tables show for the periods indicated the total amount of tax equivalent interest income recorded from average interest earning assets, the related average tax equivalent yields, the tax equivalent interest expense associated with average interest bearing liabilities, the related tax equivalent average rates paid, and the resulting tax equivalent net interest spread and margin.
| Three Months Ended September 30, | ||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||
| Average Balance (1) | Interest Earned/ Paid | Average Yield/ Rate | Average Balance (1) | Interest Earned/ Paid | Average Yield/ Rate | |||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Average Assets: | ||||||||||||||||||||
| Federal funds sold and overnight deposits | $ | 18,188 | $ | 153 | 3.30 | % | $ | 12,850 | $ | 41 | 1.23 | % | ||||||||
| Interest bearing deposits in banks | 14,826 | 95 | 2.54 | % | 14,016 | 43 | 1.24 | % | ||||||||||||
| Investment securities (2), (3) | 312,074 | 1,645 | 2.23 | % | 295,197 | 1,298 | 1.82 | % | ||||||||||||
| Loans, net (2), (4) | 1,001,353 | 12,874 | 5.15 | % | 910,614 | 10,074 | 4.43 | % | ||||||||||||
| Nonmarketable equity securities | 4,657 | 80 | 6.80 | % | 939 | 7 | 3.06 | % | ||||||||||||
| Total interest earning assets (2) | 1,351,098 | 14,847 | 4.43 | % | 1,233,616 | 11,463 | 3.73 | % | ||||||||||||
| Cash and due from banks | 4,846 | 4,724 | ||||||||||||||||||
| Premises and equipment | 20,216 | 20,938 | ||||||||||||||||||
| Other assets | 11,459 | 18,336 | ||||||||||||||||||
| Total assets | $ | 1,387,619 | $ | 1,277,614 | ||||||||||||||||
| Average Liabilities and Stockholders' Equity: | ||||||||||||||||||||
| Interest bearing checking accounts | $ | 317,918 | 1,043 | 1.30 | % | $ | 299,180 | 251 | 0.33 | % | ||||||||||
| Savings/money market accounts | 376,878 | 1,169 | 1.23 | % | 425,629 | 350 | 0.33 | % | ||||||||||||
| Time deposits | 279,288 | 2,531 | 3.60 | % | 123,660 | 267 | 0.86 | % | ||||||||||||
| Borrowed funds and other liabilities | 91,403 | 814 | 3.48 | % | 2,503 | 14 | 2.22 | % | ||||||||||||
| Subordinated notes | 16,226 | 142 | 3.49 | % | 16,192 | 141 | 3.47 | % | ||||||||||||
| Total interest bearing liabilities | 1,081,713 | 5,699 | 2.09 | % | 867,164 | 1,023 | 0.47 | % | ||||||||||||
| Noninterest bearing deposits | 230,557 | 334,523 | ||||||||||||||||||
| Other liabilities | 17,979 | 13,789 | ||||||||||||||||||
| Total liabilities | 1,330,249 | 1,215,476 | ||||||||||||||||||
| Stockholders' equity | 57,370 | 62,138 | ||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 1,387,619 | $ | 1,277,614 | ||||||||||||||||
| Net interest income | $ | 9,148 | $ | 10,440 | ||||||||||||||||
| Net interest spread (2) | 2.34 | % | 3.26 | % | ||||||||||||||||
| Net interest margin (2) | 2.76 | % | 3.40 | % | ||||||||||||||||
Union Bankshares, Inc. Page 33
| Nine Months Ended September 30, | ||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||
| Average Balance (1) | Interest Earned/ Paid | Average Yield/ Rate | Average Balance (1) | Interest Earned/ Paid | Average Yield/ Rate | |||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Average Assets: | ||||||||||||||||||||
| Federal funds sold and overnight deposits | $ | 15,144 | $ | 367 | 3.20 | % | $ | 38,470 | $ | 154 | 0.53 | % | ||||||||
| Interest bearing deposits in banks | 15,995 | 304 | 2.54 | % | 13,695 | 113 | 1.11 | % | ||||||||||||
| Investment securities (2), (3) | 312,982 | 4,900 | 2.20 | % | 291,595 | 3,751 | 1.78 | % | ||||||||||||
| Loans, net (2), (4) | 982,071 | 35,955 | 4.94 | % | 850,869 | 27,558 | 4.36 | % | ||||||||||||
| Nonmarketable equity securities | 3,783 | 168 | 5.93 | % | 907 | 17 | 2.53 | % | ||||||||||||
| Total interest earning assets (2) | 1,329,975 | 41,694 | 4.25 | % | 1,195,536 | 31,593 | 3.57 | % | ||||||||||||
| Cash and due from banks | 4,629 | 4,580 | ||||||||||||||||||
| Premises and equipment | 20,268 | 21,216 | ||||||||||||||||||
| Other assets | 11,054 | 25,617 | ||||||||||||||||||
| Total assets | $ | 1,365,926 | $ | 1,246,949 | ||||||||||||||||
| Average Liabilities and Stockholders' Equity: | ||||||||||||||||||||
| Interest bearing checking accounts | $ | 316,193 | 2,113 | 0.89 | % | $ | 287,296 | 553 | 0.26 | % | ||||||||||
| Savings/money market accounts | 396,813 | 2,489 | 0.84 | % | 437,586 | 1,030 | 0.31 | % | ||||||||||||
| Time deposits | 243,730 | 5,883 | 3.23 | % | 111,202 | 497 | 0.60 | % | ||||||||||||
| Borrowed funds and other liabilities | 70,512 | 2,041 | 3.82 | % | 845 | 14 | 2.21 | % | ||||||||||||
| Subordinated notes | 16,218 | 427 | 3.52 | % | 16,184 | 425 | 3.51 | % | ||||||||||||
| Total interest bearing liabilities | 1,043,466 | 12,953 | 1.66 | % | 853,113 | 2,519 | 0.39 | % | ||||||||||||
| Noninterest bearing deposits | 248,222 | 312,331 | ||||||||||||||||||
| Other liabilities | 16,086 | 12,748 | ||||||||||||||||||
| Total liabilities | 1,307,774 | 1,178,192 | ||||||||||||||||||
| Stockholders' equity | 58,152 | 68,757 | ||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 1,365,926 | $ | 1,246,949 | ||||||||||||||||
| Net interest income | $ | 28,741 | $ | 29,074 | ||||||||||||||||
| Net interest spread (2) | 2.59 | % | 3.18 | % | ||||||||||||||||
| Net interest margin (2) | 2.95 | % | 3.29 | % | ||||||||||||||||
__________________
(1)Average balances are calculated based on a daily averaging method.
(2)Average yields reported on a tax equivalent basis using a marginal federal corporate income tax rate of 21%.
(3)Average balances of investment securities are calculated on the amortized cost basis and include nonaccrual securities, if applicable.
(4)Includes loans held for sale as well as nonaccrual loans, unamortized costs and unamortized premiums and is net of the ACL on loans.
Union Bankshares, Inc. Page 34
Tax exempt interest income amounted to $1.2 million and $623 thousand for the three months ended September 30, 2023 and 2022, respectively, and $3.0 million and $1.6 million for the nine months ended September 30, 2023 and 2022, respectively. The following table presents the effect of tax exempt income on the calculation of net interest income, using a marginal federal corporate income tax rate of 21% for the 2023 and 2022 three and nine month comparison periods:
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||
| (Dollars in thousands) | ||||||||||||||
| Net interest income, as presented | $ | 9,148 | $ | 10,440 | $ | 28,741 | $ | 29,074 | ||||||
| Effect of tax-exempt interest | ||||||||||||||
| Investment securities | 98 | 48 | 274 | 146 | ||||||||||
| Loans | 130 | 88 | 295 | 210 | ||||||||||
| Net interest income, tax equivalent | $ | 9,376 | $ | 10,576 | $ | 29,310 | $ | 29,430 | ||||||
Rate/Volume Analysis. The following table describes the extent to which changes in average interest rates earned and paid (on a fully tax-equivalent basis) and changes in volume of average interest earning assets and interest bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. For each category of interest earning assets and interest bearing liabilities, information is provided on changes attributable to:
•changes in volume (change in volume multiplied by prior rate);
•changes in rate (change in rate multiplied by prior volume); and
•total change in rate and volume.
Changes attributable to both rate and volume have been allocated proportionately to the change due to volume and the change due to rate.
| Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022 Increase/(Decrease) Due to Change In | Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022 Increase/(Decrease) Due to Change In | |||||||||||||||||||
| Volume | Rate | Net | Volume | Rate | Net | |||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Interest earning assets: | ||||||||||||||||||||
| Federal funds sold and overnight deposits | $ | 23 | $ | 89 | $ | 112 | $ | (146) | $ | 359 | $ | 213 | ||||||||
| Interest bearing deposits in banks | 3 | 49 | 52 | 21 | 170 | 191 | ||||||||||||||
| Investment securities | 53 | 294 | 347 | 234 | 915 | 1,149 | ||||||||||||||
| Loans, net | 1,055 | 1,745 | 2,800 | 4,543 | 3,854 | 8,397 | ||||||||||||||
| Nonmarketable equity securities | 56 | 17 | 73 | 106 | 45 | 151 | ||||||||||||||
| Total interest earning assets | $ | 1,190 | $ | 2,194 | $ | 3,384 | $ | 4,758 | $ | 5,343 | $ | 10,101 | ||||||||
| Interest bearing liabilities: | ||||||||||||||||||||
| Interest bearing checking accounts | $ | 17 | $ | 775 | $ | 792 | $ | 60 | $ | 1,500 | $ | 1,560 | ||||||||
| Savings/money market accounts | (44) | 863 | 819 | (104) | 1,563 | 1,459 | ||||||||||||||
| Time deposits | 643 | 1,621 | 2,264 | 1,146 | 4,240 | 5,386 | ||||||||||||||
| Borrowed funds | 781 | 19 | 800 | 1,997 | 30 | 2,027 | ||||||||||||||
| Subordinated notes | — | 1 | 1 | 1 | 1 | 2 | ||||||||||||||
| Total interest bearing liabilities | $ | 1,397 | $ | 3,279 | $ | 4,676 | $ | 3,100 | $ | 7,334 | $ | 10,434 | ||||||||
| Net change in net interest income | $ | (207) | $ | (1,085) | $ | (1,292) | $ | 1,658 | $ | (1,991) | $ | (333) | ||||||||
Credit Loss Expense (Benefit). The Company adopted ASU No. 2016-13 to account for the ACL, effective January 1, 2023. As such, ACL and credit loss expense as of and for the three and nine months ended September 30, 2023 were accounted for under CECL in accordance with the ASU. In accordance with previously applicable GAAP, the ACL and credit loss expense as of and for the three and nine months ended September 30, 2022 were accounted for under the incurred loss methodology. Refer to Note 1, Summary of Significant Accounting Policies for a description of the Company's accounting policies for the ACL.
Union Bankshares, Inc. Page 35
Credit loss (benefit) expense was made up of the following components for the following periods:
| For The Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||
| 2023 (CECL) | 2022 (Incurred Loss) | 2023 (CECL) | 2022 (Incurred Loss) | |||||||||||
| (Dollars in thousands) | ||||||||||||||
| Credit loss expense for loans | $ | 116 | $ | — | $ | 55 | $ | — | ||||||
| Credit loss benefit for off-balance sheet credit exposures | (255) | — | (216) | — | ||||||||||
| Credit loss benefit, net | $ | (139) | $ | — | $ | (161) | $ | — | ||||||
Noninterest Income. The following table sets forth the components of noninterest income and changes between the three and nine month comparison periods of 2023 and 2022:
| For The Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2023 | 2022 | $ Variance | % Variance | 2023 | 2022 | $ Variance | % Variance | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||
| Wealth management income | $ | 244 | $ | 203 | $ | 41 | 20.2 | $ | 695 | $ | 629 | $ | 66 | 10.5 | ||||||||||||
| Service fees | 1,785 | 1,803 | (18) | (1.0) | 5,219 | 5,176 | 43 | 0.8 | ||||||||||||||||||
| Net gains on sales of loans held for sale | 336 | 448 | (112) | (25.0) | 836 | 748 | 88 | 11.8 | ||||||||||||||||||
| Income from Company-owned life insurance | 118 | 112 | 6 | 5.4 | 334 | 401 | (67) | (16.7) | ||||||||||||||||||
| Other income | 25 | 34 | (9) | (26.5) | 90 | 184 | (94) | (51.1) | ||||||||||||||||||
| Net (losses) gains on other investments | (41) | (60) | 19 | (31.7) | 61 | (120) | 181 | (150.8) | ||||||||||||||||||
| Net gains on sales of investment securities AFS | — | — | — | — | — | 31 | (31) | (100.0) | ||||||||||||||||||
| Total noninterest income | $ | 2,467 | $ | 2,540 | $ | (73) | (2.9) | $ | 7,235 | $ | 7,049 | $ | 186 | 2.6 | ||||||||||||
The significant changes in noninterest income for the three and nine months ended September 30, 2023 compared to the same periods of 2022 are described below:
•Wealth management income: Wealth management income increased as managed fiduciary accounts grew between September 30, 2023 and 2022, as did the value of assets within those accounts.
•Service fees. Service fees increased $43 thousand for the nine months ended September 30, 2023, compared to the same period in 2022 primarily due to increases of $38 thousand in ATM network fees, $19 thousand in service charge income, and $14 thousand in overdraft fee income, partially offset by a $29 thousand decrease in merchant program fees. Service fees decreased $18 thousand for the three months ended September 30, 2023, compared to 2022 primarily due to decreases in loan servicing fees and merchant program fees.
•Net gains on sales of loans held for sale. Residential mortgage loans totaling $24.7 million and $54.2 million were sold during the three and nine months ended September 30, 2023, respectively, compared to sales of $25.8 million and $60.2 million during the same periods in 2022, respectively. The decrease of $112 thousand in net gains on sales of loans held for sale for the three months ended September 30, 2023, compared to 2022 reflects the lower sales volume and lower premiums obtained on sales during the three months ended September 30, 2023. In addition, there was $10 thousand of fees and gain recapture recorded in the third quarter of 2023 due to early payment default of two loans that were sold in 2022. The increase of $88 thousand in net gains on sales of loans held for sale despite the lower sales volumes for the nine months ended September 30, 2023 compared to the same period in 2022 reflects higher premiums obtained on sales in the first half of 2023 and $31 thousand of recapture on gains from 2021 recorded in the first quarter of 2022 that did not recur in 2023.
•Income from Company-owned life insurance. Death benefit proceeds of $77 thousand were received in the first quarter of 2022 that did not repeat in 2023.
Union Bankshares, Inc. Page 36
•Other income. The decrease in other income between the nine month comparison periods primarily reflects $90 thousand in prepayment penalties received from the early payoff of loans during the nine months ended September 30, 2022 that did not recur for the same period in 2023.
•Net (losses) gains on other investments. Participants in the 2020 Amended and Restated Nonqualified Excess Plan elect to defer receipt of current compensation from the Company or its subsidiary and select designated reference investments consisting of investment funds. The performance of those funds, over which the Company has no control, resulted in net losses of $41 thousand and net gains of $61 thousand for the three and nine months ended September 30, 2023, respectively, and net losses of $60 thousand and $120 thousand for the three and nine months ended September 30, 2022, respectively.
Noninterest Expenses. The following table sets forth the components of noninterest expenses and changes between the three and nine month comparison periods ended September 30, 2023 and 2022:
| For The Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2023 | 2022 | $ Variance | % Variance | 2023 | 2022 | $ Variance | % Variance | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||
| Salaries and wages | $ | 3,720 | $ | 3,575 | $ | 145 | 4.1 | $ | 10,895 | $ | 10,505 | $ | 390 | 3.7 | ||||||||||||
| Employee benefits | 1,217 | 1,154 | 63 | 5.5 | 4,065 | 3,754 | 311 | 8.3 | ||||||||||||||||||
| Occupancy expense, net | 459 | 448 | 11 | 2.5 | 1,519 | 1,437 | 82 | 5.7 | ||||||||||||||||||
| Equipment expense | 935 | 948 | (13) | (1.4) | 2,714 | 2,798 | (84) | (3.0) | ||||||||||||||||||
| FDIC insurance assessment | 267 | 179 | 88 | 49.2 | 734 | 452 | 282 | 62.4 | ||||||||||||||||||
| Training and development | 53 | 29 | 24 | 82.8 | 172 | 108 | 64 | 59.3 | ||||||||||||||||||
| Communication expense | 105 | 73 | 32 | 43.8 | 295 | 229 | 66 | 28.8 | ||||||||||||||||||
| Amortization of MSRs, net | 47 | 73 | (26) | (35.6) | 248 | 362 | (114) | (31.5) | ||||||||||||||||||
| ATM and debit card expense | 283 | 260 | 23 | 8.8 | 817 | 717 | 100 | 13.9 | ||||||||||||||||||
| Other losses | 37 | 17 | 20 | 117.6 | 127 | 36 | 91 | 252.8 | ||||||||||||||||||
| Donations | 135 | 38 | 97 | 255.3 | 238 | 139 | 99 | 71.2 | ||||||||||||||||||
| Loan related expense | 158 | 119 | 39 | 32.8 | 355 | 289 | 66 | 22.8 | ||||||||||||||||||
| Other expenses | 1,510 | 1,526 | (16) | (1.0) | 4,560 | 4,311 | 249 | 5.8 | ||||||||||||||||||
Total noninterest expenses | $ | 8,926 | $ | 8,439 | $ | 487 | 5.8 | $ | 26,739 | $ | 25,137 | $ | 1,602 | 6.4 | ||||||||||||
The significant changes in noninterest expenses for the three and nine months ended September 30, 2023 compared to the same periods in 2022 are described below:
•Salaries and wages. Salaries and wages increased $145 thousand and $390 thousand for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022 primarily due to annual salary adjustments for the 2023 fiscal year.
•Employee benefits. Employee benefit expense increased $63 thousand for the three months ended September 30, 2023 compared to the same period in 2022 due primarily to increases of $23 thousand in 401k contributions, $22 thousand in the Company's deferred compensation plans, and $13 thousand in payroll taxes. The increase of $311 thousand for the nine months ended September 30, 2023 compared to the same period in 2022 was primarily due to increases of $161 thousand in employee benefits related to the Company's deferred compensation plans and $141 thousand in premium expense for the Company's medical and dental plans between periods.
•Occupancy expense, net. The increase in occupancy expense for the three and nine month comparison periods is due to increases in utilities and taxes, partially offset by a decrease in repair and maintenance expenses. Also, lease expense increased $14 thousand and $55 thousand, respectively for the three and nine month periods ended September 30, 2023 compared to the same periods last year, primarily due to a new lease for a full service branch location in North Conway, NH.
•Equipment expense. Equipment expenses decreased between periods primarily due to decreases of $51 thousand and $159 thousand in office equipment and ATM depreciation expense for the three and nine month comparison periods,
Union Bankshares, Inc. Page 37
respectively, related to the timing of ATM and equipment replacement purchases. These decreases were partially offset by increases in software license and maintenance costs.
•FDIC insurance assessment. The FDIC insurance assessment increased by $88 thousand and $282 thousand, respectively, during the three and nine month periods ended September 30, 2023 compared to the same periods in 2022, primarily due to an increase in the assessment rate as well as overall growth in net assets.
•Training and development. Training and development events that were suspended or held as virtual events in the prior year due to the impacts of COVID-19 have resumed in-person, resulting in increased expense of $24 thousand and $64 thousand for the three and nine month comparison periods, respectively.
•Communication expense. The respective increases in expense between the three and nine month comparison periods were due to the increase in remote ATM telecommunication expense.
•Amortization of MSRs, net. Income from MSRs is derived from servicing rights acquired through the sale of loans where servicing is retained. Capitalized servicing rights are initially recorded at fair value and amortized in proportion to, and over the period of, the estimated future servicing period of the underlying mortgages. The amortization of MSRs exceeded new capitalized MSRs which resulted in net expense of $47 thousand and $248 thousand for the three and nine months ended September 30, 2023, respectively, and $73 thousand and $362 thousand for the three and nine months ended September 30, 2022, respectively.
•ATM and debit card expense. The respective increases between the three and nine month comparison periods relate to increases in the volume of ATM and debit card transactions and new card issuance costs.
•Other losses. Other losses primarily consists of debit card fraud on customer accounts, charged off checking accounts, and fraudulent check cashing schemes. Hackers continue to become more sophisticated and are being more successful in hacking customer debit cards, resulting in an increase in losses sustained by the Company. New debit cards are issued to customers whose accounts have been compromised.
•Donations. Charitable donations are made as part of the Company's on-going commitment to enhancing the economic vitality and social welfare of our communities. Donations increased for the three and nine month comparison periods due to contributions made to assist communities with recovery efforts related to the July 2023 historic flood that occurred in the State of Vermont.
•Loan related expense. There was an increase in the costs incurred for originating and servicing loans during the the three and nine months ended September 30, 2023, compared to the same periods in 2022. These costs include insurance and property tax tracking expenses, credit report fees, and other real estate closing costs.
Provision for Income Taxes. The Company has provided for current and deferred federal income taxes for the three and nine months ended September 30, 2023 and 2022. The Company's net provision for income taxes was $296 thousand and $1.2 million for the three and nine months ended September 30, 2023, respectively, compared to $783 thousand and $1.8 million for the same periods in 2022, respectively. The Company's effective federal corporate income tax rate was 10.8% and 12.9% for the three and nine months ended September 30, 2023 compared to 16.6% and 16.1% for the same period in 2022, respectively.
Amortization expense related to limited partnership investments is included as a component of income tax expense and amounted to $363 thousand and $1.0 million for the three and nine months ended September 30, 2023, respectively, compared to $316 and $864 thousand for the same periods in 2022, respectively. These investments provide tax benefits, including tax credits. Low income housing and rehabilitation tax credits with respect to limited partnership investments are also included as a component of income tax expense and amounted to $358 thousand and $1.1 million for the three and nine months ended September 30, 2023, respectively, and $310 thousand and $833 thousand for the three and nine months ended September 30, 2022, respectively.
FINANCIAL CONDITION
At September 30, 2023, the Company had total consolidated assets of $1.40 billion, including gross loans and loans held for sale (total loans) of $1.03 billion, investment securities AFS of $249.0 million, deposits of $1.22 billion, borrowed funds of $90.7 million, subordinated notes of $16.2 million and stockholders' equity of $49.2 million. The Company’s total assets at September 30, 2023 increased $59.1 million, or 4.4%, from $1.34 billion at December 31, 2022, and increased $95.3 million, or 7.3%, compared to September 30, 2022.
Net loans and loans held for sale increased $70.5 million, or 7.4%, to $1.02 billion, representing 73.3% of total assets at September 30, 2023, compared to $952.3 million, or 71.3% of total assets at December 31, 2022. (See Loans Held for Sale and Loan Portfolio below.)
Union Bankshares, Inc. Page 38
Total deposits increased $20.4 million, or 1.7%, to $1.22 billion at September 30, 2023, from $1.20 billion at December 31, 2022. There was an increase in time deposits of $132.3 million, or 86.4%, which was partially offset by decreases in noninterest bearing deposits of $57.0 million, or 19.9%, and interest bearing deposits of $54.9 million, or 7.2%. (See Deposits on page 43.)
Borrowed funds, which consist of FHLB advances, were $90.7 million and $50.0 million at September 30, 2023 and December 31, 2022, respectively. (See Borrowings on page 44.)
Stockholders’ equity decreased from $55.2 million at December 31, 2022 to $49.2 million at September 30, 2023, reflecting an increase of $9.6 million in accumulated other comprehensive loss due to a decrease in the fair market value of the Company's AFS investment securities, cash dividends declared of $4.9 million and stock repurchases of $115 thousand during the nine months ended September 30, 2023. These decreases were partially offset by net income of $8.2 million for the first nine months of 2023, an increase of $348 thousand to common stock and additional paid in capital from the vesting of stock based compensation, a $37 thousand increase to retained earnings from the impact of adoption of ASU No. 2016-13 and a $61 thousand increase due to the issuance of common stock under the DRIP. (See Capital Resources on page 46.)
Loans Held for Sale and Loan Portfolio. Total loans (including loans held for sale) increased $68.7 million, or 7.2%, to $1.03 billion, representing 73.7% of assets at September 30, 2023, from $959.3 million, representing 71.8% of assets at December 31, 2022. The total loan portfolio at September 30, 2023 increased $86.8 million compared to the September 30, 2022 level of $941.2 million, which represented 72.4% of assets. The Company’s loans consist primarily of adjustable-rate and fixed-rate mortgage loans secured by one-to-four family, multi-family residential or commercial real estate. Real estate secured loans represented $903.9 million, or 87.9% of total loans at September 30, 2023 and $828.2 million, or 86.3% of total loans at December 31, 2022. The net change in the Company's loan portfolio from December 31, 2022 (see table below) resulted primarily from an increase in the volume of residential, commercial real estate, and residential construction loans originated.
The composition of the Company's loan portfolio, including loans held for sale, as of September 30, 2023 and December 31, 2022 was as follows:
| September 30, 2023 | December 31, 2022 | |||||||||||||
| Loan Class | Amount | Percent | Amount | Percent | ||||||||||
| Residential real estate | (Dollars in thousands) | |||||||||||||
| Non-revolving residential real estate | $ | 382,332 | 37.2 | $ | 335,470 | 35.0 | ||||||||
| Revolving residential real estate | 17,652 | 1.7 | 16,963 | 1.8 | ||||||||||
| Construction real estate | ||||||||||||||
| Commercial construction real estate | 52,423 | 5.1 | 56,501 | 5.9 | ||||||||||
| Residential construction real estate | 49,826 | 4.9 | 40,119 | 4.2 | ||||||||||
| Commercial real estate | ||||||||||||||
| Non-residential commercial real estate | 292,337 | 28.5 | 282,397 | 29.4 | ||||||||||
| Multi-family residential real estate | 102,855 | 10.0 | 95,550 | 9.9 | ||||||||||
| Commercial | 41,258 | 4.0 | 40,973 | 4.3 | ||||||||||
| Consumer | 2,289 | 0.2 | 2,204 | 0.2 | ||||||||||
| Municipal | 80,611 | 7.8 | 87,980 | 9.2 | ||||||||||
| Loans held for sale | 6,452 | 0.6 | 1,178 | 0.1 | ||||||||||
| Total loans | 1,028,035 | 100.0 | 959,335 | 100.0 | ||||||||||
| ACL on loans | (6,895) | (8,339) | ||||||||||||
| Unamortized net loan costs | 1,700 | 1,336 | ||||||||||||
| Net loans and loans held for sale | $ | 1,022,840 | $ | 952,332 | ||||||||||
The Company originates and sells qualified residential mortgage loans in various secondary market avenues to mitigate long-term interest rate risk and generate fee income, with a majority of sales made to the FHLMC/Freddie Mac, generally with servicing rights retained. At September 30, 2023, the Company serviced a $1.05 billion residential real estate mortgage portfolio, of which $6.5 million was held for sale and approximately $642.9 million of which was serviced for unaffiliated third parties.
The Company sold $54.2 million of qualified residential real estate loans to the secondary market during the first nine months of 2023 compared to sales of $60.2 million during the first nine months of 2022. Residential mortgage loan origination activity was strong during the third quarter of 2023. Despite low housing inventory and rising interest rates, purchase activity in the Company's markets continues to be stable with an increase in construction loan activity. The Company originates and sells
Union Bankshares, Inc. Page 39
FHA, VA, and RD residential mortgage loans, and also has an Unconditional Direct Endorsement Approval from HUD which allows the Company to approve FHA loans originated in any of its Vermont or New Hampshire markets without needing prior HUD underwriting approval. The Company sells FHA, VA and RD loans as originated with servicing released. Some of the government backed loans qualify for zero down payments without geographic or income restrictions. These loan products increase the Company's ability to serve the borrowing needs of residents in the communities served, including low and moderate income borrowers, while the loan sales and government guaranty mitigate the Company's exposure to credit risk.
The Company also originates commercial real estate and commercial loans under various SBA, USDA and State sponsored programs which provide a government agency guaranty for a portion of the loan amount. There was $2.8 million guaranteed under these various programs at September 30, 2023 on an aggregate balance of $3.8 million in subject loans.
The Company serviced $27.5 million of commercial and commercial real estate loans for unaffiliated third parties as of September 30, 2023. This included $26.5 million of commercial or commercial real estate loans the Company originated and participated out to other financial institutions. These loans were participated in the ordinary course of business on a nonrecourse basis, for liquidity or credit concentration management purposes.
The Company capitalizes MSRs for all loans sold with servicing retained. The unamortized balance of MSRs on loans sold with servicing retained was $1.8 million at September 30, 2023, with an estimated market value in excess of the carrying value as of such date. Management periodically evaluates and measures the servicing assets for impairment.
Qualifying residential first lien mortgage loans and certain commercial real estate loans with a combined carrying value of $350.4 million were pledged as collateral for borrowings from the FHLB under a blanket lien at September 30, 2023.
Asset Quality. The Company, like all financial institutions, is exposed to certain credit risks, including those related to the value of the collateral that secures its loans and the ability of borrowers to repay their loans. Consistent application of the Company’s conservative loan policies has helped to mitigate this risk and has been prudent for both the Company and its customers. Management closely monitors the Company’s loan and investment portfolios, OREO and OAO for potential problems and reports to the Company’s and Union’s Board at regularly scheduled meetings. Board approved policies set forth portfolio diversification levels to mitigate concentration risk and the Company participates large credits out to other financial institutions to further mitigate that risk.
Repossessed assets, nonaccrual loans, and loans that are 90 days or more past due are considered to be nonperforming assets. The following table details the composition of the Company's nonperforming assets and amounts utilized to calculate certain asset quality ratios monitored by the Company's management as of the balance sheet dates and September 30, 2022:
| September 30, 2023 | December 31, 2022 | September 30, 2022 | |||||||||
| (Dollars in thousands) | |||||||||||
| Nonaccrual loans | $ | 1,882 | $ | 2,211 | $ | 1,381 | |||||
| Loans past due 90 days or more and still accruing interest | 245 | 186 | 308 | ||||||||
| Total nonperforming assets | $ | 2,127 | $ | 2,397 | $ | 1,689 | |||||
| Guarantees of U.S. or state government agencies on the above nonperforming loans | $ | — | $ | 76 | $ | 131 | |||||
| TDR loans | $ | — | $ | 179 | $ | 1,757 | |||||
| ACL on loans | $ | 6,895 | $ | 8,339 | $ | 8,340 | |||||
| Net charge-offs (recoveries) | $ | 4 | $ | (3) | $ | (4) | |||||
| Total loans outstanding | $ | 1,028,035 | $ | 959,335 | $ | 941,191 | |||||
| Total average loans outstanding | $ | 982,071 | $ | 875,528 | $ | 850,869 | |||||
Union Bankshares, Inc. Page 40
The following table shows trends of certain asset quality ratios monitored by the Company's management as of the balance sheet dates and September 30, 2022:
| September 30, 2023 | December 31, 2022 | September 30, 2022 | |||||||||
| (Dollars in thousands) | |||||||||||
| ACL on loans to total loans outstanding | 0.67 | % | 0.87 | % | 0.89 | % | |||||
| ACL on loans to nonperforming loans | 324.17 | % | 347.89 | % | 493.78 | % | |||||
| ACL on loans to nonaccrual loans | 366.37 | % | 377.16 | % | 603.91 | % | |||||
| Nonperforming loans to total loans | 0.21 | % | 0.25 | % | 0.18 | % | |||||
| Nonperforming assets to total assets | 0.15 | % | 0.18 | % | 0.13 | % | |||||
| Nonaccrual loans to total loans | 0.18 | % | 0.23 | % | 0.15 | % | |||||
| Delinquent loans (30 days to nonaccruing) to total loans | 0.22 | % | 0.57 | % | 0.54 | % | |||||
| Net charge-offs (recoveries) to total average loans | — | % | — | % | — | % | |||||
| Residential real estate | — | % | — | % | — | % | |||||
Net recoveries | $ | (1) | $ | — | $ | — | |||||
| Total average loans | $ | 371,088 | $ | 304,778 | $ | 292,147 | |||||
| Commercial | — | % | — | % | — | % | |||||
| Net recoveries | $ | — | $ | (1) | $ | (1) | |||||
| Total average loans | $ | 40,862 | $ | 43,710 | $ | 44,477 | |||||
| Consumer | 0.21 | % | (0.09) | % | (0.13) | % | |||||
| Net charge-offs (recoveries) | $ | 5 | $ | (2) | $ | (3) | |||||
| Total average loans | $ | 2,365 | $ | 2,262 | $ | 2,258 | |||||
All other loan categories did not have charge-offs or recoveries for the periods presented above.
There were no loans in process of foreclosure at September 30, 2023 and one residential real estate loan totaling $28 thousand in process of foreclosure at December 31, 2022. The aggregate interest income not recognized on nonaccrual loans approximated $120 thousand as of September 30, 2023 and $59 thousand as of December 31, 2022.
The Company had loans rated substandard that were on performing status totaling $1.3 million at September 30, 2023 and December 31, 2022. In management's view, substandard loans represent a higher degree of risk of becoming nonperforming loans in the future.
Allowance for Credit Losses on Loans. Some of the Company’s loan customers ultimately do not make all of their contractually scheduled payments, requiring the Company to charge off a portion or all of the remaining principal balance due. The Company maintains an ACL to absorb such losses. The level of the ACL on loans at September 30, 2023 represents management's estimate of expected credit losses over the expected life of the loans at the balance sheet date. The Company's policy and methodologies for establishing the ACL on loans under previously applicable GAAP for the 2022 comparison periods presented are described in the Company's 2022 Annual Report, while the Company's policy and methodologies related to the adoption of CECL as of January 1, 2023 and for the first nine months of 2023 are described in the Summary of Significant Accounting Policies in Note 1 to the unaudited interim consolidated financial statements included in this report. The Company's ACL on loans was $6.9 million and $8.3 million at September 30, 2023 and December 31, 2022, respectively.
Union Bankshares, Inc. Page 41
The following table reflects activity in the ACL on loans for the three and nine months ended September 30, 2023 and 2022:
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||
| (Dollars in thousands) | ||||||||||||||
| Balance at beginning of period | $ | 6,780 | $ | 8,340 | $ | 8,339 | $ | 8,336 | ||||||
| Impact of adoption of ASU No. 2016-13 | — | — | (1,495) | — | ||||||||||
| Charge-offs | (4) | — | (8) | (2) | ||||||||||
| Recoveries | 3 | — | 4 | 6 | ||||||||||
| Net (charge-offs) recoveries | (1) | — | (4) | 4 | ||||||||||
| Credit loss expense | 116 | — | 55 | — | ||||||||||
| Balance at end of period | $ | 6,895 | $ | 8,340 | $ | 6,895 | $ | 8,340 | ||||||
The following table (net of loans held for sale) shows the internal breakdown by risk component of the Company's ACL on loans and the percentage of loans in each category to total loans in the respective portfolios at the dates indicated:
| September 30, 2023 | December 31, 2022 | |||||||||||||
| Amount | Percent | Amount | Percent | |||||||||||
| Residential real estate | (Dollars in thousands) | |||||||||||||
| Non-revolving residential real estate | $ | 2,300 | 37.4 | $ | 2,294 | 35.0 | ||||||||
| Revolving residential real estate | 150 | 1.7 | 123 | 1.8 | ||||||||||
| Construction real estate | ||||||||||||||
| Commercial construction real estate | 1,465 | 5.1 | 611 | 5.9 | ||||||||||
| Residential construction real estate | 159 | 4.9 | 421 | 4.2 | ||||||||||
| Commercial real estate | ||||||||||||||
| Non-residential commercial real estate | 2,149 | 28.6 | 2,931 | 29.5 | ||||||||||
| Multi-family residential real estate | 239 | 10.1 | 1,004 | 9.9 | ||||||||||
| Commercial | 357 | 4.1 | 301 | 4.3 | ||||||||||
| Consumer | 5 | 0.2 | 10 | 0.2 | ||||||||||
| Municipal | 71 | 7.9 | 95 | 9.2 | ||||||||||
| Unallocated | — | — | 549 | — | ||||||||||
| Total | $ | 6,895 | 100.0 | $ | 8,339 | 100.0 | ||||||||
Notwithstanding the categories shown in the table above or any specific allocation under the Company's ACL methodology, all funds in the ACL on loans are available to absorb loan losses in the portfolio, regardless of loan category or specific allocation.
Management believes, in its best estimate, that the ACL on loans at September 30, 2023 is appropriate to cover expected credit losses over the expected life of the Company’s loan portfolio as of such date. However, there can be no assurance that the Company will not sustain losses in future periods which could be greater than the size of the ACL on loans at September 30, 2023. In addition, our banking regulators, as an integral part of their examination process, periodically review our ACL. Such agencies may require us to recognize adjustments to the ACL based on their judgments about information available to them at the time of their examination. A large adjustment to the ACL on loans for losses in future periods could require increased credit loss expense to replenish the ACL on loans, which could negatively affect earnings.
Investment Activities. During the first nine months of 2023, investment securities classified as AFS, which are carried at fair value, decreased $1.3 million to $249.0 million, comprising 17.8% of total assets, compared to $250.3 million, or 18.7% of total assets, at December 31, 2022. The decrease between periods is due to an increase in unrealized losses of $12.9 million and returns of principal of $12.9 million, partially offset by purchases of higher yielding municipal securities of $24.9 million during the first quarter of 2023.
Net unrealized losses in the Company’s AFS investment securities portfolio were $60.3 million as of September 30, 2023, compared to net unrealized losses of $47.4 million as of December 31, 2022. The Company’s accumulated OCI component of stockholders’ equity at September 30, 2023 reflected cumulative net unrealized losses on investment securities of $47.1 million. There were no securities classified as HTM at September 30, 2023 or December 31, 2022. The increase in unrealized losses is
Union Bankshares, Inc. Page 42
primarily attributable to increases in long term interest rates which are tied to the pricing indexes for the securities. No declines in value were deemed by management to be impairment related to credit losses at September 30, 2023. Deterioration in credit quality and/or imbalances in liquidity that may result from changes in financial market conditions might adversely affect the fair values of the Company’s investment portfolio and the amount of gains or losses ultimately realized on the sale of such securities and may also increase the potential that credit losses may be identified in future periods, resulting in credit loss expense recorded in earnings.
Investment securities AFS with a carrying amount of $874 thousand and $433 thousand were pledged as collateral for public unit deposits or for other purposes as required or permitted by law at September 30, 2023 and December 31, 2022, respectively.
Deposits. The following table shows information concerning the Company's average deposits by account type and weighted average nominal rates at which interest was paid on such deposits for the nine months ended September 30, 2023 and 2022:
| Nine Months Ended September 30, 2023 | Nine Months Ended September 30, 2022 | |||||||||||||||||||
| Average Amount | Percent of Total Deposits | Average Rate | Average Amount | Percent of Total Deposits | Average Rate | |||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Nontime deposits: | ||||||||||||||||||||
| Noninterest bearing deposits | $ | 248,222 | 20.6 | — | $ | 312,331 | 27.2 | — | ||||||||||||
| Interest bearing checking accounts | 316,193 | 26.2 | 0.89 | % | 287,296 | 25.0 | 0.26 | % | ||||||||||||
| Money market accounts | 228,262 | 18.9 | 1.43 | % | 249,018 | 21.7 | 0.53 | % | ||||||||||||
| Savings accounts | 168,551 | 14.0 | 0.03 | % | 188,568 | 16.4 | 0.04 | % | ||||||||||||
| Total nontime deposits | 961,228 | 79.7 | 0.64 | % | 1,037,213 | 90.3 | 0.20 | % | ||||||||||||
| Total time deposits | 243,730 | 20.3 | 3.23 | % | 111,202 | 9.7 | 0.60 | % | ||||||||||||
| Total deposits | $ | 1,204,958 | 100.0 | 1.16 | % | $ | 1,148,415 | 100.0 | 0.24 | % | ||||||||||
During the first nine months of 2023, average total deposits grew $56.5 million, or 4.9%, compared to the nine months ended September 30, 2022. The average balance of total non-time deposit balances decreased $76.0 million between periods primarily due to decreases of $64.1 million in noninterest bearing deposits, $20.8 million in money market accounts, and $20.0 million in saving accounts, partially offset by an increase of $28.9 million in interest bearing checking accounts. The increase in interest bearing checking accounts is primarily attributable to the purchase of nonreciprocal ICS deposits from IntraFi as described below for the the nine months ended September 30, 2023. The decreases in the other categories are attributable to customers spending down deposit balances (including COVID-19 relief funds), the loss of deposit dollars to competing financial institutions and brokerage firms, and customers shifting monies into time deposits as they continue to seek higher yields. The average balance in total time deposits increased $132.5 million between periods due to an increase of $82.0 million in average brokered deposits and an increase of $50.5 million in average customer time deposit accounts as customers took advantage of higher rate paying CDs.
The Company participates in CDARS, which permits it to offer full deposit insurance coverage to its customers by exchanging deposit balances with other CDARS participants. CDARS also provides the Company with an additional source of funding and liquidity through the purchase of deposits. There were no purchased CDARS deposits as of September 30, 2023 or December 31, 2022. There were $14.3 million and $12.3 million of time deposits of $250,000 or less on the balance sheet at September 30, 2023 and December 31, 2022, respectively, which were exchanged with other CDARS participants.
The Company also participates in the ICS program, a service through which it can offer its customers demand or savings products with access to unlimited FDIC insurance, while receiving reciprocal deposits from other FDIC-insured banks. Like the exchange of certificate of deposit accounts through CDARS, exchange of demand or savings deposits through ICS provides a depositor with full deposit insurance coverage of excess balances, thereby helping the Company retain the full amount of the deposit on its balance sheet. As with the CDARS program, in addition to reciprocal deposits, participating banks may also purchase one-way ICS deposits. There were $106.6 million and $209.3 million in exchanged ICS demand and money market deposits on the balance sheet at September 30, 2023 and December 31, 2022, respectively. Additionally, there were $50.2 million of purchased ICS deposits at September 30, 2023 and no purchased ICS deposits at December 31, 2022.
At September 30, 2023 there were $103.0 million of retail brokered deposits at a weighted average rate of 5.07% issued under a master certificate of deposit program with a deposit broker for six, nine and twelve month terms for the purpose of providing a supplemental source of funding and liquidity. There were $33.0 million of retail brokered deposits at December 31, 2022 at a weighted average rate of 3.45% for a three month term that matured in January 2023.
Union Bankshares, Inc. Page 43
Uninsured deposits have been estimated to include deposits with balances greater than the FDIC insurance coverage limit of $250 thousand. This estimate is based on the same methodologies and assumptions used for regulatory reporting requirements. At September 30, 2023, the Company had total estimated uninsured deposit accounts totaling $362.7 million, or 29.7% of total deposits. Uninsured deposits include $31.1 million of municipal deposits that were collateralized under applicable state regulations by investment securities or letters of credit issued by the FHLB at September 30, 2023, as described below under Borrowings.
The following table provides a maturity distribution of the Company’s time deposits in amounts in excess of the $250 thousand FDIC insurance limit at September 30, 2023 and December 31, 2022:
| September 30, 2023 | December 31, 2022 | |||||||
| (Dollars in thousands) | ||||||||
| Within 3 months | $ | 14,143 | $ | 1,011 | ||||
| 3 to 6 months | 11,727 | 4,001 | ||||||
| 6 to 12 months | 14,742 | 11,462 | ||||||
| Over 12 months | 621 | 9,883 | ||||||
| $ | 41,233 | $ | 26,357 | |||||
Borrowings. Advances from the FHLB are another key source of funds to support earning assets. These funds are also used to manage the Bank's interest rate and liquidity risk exposures. The Company's borrowed funds at September 30, 2023 were comprised of borrowings from the FHLB of $90.7 million at a weighted average rate of 3.57%. At December 31, 2022, borrowed funds were comprised of borrowings from the FHLB of $50.0 million at a weighted average rate of 4.41%.
The Company has the authority, up to its available borrowing capacity with the FHLB, to collateralize public unit deposits with letters of credit issued by the FHLB. FHLB letters of credit in the amount of $42.4 million and $42.5 million were utilized as collateral for these deposits at September 30, 2023 and December 31, 2022, respectively. The Company's reimbursement obligations to the FHLB relating to these letters of credit are secured by pledged collateral, which reduces the Company's available borrowing capacity with the FHLB. Total fees paid by the Company in connection with the issuance of these letters of credit were $11 thousand and $34 thousand for the three and nine months ended September 30, 2023, respectively and $8 thousand and $23 thousand for the three and nine months ended September 30, 2022, respectively.
In August 2021, the Company completed the private placement of $16.5 million in aggregate principal amount of fixed-to-floating rate subordinated notes due 2031 to certain qualified institutional buyers and accredited investors. The Notes initially bear interest, payable semi-annually, at the rate of 3.25% per annum, until September 1, 2026. From and including September 1, 2026, the interest rate applicable to the outstanding principal amount due will reset quarterly to the then current three-month secured overnight financing rate (SOFR) plus 263 basis points. The Notes are presented in the consolidated balance sheets net of unamortized issuance costs of $270 thousand and $295 thousand at September 30, 2023 and December 31, 2022, respectively.
Commitments, Contingent Liabilities, and Off-Balance-Sheet Arrangements. The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers, to reduce its own exposure to fluctuations in interest rates and to implement its strategic objectives. These financial instruments include commitments to extend credit, standby letters of credit, interest rate caps and floors written on adjustable-rate loans, commitments to participate in or sell loans, commitments to buy or sell securities, certificates of deposit or other investment instruments and risk-sharing commitments or guarantees on certain sold loans. Such instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the balance sheet. The contractual or notional amounts of these instruments reflect the extent of involvement the Company has in a particular class of financial instruments.
The Company's maximum exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. For interest rate caps and floors written on adjustable-rate loans, the contractual or notional amounts do not represent the Company’s exposure to credit loss. The Company controls the risk of interest rate cap agreements through credit approvals, borrowing limits, and monitoring procedures. The Company generally requires collateral or other security to support financial instruments with credit risk.
Union Bankshares, Inc. Page 44
The following table details the contractual or notional amount of financial instruments that represented credit risk at the balance sheet dates:
| September 30, 2023 | December 31, 2022 | |||||||
| (Dollars in thousands) | ||||||||
| Commitments to originate loans | $ | 29,484 | $ | 39,217 | ||||
| Unused lines of credit | 194,234 | 185,539 | ||||||
| Standby and commercial letters of credit | 1,532 | 1,762 | ||||||
| Credit card arrangements | 146 | 241 | ||||||
| FHLB Mortgage Partnership Finance credit enhancement obligation, net | 765 | 396 | ||||||
| Commitment to purchase investment in a real estate limited partnership | — | 3,000 | ||||||
| Total | $ | 226,161 | $ | 230,155 | ||||
Commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Loan commitments generally have a fixed expiration date or other termination clause and may require payment of a fee. Since many of the loan commitments are expected to expire without being drawn upon and not all credit lines will be utilized, the total commitment amounts do not necessarily represent future cash requirements. Lines of credit incur seasonal volume fluctuations due to the nature of some customers' businesses, such as tourism.
The Company did not hold any derivative or hedging instruments at September 30, 2023 or December 31, 2022.
In addition to commitments arising from the Company’s financial instruments, in the normal course of business the Company enters into contractual commitments from time to time for the purchase or lease of property, including real property for its banking premises.
With the adoption of CECL, effective January 1, 2023, the Company records an ACL on off-balance sheet credit exposures through a charge or credit to Credit loss expense on the consolidated statements of income to account for the change in the ACL on off-balance sheet exposures between reporting periods. The ACL on off-balance sheet credit exposures totaled $1.2 million at September 30, 2023 and was included in Accrued interest and other liabilities on the September 30, 2023 consolidated balance sheet. There was $255 thousand and $216 thousand of credit loss benefit for off-balance sheet credit exposures recorded for the three and nine months ended September 30, 2023, respectively. Under previously applicable GAAP, there was no ACL on off-balance sheet credit exposures required at December 31, 2022.
Liquidity. Liquidity is a measurement of the Company’s ability to meet potential cash requirements, including ongoing commitments to fund deposit withdrawals, repay borrowings, fund investment and lending activities, purchase and lease commitments, and for other general business purposes. The primary objective of liquidity management is to maintain a balance between sources and uses of funds to meet our cash flow needs in the most economical and expedient manner. The Company’s principal sources of funds are deposits; whole-sale funding options including purchased deposits, amortization, prepayment and maturity of loans, investment securities, interest bearing deposits and other short-term investments; sales of securities and loans AFS; earnings; and funds provided from operations. Contractual principal repayments on loans have been a relatively predictable source of funds. Deposit flows and loan and investment prepayments are less predictable and can be significantly influenced by market interest rates, economic conditions, and rates offered by our competitors. Managing liquidity risk is essential to maintaining both depositor confidence and earnings stability.
As of September 30, 2023, Union, as a member of FHLB, had access to unused lines of credit up to $102.8 million over and above the $134.7 million in combined outstanding FHLB borrowings and other credit, subject to collateralization and to the purchase of required FHLB Class B common stock and evaluation by the FHLB of the underlying collateral available. This line of credit can be used for either short-term or long-term liquidity or other funding needs.
Union also maintains an IDEAL Way Line of Credit with the FHLB. The total line available was $551 thousand at September 30, 2023. There were no borrowings against this line of credit as of such date. Interest on this line is chargeable at a rate determined by the FHLB and payable monthly. Should Union utilize this line of credit, qualified portions of the loan and investment portfolios would collateralize these borrowings.
In addition to its borrowing arrangements with the FHLB, Union maintains a pre-approved federal funds line of credit totaling $15.0 million with an upstream correspondent bank, a master brokered deposit agreement with a brokerage firm, and one-way buy options with CDARS and ICS. At September 30, 2023, there were no purchased CDARS deposits, $50.2 million in purchased ICS deposits, $103.0 million in retail brokered deposits issued under a master certificate of deposit program with a broker, and no outstanding advances on the Union or Company correspondent lines.
In response to the recent bank failures, the Federal Reserve created a Bank Term Funding Program to provide liquidity to U.S. Depository institutions which allows any federally insured depository institution to pledge as collateral its investment portfolio
Union Bankshares, Inc. Page 45
at par, not at fair market value. The Company continues to evaluate the program and has not yet taken any advances under this facility.
Union's investment and residential loan portfolios also provide a significant amount of contingent liquidity that could be accessed in a reasonable time period through sales of those portfolios. Additional contingent liquidity sources are available with further access to the brokered deposit market. These sources are considered as liquidity alternatives in our contingent liquidity plan. Management believes the Company has sufficient liquidity to meet all reasonable borrower, depositor, and creditor needs in the present economic environment. However, any projections of future cash needs and flows are subject to substantial uncertainty, including factors outside the Company's control.
Capital Resources. Capital management is designed to maintain an optimum level of capital in a cost-effective structure that meets target regulatory ratios, supports management’s internal assessment of economic capital, funds the Company’s business strategies and builds long-term stockholder value. Dividends are generally in line with long-term trends in earnings per share and conservative earnings projections, while sufficient profits are retained to support anticipated business growth, fund strategic investments, maintain required regulatory capital levels and provide continued support for deposits. The Company continues to evaluate growth opportunities both through internal growth or potential acquisitions.
In August 2021, the Company completed the private placement of $16.5 million in aggregate principal amount of fixed-to-floating rate subordinated notes due 2031 to certain qualified institutional buyers and accredited investors. The Notes are structured to qualify as Tier 2 capital for the Company under regulatory capital guidelines for bank holding companies. Proceeds from the sale of the Notes were utilized primarily to provide additional Tier 1 capital to Union to support its growth and for other general corporate purposes.
Stockholders’ equity decreased from $55.2 million at December 31, 2022 to $49.2 million at September 30, 2023, reflecting an increase of $9.6 million in accumulated other comprehensive loss due to a decrease in the fair market value of the Company's AFS investment securities, cash dividends declared of $4.9 million and stock repurchases of $115 thousand during the nine months ended September 30, 2023. These decreases were partially offset by net income of $8.2 million for the first nine months of 2023, an increase of $348 thousand to common stock and additional paid in capital from the vesting of stock based compensation, a $37 thousand increase to retained earnings from the impact of adoption of ASU No. 2016-13 and a $61 thousand increase due to the issuance of common stock under the DRIP. The components of other comprehensive loss are illustrated in Note 10 of the unaudited consolidated financial statements.
The Company has 7,500,000 shares of $2.00 par value common stock authorized. As of September 30, 2023, the Company had 4,984,311 shares issued, of which 4,507,905 were outstanding and 476,406 were held in treasury.
In January 2023, the Company's Board reauthorized for 2023 the limited stock repurchase plan that was initially established in May of 2010. The limited stock repurchase plan allows the repurchase of up to a fixed number of shares of the Company's common stock each calendar quarter in open market purchases or privately negotiated transactions, as management deems advisable and as market conditions may warrant. The repurchase authorization for a calendar quarter (currently 2,500 shares) expires at the end of that quarter to the extent it has not been exercised, and is not carried forward into future quarters. The quarterly repurchase authorization expires on December 31, 2023, unless reauthorized. The Company repurchased 5,000 shares under this program during the first nine months of 2023 at a total cost of $114 thousand. The Company also purchased 30 shares outside of the limited stock repurchase program during the first quarter of 2023 at a cost of $1 thousand.
The Company maintains a DRIP whereby registered stockholders may elect to reinvest cash dividends and make optional cash contributions to purchase additional shares of the Company's common stock. The Company has reserved 200,000 shares of its common stock for issuance and sale under the DRIP. As of September 30, 2023, 10,143 shares of stock had been issued from treasury stock under the DRIP.
The Company (on a consolidated basis) and Union are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's and Union's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Union must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and Union's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Under the standard regulatory capital guidelines, banking organizations must have a minimum total risk-based capital ratio of 8.0%, a minimum Tier I risk-based capital ratio of 6.0%, a minimum common equity Tier I risk-based capital ratio of 4.5%, and a minimum leverage ratio of 4.0% in order to be "adequately capitalized." In addition to these requirements, banking organizations must maintain a 2.5% capital conservation buffer consisting of common Tier I equity, increasing the minimum required total risk-based capital, Tier I risk-based and common equity Tier I capital to risk-weighted assets they must maintain to avoid limits on capital distributions and certain bonus payments to executive officers and similar employees.
Union Bankshares, Inc. Page 46
As shown in the table below, as of September 30, 2023, both the Company and Union met all capital adequacy requirements to which they are subject and Union exceeded the requirements for a "well capitalized" bank under the FDIC's Prompt Corrective Action framework. There were no conditions or events between September 30, 2023 and the date of this report that management believes have changed either company’s regulatory capital category.
| Actual | For Capital Adequacy Purposes | To Be Well Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||
| As of September 30, 2023 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Company: | ||||||||||||||||||||
| Total capital to risk weighted assets | $ | 118,453 | 13.19 | % | $ | 71,844 | 8.00 | % | N/A | N/A | ||||||||||
| Tier I capital to risk weighted assets | 94,085 | 10.48 | % | 53,865 | 6.00 | % | N/A | N/A | ||||||||||||
| Common Equity Tier 1 to risk weighted assets | 94,085 | 10.48 | % | 40,399 | 4.50 | % | N/A | N/A | ||||||||||||
| Tier I capital to average assets | 94,085 | 6.56 | % | 57,369 | 4.00 | % | N/A | N/A | ||||||||||||
| Union: | ||||||||||||||||||||
| Total capital to risk weighted assets | $ | 118,274 | 13.18 | % | $ | 71,790 | 8.00 | % | $ | 89,737 | 10.00 | % | ||||||||
| Tier I capital to risk weighted assets | 110,136 | 12.27 | % | 53,856 | 6.00 | % | 71,808 | 8.00 | % | |||||||||||
| Common Equity Tier 1 to risk weighted assets | 110,136 | 12.27 | % | 40,392 | 4.50 | % | 58,344 | 6.50 | % | |||||||||||
| Tier I capital to average assets | 110,136 | 7.68 | % | 57,363 | 4.00 | % | 71,703 | 5.00 | % | |||||||||||
Dividends paid by Union are the primary source of funds available to the Company for payment of dividends to its stockholders. Union is subject to certain requirements imposed by federal banking laws and regulations, which among other things, establish minimum levels of capital and restrict the amount of dividends that may be distributed by Union to the Company.
Quarterly cash dividends of $0.36 per share were paid during the second quarter of 2023 and were declared for the third quarter, payable on November 2, 2023 to stockholders of record on October 28, 2023.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Omitted, in accordance with the regulatory relief available to smaller reporting companies in SEC Release Nos. 33-10513 (effective September 10, 2018).
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. The Company’s Chief Executive Officer and Chief Financial Officer, with the assistance of the Disclosure Control Committee, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of September 30, 2023. Based on this evaluation they concluded that those disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files with the Commission is accumulated and communicated to the Company’s management, including its principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required information.
Changes in Internal Controls over Financial Reporting. There was no change in the Company's internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act, during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
In the normal course of business, the Company is involved in various legal and other proceedings. In the opinion of management, any liability resulting from such proceedings is not expected to have a material adverse effect on the Company’s consolidated financial condition or results of operations.
Union Bankshares, Inc. Page 47
Item 1A. Risk Factors
There have been no material changes in the risk factors discussed in Part I-Item 1A, "Risk Factors" in the Company’s 2022 Annual Report since the date of the filing of that report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The Company did not issue any unregistered shares during the quarter ended September 30, 2023.
The following table summarizes repurchases of the Company's equity securities during the quarter ended September 30, 2023.
| Issuer Purchases of Equity Securities | ||||||||||||||
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs (1) | ||||||||||
| July 2023 | 2,500 | $21.80 | 2,500 | — | ||||||||||
| August 2023 | — | — | — | — | ||||||||||
| September 2023 | — | — | — | — | ||||||||||
__________________
(1)Repurchases were made pursuant to a discretionary stock repurchase program under which the Company may repurchase up to 2,500 shares of its common stock each calendar quarter, in open market or privately negotiated transactions, in management's discretion. The repurchase authorization for a calendar quarter expires at the end of that quarter to the extent it has not been exercised, and is not carried forward into future quarters. The program was initially authorized in 2010 and was reauthorized most recently in January 2023. The program will expire on December 31, 2023, unless reauthorized by the Board of Directors.
Item 6. Exhibits.
| 31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||||
| 31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||||
| 32.1 | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* | ||||
| 32.2 | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* | ||||
| 101 | The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 formatted in Inline eXtensible Business Reporting Language (iXBRL): (i) the unaudited consolidated balance sheets, (ii) the unaudited consolidated statements of income for the three and nine months ended September 30, 2023 and 2022, (iii) the unaudited consolidated statements of comprehensive income for the three and nine months ended September 30, 2023 and 2022, (iv) the unaudited consolidated statements of changes in stockholders' equity, (iv) the unaudited consolidated statements of cash flows and (v) related notes. | ||||
| 104 | Cover page interactive data file (embedded within exhibit 101). | ||||
____________________
* This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
Union Bankshares, Inc. Page 48
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
| Union Bankshares, Inc. | ||||||||
| November 14, 2023 | /s/ David S. Silverman | |||||||
| David S. Silverman | ||||||||
| Director, President and Chief Executive Officer | ||||||||
| November 14, 2023 | /s/ Karyn J. Hale | |||||||
| Karyn J. Hale | ||||||||
| Chief Financial Officer | ||||||||
| (Principal Financial Officer) | ||||||||
EXHIBIT INDEX
| Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||||
| Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||||
| Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* | |||||
| Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* | |||||
| 101 | The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 formatted in Inline eXtensible Business Reporting Language (iXBRL): (i) the unaudited consolidated balance sheets, (ii) the unaudited consolidated statements of income for the three and nine months ended September 30, 2023 and 2022, (iii) the unaudited consolidated statements of comprehensive income for the three and nine months ended September 30, 2023 and 2022, (iv) the unaudited consolidated statements of changes in stockholders' equity, (iv) the unaudited consolidated statements of cash flows and (v) related notes. | ||||
| 104 | Cover page interactive data file (embedded within exhibit 101). | ||||
____________________
* This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
Union Bankshares, Inc. Page 49
Exhibit 31.1
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, David S. Silverman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Union Bankshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations;
(d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors:
(a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.
Date: November 14, 2023
| /s/ David S. Silverman | |||||
| David S. Silverman Director, President and Chief Executive Officer (Principal Executive Officer) | |||||
Exhibit 31.2
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Karyn J. Hale, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Union Bankshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations;
(d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors:
(a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.
Date: November 14, 2023
| /s/ Karyn J. Hale | |||||
| Karyn J. Hale Chief Financial Officer (Principal Financial Officer) | |||||
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Union Bankshares, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned Chief Executive Officer of the Company hereby certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 that to the best of his knowledge: 1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and 2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered in the Report.
A signed original of this written statement required by Section 906 has been provided to Union Bankshares, Inc. and will be retained by Union Bankshares, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
| /s/ David S. Silverman | |||||
| David S. Silverman Chief Executive Officer | |||||
November 14, 2023
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Union Bankshares, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned Chief Financial Officer of the Company hereby certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 that to the best of her knowledge: 1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and 2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered in the Report.
A signed original of this written statement required by Section 906 has been provided to Union Bankshares, Inc. and will be retained by Union Bankshares, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
| /s/ Karyn J. Hale | |||||
| Karyn J. Hale Chief Financial Officer | |||||
November 14, 2023