Financial Performance - The Company's consolidated net income for 2023 was $11.3 million, with basic earnings per share of $2.50, down from $12.6 million and $2.81 in 2022, reflecting a decrease in net interest income of $1.6 million or 4.0%[181]. - Net income for the year ended December 31, 2023, was $11.3 million, down from $12.6 million in 2022, indicating a decrease of 10.3%[189]. - The provision for income taxes decreased by $1.0 million or 38.4%, contributing to the overall financial performance for the year[181]. - Noninterest income totaled $9.9 million for the year ended December 31, 2023, a $451 thousand increase, or 4.8%, compared to 2022[202]. - Total noninterest expenses increased by $1.7 million, or 5.2%, to $35.4 million for the year ended December 31, 2023[204]. - The provision for income taxes was $1.6 million for 2023, with an effective federal corporate income tax rate of 12.5%[206]. - The Company's total capital increased from $55.2 million at December 31, 2022, to $65.8 million at December 31, 2023, reflecting a net income of $11.3 million for 2023 and a decrease of $5.5 million in accumulated other comprehensive loss[185]. Asset and Loan Management - Total consolidated assets increased by 9.9% to $1.5 billion as of December 31, 2023, compared to $1.3 billion at the end of 2022[183]. - Net loans and loans held for sale rose by 7.8% to $1.0 billion, representing 69.9% of total assets, while total investments increased by 5.7% to $265.9 million[183]. - The Company's gross loan portfolio increased by $72.0 million, or 7.5%, to $1.0 billion as of December 31, 2023, compared to $959.3 million at the end of 2022[211]. - Real estate secured loans represented $911.5 million, or 88.4% of total loans, at December 31, 2023, up from $828.2 million, or 86.3% of total loans, at December 31, 2022[211]. - The Company serviced a residential real estate mortgage portfolio of $1.1 billion at December 31, 2023, an increase from $987.4 million at the end of 2022[212]. - The Company originated and sold $75.6 million of qualified residential real estate loans in 2023, compared to $78.0 million in 2022[213]. - The net loans and loans held for sale amounted to $1,026.5 million as of December 31, 2023, compared to $952.3 million at the end of 2022[212]. - The Company reported a decrease in the percentage of municipal loans from 9.2% in 2022 to 7.4% in 2023[212]. Capital and Regulatory Compliance - As of December 31, 2023, Union's Tier I and Total Risk Based Capital Ratios were 12.5% and 13.4% respectively, with a Leverage Capital Ratio of 7.6%, indicating it is considered well capitalized under applicable regulatory guidelines[54]. - The Company is subject to regulation and supervision by the FRB, FDIC, and Vermont Department of Financial Regulation, impacting its operational framework[30]. - The Dodd-Frank Act has introduced new capital standards and increased supervisory authority for the FRB, affecting the Company's regulatory environment[34]. - The FRB has the authority to prohibit dividends by bank holding companies if their actions constitute unsafe or unsound practices[41]. - The Company is subject to extensive regulatory compliance requirements, including those related to cybersecurity, which could impact its operations and reputation[138]. - The Company has established a robust cybersecurity risk management program to safeguard sensitive customer data and financial transactions[142]. Market and Competitive Environment - Competitive pressures for deposits increased during 2023 as customers sought higher yields, prompting the Company to offer higher rates on non-maturity deposits and time deposit specials[26]. - The Company focuses on community banking, providing services through 20 banking offices and several ATMs in northern Vermont and New Hampshire[19]. - The Company has seen a trend of customers turning to local community banks for their financial needs, enhancing its customer base through personal relationships[24]. - The Company faces significant competition from both financial and non-financial services firms, which could impact market share and financial results[134]. - Competition in the local banking industry may impair the company's ability to attract and retain customers, affecting loan growth and financial results[123]. Risk Management - The company faces risks related to liquidity, as reliance on more expensive funding sources could adversely affect operating margins and profitability[87]. - Rising interest rates have significantly decreased the value of the company's securities portfolio, leading to potential losses if securities need to be sold to meet liquidity needs[88]. - The company may incur fines and penalties for inadvertent regulatory violations, which could damage its reputation and restrict investment opportunities[101]. - The company is exposed to environmental liabilities associated with its lending activities, particularly in commercial real estate, which could result in significant costs[92]. - Changes in monetary policies by the Federal Reserve could affect interest rates and the valuation of the company's investment securities, impacting overall operating results[94]. - The company may face significant legal risks from regulatory investigations and private actions, potentially leading to reputational damage and increased operational costs[102]. - Cybersecurity threats and attacks pose significant risks to the company's operations and customer data security, potentially leading to financial losses and reputational damage[116]. Employee and Operational Insights - As of December 31, 2023, Union employed 197 full-time employees, emphasizing a commitment to employee development and well-being[21]. - The Company has invested significant resources in information technology enhancements to meet customer expectations and improve operational efficiency[127]. - The Company cannot assure that the opening of new branches will be accretive to earnings, as various factors influence branch performance[126]. - The Company adopted a clawback policy in November 2023 to recover executive compensation in the event of a financial restatement[44].

[PART I FINANCIAL INFORMATION](index=3&type=section&id=PART%20I%20FINANCIAL%20INFORMATION) This section provides an overview of the Company's unaudited interim consolidated financial statements and related notes for the specified periods [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements.) This section presents the unaudited interim consolidated financial statements of Union Bankshares, Inc. and its subsidiary for the periods ended September 30, 2023, and December 31, 2022, along with detailed notes. Key financial statements include Balance Sheets, Statements of Income, Comprehensive Loss, Changes in Stockholders' Equity, and Cash Flows, prepared in conformity with GAAP and general banking industry practices [Consolidated Balance Sheets](index=4&type=section&id=Consolidated%20Balance%20Sheets) This statement presents the Company's financial position, detailing assets, liabilities, and equity at specific points in time Consolidated Balance Sheet Highlights (Dollars in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | Total assets | $ 1,395,628 | $ 1,336,489 | | Total liabilities | $ 1,346,382 | $ 1,281,269 | | Total stockholders' equity | $ 49,246 | $ 55,220 | | Loans (net) | $ 1,016,388 | $ 951,154 | | Total deposits | $ 1,222,288 | $ 1,201,912 | | Borrowed funds | $ 90,696 | $ 50,000 | - **Total assets** increased by **$59.1 million** (**4.4%**) from December 31, 2022, to September 30, 2023, driven by growth in **net loans**[9](index=9&type=chunk)[163](index=163&type=chunk) - **Stockholders' equity** decreased by **$5.97 million** (**10.8%**) primarily due to an increase in **accumulated other comprehensive loss** from **unrealized losses** on **AFS investment securities**[9](index=9&type=chunk)[132](index=132&type=chunk)[207](index=207&type=chunk) [Consolidated Statements of Income](index=5&type=section&id=Consolidated%20Statements%20of%20Income) This statement outlines the Company's revenues, expenses, and net income over specific reporting periods Consolidated Statements of Income Highlights (Dollars in thousands, except per share data) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total interest and dividend income | $ 14,847 | $ 11,463 | $ 41,694 | $ 31,593 | | Total interest expense | $ 5,699 | $ 1,023 | $ 12,953 | $ 2,519 | | Net interest income | $ 9,148 | $ 10,440 | $ 28,741 | $ 29,074 | | Net income | $ 2,532 | $ 3,758 | $ 8,208 | $ 9,171 | | Basic earnings per common share | $ 0.56 | $ 0.84 | $ 1.82 | $ 2.04 | | Diluted earnings per common share | $ 0.55 | $ 0.83 | $ 1.81 | $ 2.03 | | Dividends per common share | $ 0.36 | $ 0.35 | $ 1.08 | $ 1.05 | - **Net income** decreased by **$1.2 million** (**32.6%**) for the three months ended September 30, 2023, compared to the same period in 2022, primarily due to lower **net interest income** and higher noninterest expenses[11](index=11&type=chunk)[129](index=129&type=chunk) - **Net interest income** decreased by **$1.292 million** for the three months ended September 30, 2023, compared to the same period in 2022, driven by a larger increase in interest expense than interest income[11](index=11&type=chunk)[152](index=152&type=chunk) [Consolidated Statements of Comprehensive Loss](index=6&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Loss) This statement reports net income and other comprehensive income (loss) components, reflecting changes in equity not from owners Consolidated Statements of Comprehensive Loss Highlights (Dollars in thousands) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------------------------------------------------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income | $ 2,532 | $ 3,758 | $ 8,208 | $ 9,171 | | Net unrealized holding losses arising during the period on investment securities available-for-sale | $ (10,812) | $ (12,539) | $ (9,644) | $ (39,361) | | Total comprehensive loss | $ (8,280) | $ (8,781) | $ (1,436) | $ (30,215) | - **Total comprehensive loss** for the nine months ended September 30, 2023, was **$(1,436) thousand**, a significant improvement from **$(30,215) thousand** in the prior year, primarily due to lower **net unrealized holding losses** on **AFS securities**[13](index=13&type=chunk) [Consolidated Statements of Changes in Stockholders' Equity](index=7&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Stockholders'%20Equity) This statement details the changes in the Company's equity accounts, including net income, dividends, and other comprehensive loss Changes in Stockholders' Equity (Dollars in thousands) | Metric | Balances Dec 31, 2022 | Net Income | Other Comprehensive Loss | Cash Dividends Declared | Purchase of Treasury Stock | Balances Sep 30, 2023 | | :-------------------------------- | :-------------------- | :--------- | :----------------------- | :---------------------- | :------------------------- | :-------------------- | | Total stockholders' equity | $ 55,220 | $ 8,208 | $ (9,644) | $ (4,869) | $ (115) | $ 49,246 | - **Stockholders' equity** decreased from **$55.2 million** at December 31, 2022, to **$49.2 million** at September 30, 2023, primarily due to increased **accumulated other comprehensive loss** and **cash dividends**, partially offset by **net income**[17](index=17&type=chunk)[132](index=132&type=chunk)[207](index=207&type=chunk) [Consolidated Statements of Cash Flows](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) This statement categorizes cash inflows and outflows from operating, investing, and financing activities over specific periods Consolidated Statements of Cash Flows Highlights (Nine Months Ended September 30, Dollars in thousands) | Cash Flow Activity | 2023 | 2022 | | :-------------------------------- | :----- | :----- | | Net cash provided by operating activities | $ 6,156 | $ 22,721 | | Net cash used in investing activities | $ (78,860) | $ (178,075) | | Net cash provided by financing activities | $ 56,149 | $ 121,573 | | Net decrease in cash and cash equivalents | $ (16,555) | $ (33,781) | | Cash and cash equivalents, End of period | $ 21,330 | $ 32,141 | - **Net cash provided by operating activities** significantly decreased to **$6.156 million** for the nine months ended September 30, 2023, from **$22.721 million** in the prior year[19](index=19&type=chunk) - **Net cash used in investing activities** decreased to **$78.860 million** in 2023 from **$178.075 million** in 2022, mainly due to lower net increase in **loans** and reduced purchases of **investment securities**[19](index=19&type=chunk) - **Net cash provided by financing activities** decreased to **$56.149 million** in 2023 from **$121.573 million** in 2022, primarily due to a net decrease in noninterest bearing and interest bearing **deposits**, partially offset by advances on long-term **borrowings** and an increase in **time deposits**[20](index=20&type=chunk) [Notes to Unaudited Interim Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Unaudited%20Interim%20Consolidated%20Financial%20Statements) This section provides detailed explanations and disclosures supporting the interim consolidated financial statements [Note 1. Basis of Presentation](index=10&type=section&id=Note%201.%20Basis%20of%20Presentation) This note describes the accounting principles and policies used in preparing the financial statements, including recent accounting standard adoptions - The Company adopted **ASU No. 2016-13 (CECL)** effective January 1, 2023, replacing the incurred loss model with a lifetime expected credit loss model for financial assets at amortized cost and **off-balance sheet credit exposures**[26](index=26&type=chunk)[27](index=27&type=chunk)[31](index=31&type=chunk) Impact of CECL Adoption on ACL and Retained Earnings (January 1, 2023, Dollars in thousands) | Metric | Pre-CECL Adoption | Post-CECL Adoption | Impact of CECL Adoption | | :------------------------------------ | :------------------ | :----------------- | :---------------------- | | Total ACL on loans | $ 8,339 | $ 6,844 | $ (1,495) | | ACL on off-balance sheet credit exposures | $ — | $ 1,458 | $ 1,458 | | Increase to retained earnings | | | $ 37 | - Upon **CECL** adoption, there was no **Allowance for Credit Losses (ACL)** required for **Available-for-Sale (AFS) debt securities**[29](index=29&type=chunk)[43](index=43&type=chunk) [Note 2. Legal Contingencies](index=14&type=section&id=Note%202.%20Legal%20Contingencies) This note discusses potential liabilities arising from legal actions and their expected financial impact on the Company - Management believes that any liability from ongoing legal proceedings is not expected to have a material adverse effect on the Company's consolidated financial condition or results of operations[46](index=46&type=chunk) [Note 3. Per Share Information](index=14&type=section&id=Note%203.%20Per%20Share%20Information) This note provides details on basic and diluted earnings per common share, along with weighted average share counts Earnings Per Share (EPS) (Dollars in thousands, except per share data) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income | $ 2,532 | $ 3,758 | $ 8,208 | $ 9,171 | | Basic EPS | $ 0.56 | $ 0.84 | $ 1.82 | $ 2.04 | | Diluted EPS | $ 0.55 | $ 0.83 | $ 1.81 | $ 2.03 | | Weighted average common shares outstanding for basic EPS | 4,508,028 | 4,495,348 | 4,508,569 | 4,494,751 | | Weighted average common and potential common shares for diluted EPS | 4,540,026 | 4,521,973 | 4,536,851 | 4,512,793 | - **Basic EPS** decreased to **$0.56** for the three months ended September 30, 2023, from **$0.84** in the prior year, and to **$1.82** for the nine months ended September 30, 2023, from **$2.04** in the prior year[47](index=47&type=chunk) [Note 4. Recent Accounting Pronouncements](index=14&type=section&id=Note%204.%20Recent%20Accounting%20Pronouncements) This note outlines recently adopted and issued accounting standards and their anticipated or actual impact on the Company's financial statements - The Company adopted **ASU No. 2016-13 (CECL)** and **ASU No. 2022-02 (TDRs and Vintage Disclosures)** effective January 1, 2023, with **ASU No. 2022-02** having no material impact[48](index=48&type=chunk)[50](index=50&type=chunk)[51](index=51&type=chunk) - **ASU No. 2020-04 (Reference Rate Reform)** is not expected to have a material impact on the Company's financial statements[49](index=49&type=chunk) - The Company is evaluating the impact of **ASU No. 2023-02 (Investments-Equity Method and Joint Ventures)** for fiscal years beginning after December 31, 2023, which permits the proportional amortization method for tax credit structures[52](index=52&type=chunk) [Note 5. Investment Securities](index=15&type=section&id=Note%205.%20Investment%20Securities) This note details the composition, fair value, and unrealized gains or losses of the Company's investment securities portfolio Debt Securities AFS (Dollars in thousands) | Category | Sep 30, 2023 Fair Value | Dec 31, 2022 Fair Value | | :-------------------------------- | :---------------------- | :---------------------- | | U.S. Government-sponsored enterprises | $ 37,938 | $ 39,245 | | Agency mortgage-backed | $ 146,133 | $ 164,432 | | State and political subdivisions | $ 58,819 | $ 40,466 | | Corporate | $ 6,107 | $ 6,124 | | Total | $ 248,997 | $ 250,267 | Gross Unrealized Losses on AFS Debt Securities (Dollars in thousands) | Category | Sep 30, 2023 Gross Unrealized Losses | Dec 31, 2022 Gross Unrealized Losses | | :-------------------------------- | :----------------------------------- | :----------------------------------- | | U.S. Government-sponsored enterprises | $ (6,383) | $ (5,845) | | Agency mortgage-backed | $ (40,149) | $ (34,150) | | State and political subdivisions | $ (13,558) | $ (7,537) | | Corporate | $ (247) | $ (219) | | Total | $ (60,337) | $ (47,751) | - **Total AFS debt securities** decreased slightly to **$248.997 million** at September 30, 2023, from **$250.267 million** at December 31, 2022, with a significant increase in **gross unrealized losses** from **$47.751 million** to **$60.337 million**[53](index=53&type=chunk)[183](index=183&type=chunk) - No **ACL** for **AFS debt securities** was recorded at **CECL** adoption or at September 30, 2023, as no declines in value were deemed credit-loss related[29](index=29&type=chunk)[57](index=57&type=chunk)[184](index=184&type=chunk) [Note 6. Loans](index=17&type=section&id=Note%206.%20Loans) This note provides a breakdown of the Company's loan portfolio by class and discusses changes in loan risk characteristics Composition of Net Loans (Dollars in thousands) | Loan Class | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | Residential real estate | $ 399,984 | $ 352,433 | | Construction real estate | $ 102,249 | $ 96,620 | | Commercial real estate | $ 395,192 | $ 377,947 | | Commercial | $ 41,258 | $ 40,973 | | Consumer | $ 2,289 | $ 2,204 | | Municipal | $ 80,611 | $ 87,980 | | Gross loans | $ 1,021,583 | $ 958,157 | | ACL on loans | $ (6,895) | $ (8,339) | | Net loans | $ 1,016,388 | $ 951,154 | - **Net loans** increased by **$65.234 million** (**6.86%**) to **$1.016 billion** at September 30, 2023, from **$951.154 million** at December 31, 2022, primarily driven by increases in **residential** and **commercial real estate loans**[63](index=63&type=chunk)[164](index=164&type=chunk)[165](index=165&type=chunk) - The Company changed its **loan** risk characteristics evaluation from underlying collateral to regulatory call report code with segmentation based on collateral/purpose upon **CECL** adoption[62](index=62&type=chunk) [Note 7. Allowance for Credit Losses on Loans and Off-Balance Sheet Credit Exposures](index=18&type=section&id=Note%207.%20Allowance%20for%20Credit%20Losses%20on%20Loans%20and%20Off-Balance%20Sheet%20Credit%20Exposures) This note details the methodology and changes in the allowance for credit losses for both loans and off-balance sheet exposures Changes in ACL on Loans (Dollars in thousands) | Metric | 3 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Balance at beginning of period | $ 6,780 | $ 8,339 | $ 8,336 | | Impact of adoption of ASU No. 2016-13 | $ — | $ (1,495) | $ — | | Net (charge-offs) recoveries | $ (1) | $ (4) | $ 4 | | Credit loss expense (benefit) | $ 116 | $ 55 | $ — | | Balance at end of period | $ 6,895 | $ 6,895 | $ 8,340 | - The **ACL on loans** decreased to **$6.895 million** at September 30, 2023, from **$8.339 million** at December 31, 2022, primarily due to the impact of **CECL** adoption[72](index=72&type=chunk)[178](index=178&type=chunk)[180](index=180&type=chunk) ACL on Off-Balance Sheet Credit Exposures (Dollars in thousands) | Metric | 3 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2023 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Balance, Beginning of Period | $ 1,497 | $ — | | Impact of adoption of ASU No. 2016-13 | $ — | $ 1,458 | | Credit loss benefit | $ (255) | $ (216) | | Balance, September 30, 2023 | $ 1,242 | $ 1,242 | - The **ACL on off-balance sheet credit exposures** was **$1.242 million** at September 30, 2023, with a **credit loss benefit** of **$255 thousand** for the three months and **$216 thousand** for the nine months ended September 30, 2023[73](index=73&type=chunk)[197](index=197&type=chunk) Nonaccrual Loans (Dollars in thousands) | Loan Class | Sep 30, 2023 Nonaccrual | Dec 31, 2022 Nonaccrual | | :-------------------------------- | :---------------------- | :---------------------- | | Non-revolving residential real estate | $ — | $ 103 | | Revolving residential real estate | $ — | $ — | | Commercial real estate | $ 1,882 | $ 2,102 | | Total | $ 1,882 | $ 2,211 | - **Nonaccrual loans** decreased to **$1.882 million** at September 30, 2023, from **$2.211 million** at December 31, 2022[81](index=81&type=chunk)[174](index=174&type=chunk) [Note 8. Stock Based Compensation](index=26&type=section&id=Note%208.%20Stock%20Based%20Compensation) This note describes the Company's stock-based compensation plans, including restricted stock units and related expenses Restricted Stock Units (RSUs) Summary | Award Year | Number of RSUs Granted | Number of Unvested RSUs (Sep 30, 2023) | | :----------- | :--------------------- | :------------------------------------- | | 2021 Award | 17,685 | 1,745 | | 2022 Award | 15,705 | 7,593 | | 2023 Award | 19,282 | 18,788 | | Total | 52,672 | 28,126 | - **Unrecognized compensation expense** related to unvested RSUs was **$461 thousand** at September 30, 2023, up from **$297 thousand** at December 31, 2022[89](index=89&type=chunk) - An additional **3,872** RSUs were granted to non-employee directors in May 2023, vesting in May 2024, with **$53 thousand** in **unrecognized compensation expense** as of September 30, 2023[90](index=90&type=chunk) [Note 9. Subordinated Notes](index=26&type=section&id=Note%209.%20Subordinated%20Notes) This note provides information on the Company's subordinated debt, including terms, interest rates, and capital qualification - The Company has **$16.5 million** in fixed-to-floating rate **subordinated notes** due **2031**, bearing **3.25%** interest until September 1, 2026, then resetting quarterly to SOFR plus **263 basis points**[91](index=91&type=chunk) - These notes qualify as **Tier 2 capital** and were used to provide additional **Tier 1 capital** to Union Bank and for general corporate purposes[91](index=91&type=chunk)[92](index=92&type=chunk)[206](index=206&type=chunk) - Unamortized issuance costs were **$270 thousand** at September 30, 2023, down from **$295 thousand** at December 31, 2022[93](index=93&type=chunk) [Note 10. Other Comprehensive Income (Loss)](index=27&type=section&id=Note%2010.%20Other%20Comprehensive%20Income%20(Loss)) This note details components of other comprehensive income (loss), primarily unrealized gains and losses on available-for-sale securities Accumulated Other Comprehensive Loss (Dollars in thousands) | Component | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | Net unrealized losses on investment securities AFS | $ (47,063) | $ (37,419) | - **Accumulated other comprehensive loss**, net of tax, increased to **$(47.063) million** at September 30, 2023, from **$(37.419) million** at December 31, 2022, primarily due to increased **net unrealized holding losses** on **AFS investment securities**[95](index=95&type=chunk)[132](index=132&type=chunk)[207](index=207&type=chunk) [Note 11. Fair Value Measurement](index=28&type=section&id=Note%2011.%20Fair%20Value%20Measurement) This note describes the fair value hierarchy and valuation techniques used for financial instruments, particularly investment securities Fair Value Measurements of Debt Securities AFS (September 30, 2023, Dollars in thousands) | Category | Fair Value | Level 1 | Level 2 | Level 3 | | :-------------------------------- | :--------- | :------ | :------ | :------ | | U.S. Government-sponsored enterprises | $ 37,938 | $ 2,543 | $ 35,395 | $ — | | Agency mortgage-backed | $ 146,133 | $ — | $ 146,133 | $ — | | State and political subdivisions | $ 58,819 | $ — | $ 58,819 | $ — | | Corporate | $ 6,107 | $ — | $ 6,107 | $ — | | Total debt securities | $ 248,997 | $ 2,543 | $ 246,454 | $ — | - The majority of the Company's **AFS securities** are valued using **Level 2 inputs**, reflecting observable data from market maker bids, quotes, and pricing models[99](index=99&type=chunk)[102](index=102&type=chunk) - There were no **Level 3 assets** or liabilities at any time during the periods presented, and no transfers between **Level 1** and **Level 2**[102](index=102&type=chunk) [Note 12. Subsequent Events](index=31&type=section&id=Note%2012.%20Subsequent%20Events) This note discloses significant events that occurred after the balance sheet date but before the financial statements were issued - On October 18, 2023, the Company declared a regular quarterly cash dividend of **$0.36** per share, payable November 2, 2023[108](index=108&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=32&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations.) This section provides management's perspective on the Company's financial performance and condition, highlighting the impact of the inverted yield curve on earnings, the adoption of CECL, and strategic initiatives like branch expansion. It also details changes in net interest income, noninterest income and expenses, asset quality, and capital resources [General](index=32&type=section&id=GENERAL) This section outlines the scope and material factors discussed in the management's analysis of financial condition and results of operations - The discussion focuses on material factors affecting financial position as of September 30, 2023, and December 31, 2022, and results of operations for the three and nine months ended September 30, 2023 and 2022[111](index=111&type=chunk) [Cautionary Advice About Forward Looking Statements](index=32&type=section&id=CAUTIONARY%20ADVICE%20ABOUT%20FORWARD%20LOOKING%20STATEMENTS) This section highlights the inherent risks and uncertainties associated with forward-looking statements in the financial report - Forward-looking statements are subject to risks including changes in interest rates, competitive pressures, economic conditions, regulatory changes, and cybersecurity incidents[115](index=115&type=chunk) - The banking industry experienced significant volatility in 2023, with concerns related to liquidity, deposit outflows, unrealized securities losses, and interest rates[116](index=116&type=chunk) [Non-GAAP Financial Measures](index=32&type=section&id=Non-GAAP%20Financial%20Measures) This section defines and explains the use of non-GAAP financial measures to supplement GAAP reporting for performance evaluation - Tax-equivalent **net interest income** and tax-equivalent **net interest margin** are used as non-GAAP financial measures to evaluate performance and facilitate comparisons, considered supplemental to GAAP[119](index=119&type=chunk)[120](index=120&type=chunk) [Critical Accounting Policies](index=33&type=section&id=CRITICAL%20ACCOUNTING%20POLICIES) This section identifies key accounting policies that require significant management judgment and assumptions, such as the Allowance for Credit Losses - **Critical accounting policies** include establishing the **Allowance for Credit Losses (ACL)** and valuing intangible assets, which involve significant management judgments and assumptions[122](index=122&type=chunk) - The adoption of **CECL** effective January 1, 2023, is a significant update to the Company's accounting policies[123](index=123&type=chunk) [Overview](index=33&type=section&id=OVERVIEW) This section provides a high-level summary of the Company's financial position, performance, and strategic context - The Company's financial position remains strong, supported by a diverse deposit base, strong liquidity, excellent asset quality, and **regulatory capital** exceeding all required levels[125](index=125&type=chunk) Key Performance Ratios | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :--------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Return on average assets (annualized) | 0.73 % | 1.18 % | 0.80 % | 0.98 % | | Return on average equity (annualized) | 17.65 % | 24.19 % | 18.82 % | 17.78 % | | Net interest margin (annualized, tax equivalent) | 2.76 % | 3.40 % | 2.95 % | 3.29 % | | Efficiency ratio | 75.37 % | 64.14 % | 73.17 % | 68.65 % | | Net interest spread (annualized) | 2.34 % | 3.26 % | 2.59 % | 3.18 % | | Loan to deposit ratio | 84.11 % | 78.67 % | 84.11 % | 78.67 % | | ACL on loans to loans not held for sale | 0.67 % | 0.89 % | 0.67 % | 0.89 % | | Nonperforming assets to total assets | 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 | 64.29 % | 41.67 % | 59.34 % | 51.47 % | - **Net interest margin** decreased to **2.95%** for the nine months ended September 30, 2023, from **3.29%** in the prior year, and the **net interest spread** decreased to **2.59%** from **3.18%**[128](index=128&type=chunk)[133](index=133&type=chunk) [Results of Operations](index=34&type=section&id=RESULTS%20OF%20OPERATIONS) This section analyzes the Company's financial performance, focusing on net interest income, credit loss expense, noninterest income, and expenses [Net Interest Income](index=34&type=section&id=Net%20Interest%20Income) This section analyzes the components of net interest income, including interest income, interest expense, and net interest margin Net Interest Income and Margin (Tax Equivalent, Dollars in thousands) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net interest income | $ 9,148 | $ 10,440 | $ 28,741 | $ 29,074 | | Net interest spread | 2.34 % | 3.26 % | 2.59 % | 3.18 % | | Net interest margin | 2.76 % | 3.40 % | 2.95 % | 3.29 % | | Average yield on earning assets | 4.43 % | 3.73 % | 4.25 % | 3.57 % | | Average rate paid on interest bearing liabilities | 2.09 % | 0.47 % | 1.66 % | 0.39 % | - **Net interest income** decreased by **$1.292 million** for the three months ended September 30, 2023, and by **$333 thousand** for the nine months ended September 30, 2023, compared to the same periods in 2022[142](index=142&type=chunk)[152](index=152&type=chunk) - The **net interest spread** decreased by **92 bps** for the three months and **59 bps** for the nine months ended September 30, 2023, primarily due to a faster increase in the average rate paid on interest bearing liabilities (**162 bps** and **127 bps**, respectively) than the average yield earned on interest earning assets (**70 bps** and **68 bps**, respectively)[141](index=141&type=chunk)[145](index=145&type=chunk) Rate/Volume Analysis of Net Interest Income Change (Dollars in thousands) | Component | 3 Months Ended Sep 30, 2023 vs 2022 (Net Change) | 9 Months Ended Sep 30, 2023 vs 2022 (Net Change) | | :-------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Interest earning assets | $ 3,384 | $ 10,101 | | Interest bearing liabilities | $ 4,676 | $ 10,434 | | Net change in net interest income | $ (1,292) | $ (333) | [Credit Loss Expense (Benefit)](index=38&type=section&id=Credit%20Loss%20Expense%20(Benefit)) This section details the credit loss expense or benefit recognized under the CECL model for loans and off-balance sheet exposures Credit Loss Expense (Benefit) (Dollars in thousands) | Component | 3 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2023 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Credit loss expense for loans | $ 116 | $ 55 | | Credit loss benefit for off-balance sheet credit exposures | $ (255) | $ (216) | | Credit loss benefit, net | $ (139) | $ (161) | - The Company recorded a **net credit loss benefit** of **$139 thousand** for the three months and **$161 thousand** for the nine months ended September 30, 2023, under **CECL**[153](index=153&type=chunk) [Noninterest Income](index=39&type=section&id=Noninterest%20Income) This section provides an overview of the Company's noninterest income sources, such as wealth management fees and service charges Noninterest Income (Dollars in thousands) | Component | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Wealth management income | $ 244 | $ 203 | $ 695 | $ 629 | | Service fees | $ 1,785 | $ 1,803 | $ 5,219 | $ 5,176 | | Net gains on sales of loans held for sale | $ 336 | $ 448 | $ 836 | $ 748 | | Total noninterest income | $ 2,467 | $ 2,540 | $ 7,235 | $ 7,049 | - **Total noninterest income** decreased by **$73 thousand** (**2.9%**) for the three months ended September 30, 2023, but increased by **$186 thousand** (**2.6%**) for the nine months ended September 30, 2023, compared to the same periods in 2022[154](index=154&type=chunk) - **Wealth management income** increased due to growth in managed fiduciary accounts and asset values[154](index=154&type=chunk) - **Net gains on sales of loans held for sale** decreased by **$112 thousand** for the three months due to lower sales volume and premiums, but increased by **$88 thousand** for the nine months due to higher premiums in H1 2023[154](index=154&type=chunk) [Noninterest Expenses](index=40&type=section&id=Noninterest%20Expenses) This section details the Company's noninterest expenses, including salaries, benefits, and other operating costs Noninterest Expenses (Dollars in thousands) | Component | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Salaries and wages | $ 3,720 | $ 3,575 | $ 10,895 | $ 10,505 | | Employee benefits | $ 1,217 | $ 1,154 | $ 4,065 | $ 3,754 | | FDIC insurance assessment | $ 267 | $ 179 | $ 734 | $ 452 | | Total noninterest expenses | $ 8,926 | $ 8,439 | $ 26,739 | $ 25,137 | - **Total noninterest expenses** increased by **$487 thousand** (**5.8%**) for the three months and **$1.602 million** (**6.4%**) for the nine months ended September 30, 2023, compared to the same periods in 2022[155](index=155&type=chunk) - Key drivers of expense increases include annual salary adjustments, higher **employee benefits** (deferred compensation and medical/dental plans), increased **FDIC insurance assessments**, and resumed in-person training[158](index=158&type=chunk) [Provision for Income Taxes](index=41&type=section&id=Provision%20for%20Income%20Taxes) This section explains the Company's income tax provision and effective tax rate, including tax benefits from investments Provision for Income Taxes (Dollars in thousands) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Provision for income taxes | $ 296 | $ 783 | $ 1,190 | $ 1,815 | | Effective federal corporate income tax rate | 10.8 % | 16.6 % | 12.9 % | 16.1 % | - The **provision for income taxes** decreased for both the three and nine months ended September 30, 2023, compared to 2022, reflecting lower income before taxes and a reduced **effective tax rate**[160](index=160&type=chunk) - Amortization expense and tax credits from limited partnership investments are included in **income tax expense**, providing tax benefits[161](index=161&type=chunk) [Financial Condition](index=41&type=section&id=FINANCIAL%20CONDITION) This section discusses the Company's financial position, including loan portfolio, asset quality, investments, deposits, borrowings, and capital [Loans Held for Sale and Loan Portfolio](index=42&type=section&id=Loans%20Held%20for%20Sale%20and%20Loan%20Portfolio) This section details the composition and changes in the Company's loan portfolio, including loans held for sale and real estate secured loans Loan Portfolio Composition (Dollars in thousands) | Loan Class | Sep 30, 2023 Amount | Sep 30, 2023 Percent | Dec 31, 2022 Amount | Dec 31, 2022 Percent | | :-------------------------------- | :------------------ | :------------------- | :------------------ | :------------------- | | Residential real estate | $ 399,984 | 38.9 % | $ 352,433 | 36.7 % | | Construction real estate | $ 102,249 | 9.9 % | $ 96,620 | 10.1 % | | Commercial real estate | $ 395,192 | 38.4 % | $ 377,947 | 39.4 % | | 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 % | - **Total loans** (including **loans held for sale**) increased by **$68.7 million** (**7.2%**) to **$1.028 billion** at September 30, 2023, from **$959.3 million** at December 31, 2022[165](index=165&type=chunk)[166](index=166&type=chunk) - **Real estate secured loans** constituted **87.9%** of **total loans** at September 30, 2023[165](index=165&type=chunk) - The Company serviced a **$1.05 billion residential real estate mortgage portfolio**, with **$642.9 million** serviced for unaffiliated third parties, and capitalized MSRs of **$1.8 million**[166](index=166&type=chunk)[171](index=171&type=chunk) [Asset Quality](index=43&type=section&id=Asset%20Quality) This section assesses the quality of the Company's assets, including nonperforming loans, nonaccrual loans, and related ratios Nonperforming Assets (Dollars in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | Sep 30, 2022 | | :---------------------------------------------------------------- | :----------- | :----------- | :----------- | | 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 | Asset Quality Ratios | Ratio | Sep 30, 2023 | Dec 31, 2022 | Sep 30, 2022 | | :--------------------------------------- | :----------- | :----------- | :----------- | | 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 % | | 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 % | - **Total nonperforming assets** decreased to **$2.127 million** at September 30, 2023, from **$2.397 million** at December 31, 2022[174](index=174&type=chunk) - The **ACL on loans** to **total loans** outstanding decreased to **0.67%** at September 30, 2023, from **0.87%** at December 31, 2022[175](index=175&type=chunk) [Allowance for Credit Losses on Loans](index=44&type=section&id=Allowance%20for%20Credit%20Losses%20on%20Loans) This section discusses the adequacy and changes in the allowance for credit losses specifically for the loan portfolio - The **ACL on loans** was **$6.9 million** at September 30, 2023, compared to **$8.3 million** at December 31, 2022, reflecting the impact of **CECL** adoption[178](index=178&type=chunk) - Management believes the **ACL on loans** is appropriate to cover expected credit losses, but future losses could exceed the current **ACL**[181](index=181&type=chunk) [Investment Activities](index=45&type=section&id=Investment%20Activities) This section reviews the Company's investment securities portfolio, including fair values and unrealized gains or losses - **Investment securities AFS** decreased by **$1.3 million** to **$249.0 million** at September 30, 2023, from **$250.3 million** at December 31, 2022[182](index=182&type=chunk) - **Net unrealized losses** in the **AFS portfolio** increased to **$60.3 million** at September 30, 2023, from **$47.4 million** at December 31, 2022, primarily due to increases in long-term interest rates[183](index=183&type=chunk) - No declines in value were deemed impairment related to credit losses at September 30, 2023[184](index=184&type=chunk) [Deposits](index=46&type=section&id=Deposits) This section analyzes the Company's deposit base, including average balances, rates, and the composition of interest-bearing and noninterest-bearing accounts Average Deposits by Account Type (Nine Months Ended September 30, Dollars in thousands) | Account Type | 2023 Average Amount | 2023 Percent of Total | 2023 Average Rate | 2022 Average Amount | 2022 Percent of Total | 2022 Average Rate | | :-------------------------------- | :------------------ | :-------------------- | :---------------- | :------------------ | :-------------------- | :---------------- | | 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 % | - **Average total deposits** grew by **$56.5 million** (**4.9%**) for the nine months ended September 30, 2023, compared to the prior year[185](index=185&type=chunk) - There was a shift from non-time **deposits** to **time deposits**, with **average time deposits** increasing by **$132.5 million** and their average rate rising to **3.23%** from **0.60%**[144](index=144&type=chunk)[185](index=185&type=chunk) - **Uninsured deposits** totaled **$362.7 million** (**29.7%** of **total deposits**) at September 30, 2023[189](index=189&type=chunk) [Borrowings](index=47&type=section&id=Borrowings) This section details the Company's borrowed funds, primarily from the FHLB, including amounts, rates, and collateral arrangements - **Borrowed funds** from **FHLB** increased to **$90.7 million** at September 30, 2023, from **$50.0 million** at December 31, 2022, with a weighted average rate of **3.57%**[190](index=190&type=chunk) - **FHLB** letters of credit totaling **$42.4 million** were used as collateral for public unit **deposits** at September 30, 2023[191](index=191&type=chunk) [Commitments, Contingent Liabilities, and Of -Balance-Sheet Arrangements](index=47&type=section&id=Commitments,%20Contingent%20Liabilities,%20and%20Of%20-Balance-Sheet%20Arrangements) This section outlines the Company's off-balance sheet exposures, such as loan commitments and letters of credit Contractual/Notional Amount of Financial Instruments Representing Credit Risk (Dollars in thousands) | Instrument | Sep 30, 2023 | Dec 31, 2022 | | :------------------------------------------------ | :----------- | :----------- | | 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 | | Total | $ 226,161 | $ 230,155 | - **Total off-balance sheet credit exposures** decreased slightly to **$226.161 million** at September 30, 2023, from **$230.155 million** at December 31, 2022[195](index=195&type=chunk) - An **ACL on off-balance sheet credit exposures** of **$1.2 million** was recorded at September 30, 2023, following **CECL** adoption[197](index=197&type=chunk) [Liquidity](index=48&type=section&id=Liquidity) This section describes the Company's liquidity position, including available credit lines and other funding sources - Union Bank had access to **$102.8 million** in **unused FHLB lines of credit** at September 30, 2023, in addition to **$134.7 million** in combined outstanding **FHLB borrowings** and other credit[199](index=199&type=chunk) - Other **liquidity** sources include a **$15.0 million federal funds line of credit**, master brokered deposit agreements, and one-way buy options with CDARS and ICS[201](index=201&type=chunk) - The Company has not yet utilized the Federal Reserve's Bank Term Funding Program, which allows pledging investment portfolios at par[202](index=202&type=chunk)[203](index=203&type=chunk) [Capital Resources](index=49&type=section&id=Capital%20Resources) This section details the Company's capital structure, regulatory capital ratios, and changes in stockholders' equity - **Stockholders' equity** decreased from **$55.2 million** at December 31, 2022, to **$49.2 million** at September 30, 2023, primarily due to increased **accumulated other comprehensive loss** and **cash dividends**[207](index=207&type=chunk) - The Company repurchased **5,000** shares under its limited stock repurchase plan during the first nine months of 2023 at a cost of **$114 thousand**[209](index=209&type=chunk) Regulatory Capital Ratios (September 30, 2023, Dollars in thousands) | Capital Ratio | Company Actual Amount | Company Actual Ratio | Union Actual Amount | Union Actual Ratio | | :-------------------------------- | :-------------------- | :------------------- | :------------------ | :----------------- | | Total capital to risk weighted assets | $ 118,453 | 13.19 % | $ 118,274 | 13.18 % | | Tier I capital to risk weighted assets | $ 94,085 | 10.48 % | $ 110,136 | 12.27 % | | Common Equity Tier 1 to risk weighted assets | $ 94,085 | 10.48 % | $ 110,136 | 12.27 % | | Tier I capital to average assets | $ 94,085 | 6.56 % | $ 110,136 | 7.68 % | - Both the Company and Union met all **capital adequacy requirements** at September 30, 2023, with Union exceeding '**well capitalized**' bank requirements[213](index=213&type=chunk)[214](index=214&type=chunk) - The Company's earnings have been pressured by the inverted yield curve, leading to increased funding costs and compression of the **net interest margin** and **spread**[125](index=125&type=chunk)[128](index=128&type=chunk) - Consolidated **net income** decreased by **$1.2 million** (**32.6%**) for Q3 2023 YoY and **$963 thousand** (**10.5%**) for the nine months ended September 30, 2023 YoY[129](index=129&type=chunk)[130](index=130&type=chunk) - The Company opened a new full-service bank branch in North Conway, New Hampshire, at the end of October 2023, following success in commercial loan origination in the region[127](index=127&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=50&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk.) This section is omitted in accordance with regulatory relief available to smaller reporting companies - The Company, as a smaller reporting company, has omitted quantitative and qualitative disclosures about market risk[216](index=216&type=chunk) [Item 4. Controls and Procedures](index=50&type=section&id=Item%204.%20Controls%20and%20Procedures.) The Company's CEO and CFO concluded that disclosure controls and procedures were effective as of September 30, 2023. There were no material changes in internal controls over financial reporting during the quarter - Disclosure controls and procedures were evaluated and deemed effective as of September 30, 2023[217](index=217&type=chunk) - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[218](index=218&type=chunk) [PART II OTHER INFORMATION](index=50&type=section&id=PART%20II%20OTHER%20INFORMATION) This section provides additional information not covered in the financial statements, including legal proceedings, risk factors, and equity transactions [Item 1. Legal Proceedings](index=50&type=section&id=Item%201.%20Legal%20Proceedings.) Management believes that any liability from legal proceedings in the normal course of business is not expected to have a material adverse effect on the Company's financial condition or results of operations - Legal proceedings are not expected to have a material adverse effect on the Company's financial condition or results of operations[219](index=219&type=chunk) [Item 1A. Risk Factors](index=51&type=section&id=Item%201A.%20Risk%20Factors.) There have been no material changes to the risk factors previously discussed in the Company's 2022 Annual Report - No material changes in risk factors have occurred since the filing of the 2022 Annual Report[220](index=220&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=51&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds.) The Company did not issue any unregistered shares during the quarter ended September 30, 2023. The Company repurchased 2,500 shares of its common stock in July 2023 under its publicly announced plan - No unregistered shares were issued during the quarter ended September 30, 2023[221](index=221&type=chunk) Issuer Purchases of Equity Securities (Quarter Ended September 30, 2023) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | :------- | :------------------------------- | :--------------------------- | :------------------------------------------------------------------------------- | | July 2023 | 2,500 | $21.80 | 2,500 | | August 2023 | — | — | — | | September 2023 | — | — | — | - The repurchase authorization for a calendar quarter (currently **2,500** shares) expires at the end of that quarter and is not carried forward[222](index=222&type=chunk) [Item 6. Exhibits](index=51&type=section&id=Item%206.%20Exhibits.) This section lists the exhibits filed with the Form 10-Q, including certifications from the CEO and CFO, and financial statements in iXBRL format - Exhibits include certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 from the CEO and CFO[222](index=222&type=chunk)[226](index=226&type=chunk) - Unaudited consolidated financial statements for the quarter ended September 30, 2023, are provided in Inline eXtensible Business Reporting Language (iXBRL) format[222](index=222&type=chunk)[226](index=226&type=chunk)

Financial Performance - Consolidated net income decreased by $232 thousand, or 7.9%, to $2.7 million for Q2 2023 compared to $2.9 million for Q2 2022, primarily due to a decrease in net interest income and an increase in noninterest expenses [129]. - For the six months ended June 30, 2023, consolidated net income increased by $263 thousand, or 4.9%, to $5.7 million compared to $5.4 million for the same period in 2022, driven by increases in net interest income and noninterest income [130]. - Return on average assets for Q2 2023 was 0.79%, down from 0.94% in Q2 2022, while return on average equity was 17.98%, slightly lower than 18.30% in the prior year [133]. Assets and Liabilities - Total consolidated assets as of June 30, 2023, were $1.33 billion, with gross loans totaling $938.7 million and deposits amounting to $1.12 billion [131]. - Total consolidated assets as of June 30, 2023, were $1.33 billion, a decrease of $1.7 million or 0.1% from $1.34 billion at December 31, 2022, but an increase of $142.8 million or 12.0% compared to June 30, 2022 [163]. - Net loans and loans held for sale decreased by $18.9 million or 2.0% to $933.5 million, representing 69.9% of total assets at June 30, 2023, compared to 71.3% at December 31, 2022 [165]. Interest Income and Expenses - The net interest margin for the six months ended June 30, 2023, was 3.05%, down from 3.23% for the same period in 2022, reflecting the impact of rising deposit and funding costs [126]. - Net interest income for the first six months of 2023 was $19.6 million, an increase of $959 thousand or 5.15% compared to the same period in 2022 [144]. - Interest income on loans increased by $2.9 million due to an increase in average loan volume of $146.2 million and an increase of 54 bps in average yield [141]. Noninterest Income and Expenses - Noninterest income for Q2 2023 was $2,483 thousand, a 9.0% increase from $2,279 thousand in Q2 2022, driven by a $200 thousand increase in net gains on sales of loans held for sale [156]. - Total noninterest expense for Q2 2023 was $9,063 thousand, a 7.8% increase from $8,409 thousand in Q2 2022, with significant increases in professional fees and FDIC insurance assessments [159]. - Salaries and wages increased by $153 thousand (4.3%) in Q2 2023 compared to Q2 2022, and for the first half of 2023, they rose by $245 thousand (3.5%) [158]. Capital and Equity - The Company's total capital increased to $59.1 million at June 30, 2023, from $55.2 million at December 31, 2022, resulting in a book value per share increase to $13.10 [132]. - Stockholders' equity increased from $55.2 million at December 31, 2022, to $59.1 million at June 30, 2023, driven by net income of $5.7 million for the first six months of 2023 [165]. - Total capital to risk weighted assets for the company is $117,580, representing a ratio of 13.48% as of June 30, 2023, exceeding the minimum requirement of 8.00% [215]. Loan Quality and Credit Losses - Nonperforming assets to total assets ratio was 0.15% as of June 30, 2023, compared to 0.13% in the same period of 2022, suggesting a slight increase in asset quality concerns [133]. - Credit loss benefit for loans was $151 thousand in Q2 2023, compared to no credit loss in Q2 2022, indicating improved credit quality [156]. - The Allowance for Credit Losses (ACL) on loans was $6.8 million as of June 30, 2023, down from $8.3 million at December 31, 2022, reflecting a decrease of 18.1% [177]. Deposits and Funding - Total deposits decreased by $78.2 million or 6.5% to $1.12 billion at June 30, 2023, with noninterest bearing deposits down by $47.5 million or 16.6% [165]. - Average total deposits increased by $74.3 million, or 6.6%, to $1.205 billion for the six months ended June 30, 2023, compared to the same period in 2022 [185]. - The Company had $88.0 million in retail brokered deposits at a weighted average rate of 4.66% as of June 30, 2023, compared to $33.0 million at 3.45% at December 31, 2022 [188]. Regulatory Compliance - As of June 30, 2023, the Company met all capital adequacy requirements and exceeded the "well capitalized" standards under the FDIC's framework [214]. - The Company is subject to federal banking laws and regulations that establish minimum levels of capital and restrict dividend distributions [215]. - The Company completed a private placement of $16.5 million in subordinated notes in August 2021, which qualify as Tier 2 capital under regulatory guidelines [205].

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: March 31, 2023 Commission file number: 001-15985 UNION BANKSHARES, INC. VT 03-0283552 20 LOWER MAIN STREET, P.O. BOX 667 MORRISVILLE, VT 05661 Registrant's telephone number: 802-888-6600 Former name, former address ...

Financial Performance - The Company's consolidated net income for 2022 was $12.6 million, a decrease from $13.2 million in 2021, with basic earnings per share of $2.81 compared to $2.94 in 2021[162]. - Total consolidated assets increased by 10.9% to $1.3 billion as of December 31, 2022, while net loans and loans held for sale rose by 20.1% to $952.3 million[164]. - Customer deposits grew by $106.8 million, or 9.8%, reaching $1.2 billion at December 31, 2022[165]. - The Company's total capital decreased from $84.3 million in 2021 to $55.2 million in 2022, resulting in a decline in book value per share to $12.25 from $18.77[166]. - Net interest income for 2022 was $39.4 million, an increase of 10.4% from $35.7 million in 2021, while the net interest margin decreased to 3.28% from 3.38%[171]. - Noninterest income decreased by 30.7% to $8.987 million in 2022, primarily due to a $3.952 million drop in net gains on sales of loans held for sale[181]. - Total noninterest expenses increased slightly by 0.9% to $33.164 million in 2022, with notable increases in employee benefits and advertising expenses[183]. - The provision for income taxes remained stable at $2.6 million for both 2022 and 2021, with an effective tax rate of 16.3% in 2022[185]. Loan and Deposit Information - The Company's average loans to average deposits ratio for the year ended December 31, 2022, was 75.6%[22]. - As of December 31, 2022, approximately $762.7 million, or 63.46% of the company's deposits, consisted of interest-bearing demand deposits, savings, and money market accounts[83]. - The gross loan portfolio increased by $158.5 million, or 19.8%, to $959.3 million at December 31, 2022, representing 71.8% of total assets[190]. - Real estate secured loans represented $828.2 million, or 86.3% of total loans, at December 31, 2022, compared to $670.6 million, or 83.7% of total loans, at December 31, 2021[189]. - Total loans outstanding rose to $959.335 million in 2022, up from $800.879 million in 2021, indicating a growth of approximately 19.7%[203]. Regulatory and Compliance - The Company is subject to regulation and supervision by the FRB, FDIC, and Vermont Department of Financial Regulation[29]. - The Dodd-Frank Act has introduced several regulatory changes affecting the Company's operations, including new capital standards and consumer protection measures[33]. - The Company must comply with various federal and state consumer protection laws, which can lead to enforcement actions and penalties for non-compliance[57]. - The Dodd-Frank Act prohibits mortgage originators from receiving compensation based on the terms of residential mortgage loans, ensuring fair lending practices[58]. - The Company is required to comply with FDICIA regulations due to having total assets of over $1 billion, which includes providing management's report on the effectiveness of internal controls over financial reporting[108]. Risk Management - The Company is subject to various risks including market, liquidity, credit, operational, legal, compliance, reputational, and strategic risks that could materially affect its financial condition[74]. - The allowance for loan losses is reviewed quarterly by the Board of Directors, and if assumptions about collectability are incorrect, it may lead to increased provisions and charges to income[76]. - The company may incur significant losses due to ineffective risk management processes, which could affect financial performance[120]. - Cybersecurity threats pose significant risks, including potential financial losses and damage to reputation due to breaches of information systems[112]. - The economic qualitative reserve factor for various loan portfolios was decreased by 15 basis points in 2022, returning to pre-pandemic levels, reflecting improving economic conditions[213]. Employee and Community Engagement - As of December 31, 2022, Union employed 188 full-time employees, emphasizing a supportive workplace culture[20]. - Union Bank focuses on community banking, providing services through 18 banking offices and several ATMs in northern Vermont and New Hampshire[18]. - Union has received an "Outstanding" rating from its most recent Community Reinvestment Act compliance examination by the FDIC[44]. Market Conditions - The rapid increase in interest rates initiated by the Fed in 2022 and 2023 has led to higher deposit rates, increasing competitive pressures for deposits[25]. - Inflationary pressures are expected to remain elevated throughout 2023, potentially impacting the ability of business customers to repay loans and adversely affecting the company's financial condition[124]. - General market and economic conditions, including interest rates and inflation, continue to impact the company's operations and may lead to increased loan delinquencies[125]. Capital and Investment - As of December 31, 2022, Union's Tier I and Total Risk Based Capital Ratios were 12.9% and 14.0% respectively, with a Leverage Capital Ratio of 7.8%, indicating it is well capitalized[52]. - The Company has not elected to become a financial holding company, limiting its activities to banking and related services[37]. - The Company may need to raise additional capital in the future, which may not be available on acceptable terms, potentially leading to operational restrictions[105]. Accounting Policies - The Company has established critical accounting policies that significantly affect the reported amounts of assets, liabilities, revenues, and expenses[152]. - The allowance for loan losses (ALL) is a critical accounting policy requiring significant judgments and estimates based on the collectability of the loan portfolio[153]. - The company anticipates that the adoption of the CECL model will have an immaterial impact on its consolidated financial statements and regulatory capital ratios as of January 1, 2023[155].

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: September 30, 2022 Commission file number: 001-15985 UNION BANKSHARES, INC. VT 03-0283552 20 LOWER MAIN STREET, P.O. BOX 667 MORRISVILLE, VT 05661 Registrant's telephone number: 802-888-6600 Former name, former add ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 2022 Commission file number: 001-15985 UNION BANKSHARES, INC. VT 03-0283552 20 LOWER MAIN STREET, P.O. BOX 667 MORRISVILLE, VT 05661 Registrant's telephone number: 802-888-6600 Former name, former address ...

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: March 31, 2022 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Commission file number: 001-15985 UNION BANKSHARES, INC. VT 03-0283552 20 LOWER MAIN STREET, P.O. BOX 667 MORRISVILLE, VT 05661 Registrant's telephone number: 802-888-6600 Former name, former address ...

Financial Performance - The Company's consolidated net income for 2021 was $13.2 million, an increase of 3.1% from $12.8 million in 2020, with basic earnings per share rising to $2.94 from $2.86[159]. - Net interest income increased by $4.1 million, or 13.0%, to $35.7 million in 2021, while the net interest margin decreased to 3.38% from 3.57%[171]. - Noninterest income decreased by $3.0 million, or 19.0%, impacting overall profitability despite the increase in net interest income[159]. - The return on average assets decreased to 1.16% in 2021 from 1.33% in 2020, while the return on average equity decreased to 15.92% from 16.87%[165]. - The effective federal corporate income tax rate was 16.1% for 2021, up from 15.5% in 2020[183]. Asset and Deposit Growth - Total consolidated assets grew by 10.2% to $1.2 billion as of December 31, 2021, with total investments increasing by 151.8% to $269.0 million[161]. - Customer deposits rose by $100.8 million, or 10.1%, reaching $1.1 billion, reducing reliance on wholesale funding[162]. - Total consolidated assets grew by $111.8 million, or 10.2%, reaching $1.2 billion at December 31, 2021[186]. - Total deposits increased by $100.8 million, or 10.1%, to $1.1 billion at December 31, 2021[187]. Loan Portfolio and Credit Quality - Approximately 50% of the loan portfolio is comprised of commercial and commercial real estate loans, which historically pose greater credit risks[81]. - Nonperforming loans increased by $1.8 million, or 62.5%, from 2020 to 2021, rising from 0.27% to 0.39% of total assets[206]. - Total nonperforming assets reached $4.748 million in 2021, compared to $2.971 million in 2020[205]. - The allowance for loan losses (ALL) to total loans outstanding was 1.04% in 2021, slightly up from 1.03% in 2020[206]. - The ALL to nonperforming loans ratio decreased from 283.16% in 2020 to 175.57% in 2021[206]. Regulatory Compliance and Capital Management - The Company is subject to regulation and supervision by the FRB, FDIC, and DFR, ensuring compliance with banking laws and regulations[29]. - Union's Tier I and Total Risk Based Capital Ratios were 14.1% and 15.3% respectively, with a Leverage Capital Ratio of 8.4%, indicating it is well capitalized under regulatory guidelines[54]. - The Company is subject to capital standards established by the FDIC and the FRB, which include a minimum common equity Tier 1 capital ratio of 4.5% and a minimum Tier 1 risk-based ratio of 6.0%[49]. - The FRB has the authority to prohibit dividends by bank holding companies if their actions constitute unsafe or unsound practices, emphasizing the importance of maintaining adequate capital[43]. Economic and Market Conditions - Economic conditions, including interest rates and inflation, have adversely affected the company's financial condition and may continue to do so[120]. - The ongoing COVID-19 pandemic has resulted in significant economic contraction, with a dramatic increase in national unemployment in 2020[124]. - Financial losses may arise from credit losses due to financial stress experienced by borrowers, particularly in the hospitality, healthcare, retail, and restaurant industries[125]. - The lingering impacts of COVID-19 may continue to adversely affect the company's business, including capital, liquidity, and asset valuations, even after the outbreak subsides[126]. Operational Risks and Challenges - The company faces operational risks from potential failures in its systems or those of third-party vendors, which could lead to financial losses and reputational damage[107]. - Cybersecurity threats, including data breaches and attacks, pose significant risks to the company's operations and customer data integrity[108]. - The effectiveness of the company's risk management processes may not fully anticipate economic outcomes, leading to potential financial losses[117]. - The company relies on third-party vendors for critical infrastructure, and any issues with these vendors could disrupt business operations[115]. Employee and Workplace Culture - The Company employs 194 full-time employees as of December 31, 2021, emphasizing a supportive workplace culture and competitive employee benefits[20]. - Salaries and wages increased by $1.2 million, or 9.3%, to $14.4 million in 2021 compared to 2020[181]. Community Engagement and Services - The Company offers a variety of services including commercial loans, residential mortgages, and online cash management services, catering to both individual and business clients[21]. - The Company aims to capitalize on local community relationships to grow its customer base and enhance service delivery[23]. - Union has received an "Outstanding" rating from its most recent CRA compliance examination by the FDIC, demonstrating its commitment to serving low and moderate-income residents[47].

[PART I FINANCIAL INFORMATION](index=4&type=section&id=PART%20I%20FINANCIAL%20INFORMATION) This section presents the company's interim consolidated financial statements, management's analysis, market risk disclosures, and internal controls [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements.) This section presents the unaudited interim consolidated financial statements of Union Bankshares, Inc. and its subsidiary, Union Bank, for the periods ended September 30, 2021, and December 31, 2020, along with detailed notes explaining the basis of presentation, significant accounting policies, and specific financial statement line items [Consolidated Balance Sheets](index=4&type=section&id=Consolidated%20Balance%20Sheets) Details the company's assets, liabilities, and equity at specific reporting dates Consolidated Balance Sheet Highlights (Dollars in thousands) | Metric | Sep 30, 2021 | Dec 31, 2020 | Change ($) | Change (%) | | :-------------------------------- | :----------- | :----------- | :--------- | :--------- | | **Assets** | | | | | | Cash and cash equivalents | $120,081 | $122,771 | $(2,690) | -2.19% | | Investment securities AFS | $184,204 | $105,763 | $78,441 | 74.17% | | Total investments | $185,387 | $106,810 | $78,577 | 73.57% | | Loans held for sale | $17,821 | $32,188 | $(14,367) | -44.64% | | Net loans | $763,661 | $762,752 | $909 | 0.12% | | Total assets | $1,158,286 | $1,093,554 | $64,732 | 5.92% | | **Liabilities** | | | | | | Total deposits | $1,040,644 | $994,302 | $46,342 | 4.66% | | Subordinated debentures and notes | $16,164 | $0 | $16,164 | N/A | | Total liabilities | $1,074,538 | $1,012,687 | $61,851 | 6.11% | | **Stockholders' Equity** | | | | | | Total stockholders' equity | $83,748 | $80,867 | $2,881 | 3.56% | [Consolidated Statements of Income](index=5&type=section&id=Consolidated%20Statements%20of%20Income) Reports the company's revenues, expenses, and net income over defined periods Consolidated Statements of Income Highlights (Dollars in thousands, except per share data) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | Change ($) | Change (%) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :--------------------------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Total interest and dividend income | $9,852 | $9,343 | $509 | 5.45% | $29,250 | $27,445 | $1,805 | 6.58% | | Total interest expense | $706 | $1,158 | $(452) | -39.03% | $2,786 | $3,976 | $(1,190) | -29.93% | | Net interest income | $9,146 | $8,185 | $961 | 11.74% | $26,464 | $23,469 | $2,995 | 12.76% | | Provision for loan losses | $0 | $800 | $(800) | -100.00% | $225 | $1,600 | $(1,375) | -85.94% | | Total noninterest income | $4,201 | $5,508 | $(1,307) | -23.73% | $9,961 | $11,014 | $(1,053) | -9.56% | | Total noninterest expenses | $8,548 | $7,995 | $553 | 6.92% | $24,390 | $22,278 | $2,112 | 9.48% | | Net income | $3,925 | $4,147 | $(222) | -5.35% | $9,792 | $9,011 | $781 | 8.67% | | Basic earnings per common share | $0.87 | $0.92 | $(0.05) | -5.43% | $2.18 | $2.01 | $0.17 | 8.46% | | Diluted earnings per common share | $0.87 | $0.92 | $(0.05) | -5.43% | $2.17 | $2.01 | $0.16 | 7.96% | | Dividends per common share | $0.33 | $0.32 | $0.01 | 3.13% | $0.99 | $0.96 | $0.03 | 3.13% | [Consolidated Statements of Comprehensive Income](index=6&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) Presents net income alongside other comprehensive income and loss components Consolidated Statements of Comprehensive Income Highlights (Dollars in thousands) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | Change ($) | Change (%) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :--------------------------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Net income | $3,925 | $4,147 | $(222) | -5.35% | $9,792 | $9,011 | $781 | 8.67% | | Other comprehensive (loss) income | $(1,189) | $(124) | $(1,065) | 858.87% | $(2,824) | $1,607 | $(4,431) | -275.79% | | Total comprehensive income | $2,736 | $4,023 | $(1,287) | -31.99% | $6,968 | $10,618 | $(3,650) | -34.38% | [Consolidated Statements of Changes in Stockholders' Equity](index=7&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Stockholders%27%20Equity) Outlines the movements in each component of stockholders' equity Changes in Stockholders' Equity (Dollars in thousands) | Metric | Balances Dec 31, 2020 | Net Income (9M 2021) | Other Comprehensive Loss (9M 2021) | Dividend Reinvestment Plan (9M 2021) | Cash Dividends Declared (9M 2021) | Stock Based Compensation (9M 2021) | Exercise of Stock Options (9M 2021) | Purchase of Treasury Stock (9M 2021) | Balances Sep 30, 2021 | | :-------------------------------- | :-------------------- | :------------------- | :----------------------------------- | :----------------------------------- | :---------------------------------- | :--------------------------------- | :--------------------------------- | :----------------------------------- | :-------------------- | | Common Stock (Amount) | $9,910 | — | — | — | — | $4 | $4 | — | $9,918 | | Additional paid-in capital | $1,393 | — | — | $21 | $0 | $270 | $44 | — | $1,728 | | Retained earnings | $71,097 | $9,792 | — | — | $(4,437) | — | — | — | $76,452 | | Treasury stock | $(4,169) | — | — | $9 | — | — | — | $(2) | $(4,162) | | Accumulated other comprehensive (loss) income | $2,636 | — | $(2,824) | — | — | — | — | — | $(188) | | Total stockholders' equity | $80,867 | $9,792 | $(2,824) | $30 | $(4,437) | $274 | $48 | $(2) | $83,748 | [Consolidated Statements of Cash Flows](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Categorizes cash inflows and outflows from operating, investing, and financing activities Consolidated Statements of Cash Flows Highlights (Dollars in thousands) | Metric | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :--------------------------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Net cash provided by (used in) operating activities | $27,295 | $(11,682) | $38,977 | -333.65% | | Net cash used in investing activities | $(87,966) | $(99,114) | $11,148 | -11.25% | | Net cash provided by financing activities | $57,981 | $124,139 | $(66,158) | -53.29% | | Net (decrease) increase in cash and cash equivalents | $(2,690) | $13,343 | $(16,033) | -120.16% | | Cash and cash equivalents, End of period | $120,081 | $64,477 | $55,604 | 86.24% | [Notes to Unaudited Interim Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Unaudited%20Interim%20Consolidated%20Financial%20Statements) Provides essential explanatory details and disclosures for the interim financial statements [Note 1. Basis of Presentation](index=10&type=section&id=Note%201.%20Basis%20of%20Presentation) Describes the accounting principles and reporting standards applied to the financial statements - The unaudited interim consolidated financial statements are prepared in conformity with GAAP for interim financial information and general banking industry practices, consistent with the 2020 Annual Report on Form 10-K[23](index=23&type=chunk) - The Company is a 'smaller reporting company' and has elected to provide scaled disclosures, including two-year financial statements for income, comprehensive income, cash flows, and changes in stockholders' equity[24](index=24&type=chunk) [Note 2. Risks and Uncertainties](index=11&type=section&id=Note%202.%20Risks%20and%20Uncertainties) Outlines potential risks and their impact, including ongoing effects of the COVID-19 pandemic - The COVID-19 pandemic continues to pose risks, though health and economic conditions are trending positively as of September 30, 2021, a resurgence could adversely affect business, financial condition, and results of operations[29](index=29&type=chunk) - The Company has not experienced COVID-19 related charge-offs, but asset quality could worsen if economic conditions deteriorate, loan modifications for COVID-19 affected borrowers totaled **$145.6 million**, with **$748 thousand** remaining under modified terms as of September 30, 2021[31](index=31&type=chunk)[32](index=32&type=chunk)[38](index=38&type=chunk) - All capital ratios exceed regulatory requirements, and the Company believes it has sufficient capital to withstand a double-dip recession, liquidity sources remain accessible, and customer deposits significantly increased due to PPP loan proceeds and government assistance[33](index=33&type=chunk)[34](index=34&type=chunk) - The Company originated **$102.1 million** in PPP loans, with **$73.9 million** forgiven by the SBA as of September 30, 2021, these loans are fully guaranteed by the U.S. Government, subject to borrower eligibility[40](index=40&type=chunk) [Note 3. Legal Contingencies](index=13&type=section&id=Note%203.%20Legal%20Contingencies) Addresses potential liabilities arising from ongoing legal and other proceedings - Management believes that any liability from ongoing legal and other proceedings will not have a material adverse effect on the Company's consolidated financial condition or results of operations[41](index=41&type=chunk) [Note 4. Per Share Information](index=13&type=section&id=Note%204.%20Per%20Share%20Information) Details the calculation of basic and diluted earnings per common share Per Share Information (Dollars in thousands, except per share data) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income | $3,925 | $4,147 | $9,792 | $9,011 | | Weighted average common shares outstanding for basic EPS | 4,485,046 | 4,475,145 | 4,482,678 | 4,474,061 | | Dilutive effect of stock-based awards | 27,512 | 17,697 | 25,474 | 17,660 | | Weighted average common and potential common shares for diluted EPS | 4,512,558 | 4,492,842 | 4,508,152 | 4,491,721 | | Basic EPS | $0.87 | $0.92 | $2.18 | $2.01 | | Diluted EPS | $0.87 | $0.92 | $2.17 | $2.01 | [Note 5. Recent Accounting Pronouncements](index=13&type=section&id=Note%205.%20Recent%20Accounting%20Pronouncements) Discusses the expected impact and adoption status of new accounting standards - The Company, as a smaller reporting company, will delay the adoption of ASU No. 2016-13 (CECL) until fiscal years beginning after December 31, 2022, and has an implementation team in place[43](index=43&type=chunk) - ASU No. 2020-04 provides temporary optional guidance for reference rate reform (LIBOR transition), which is not expected to materially impact the Company's financial statements[44](index=44&type=chunk) - Interagency guidance on COVID-19 related loan modifications clarifies that short-term modifications (six months or less) for current borrowers are not considered Troubled Debt Restructurings (TDRs), with no material impact expected on financial statements[45](index=45&type=chunk) [Note 6. Investment Securities](index=14&type=section&id=Note%206.%20Investment%20Securities) Provides a breakdown of investment securities and their fair value measurements Debt Securities Available-for-Sale (AFS) (Dollars in thousands) | Category | Sep 30, 2021 Fair Value | Dec 31, 2020 Fair Value | Change ($) | Change (%) | | :-------------------------------- | :---------------------- | :---------------------- | :--------- | :--------- | | U.S. Government-sponsored enterprises | $30,279 | $6,548 | $23,731 | 362.42% | | Agency mortgage-backed | $117,401 | $62,352 | $55,049 | 88.29% | | State and political subdivisions | $28,212 | $28,461 | $(249) | -0.87% | | Corporate | $8,312 | $8,402 | $(90) | -1.07% | | Total | $184,204 | $105,763 | $78,441 | 74.17% | Gross Unrealized Losses on AFS Debt Securities (Dollars in thousands) | Category | Sep 30, 2021 Gross Unrealized Losses | Dec 31, 2020 Gross Unrealized Losses | Change ($) | Change (%) | | :-------------------------------- | :----------------------------------- | :----------------------------------- | :--------- | :--------- | | U.S. Government-sponsored enterprises | $(303) | $(51) | $(252) | 494.12% | | Agency mortgage-backed | $(2,451) | $(78) | $(2,373) | 3042.31% | | State and political subdivisions | $(38) | $(3) | $(35) | 1166.67% | | Corporate | $(10) | $(75) | $65 | -86.67% | | Total | $(2,802) | $(207) | $(2,595) | 1253.62% | - The Company evaluates investment securities quarterly for other-than-temporary impairment (OTTI), no declines in value were deemed OTTI at September 30, 2021, as the decline was due to market conditions, not credit quality, and the Company has the ability to hold these securities[49](index=49&type=chunk)[50](index=50&type=chunk) [Note 7. Loans](index=16&type=section&id=Note%207.%20Loans) Details the composition and delinquency status of the company's loan portfolio Composition of Net Loans (Dollars in thousands) | Loan Class | Sep 30, 2021 | Dec 31, 2020 | Change ($) | Change (%) | | :-------------------- | :----------- | :----------- | :--------- | :--------- | | Residential real estate | $225,797 | $183,166 | $42,631 | 23.27% | | Construction real estate | $73,845 | $57,417 | $16,428 | 28.61% | | Commercial real estate | $322,212 | $320,627 | $1,585 | 0.49% | | Commercial | $64,156 | $108,861 | $(44,705) | -41.07% | | Consumer | $2,614 | $2,601 | $13 | 0.50% | | Municipal | $83,562 | $98,497 | $(14,935) | -15.16% | | Gross loans | $772,186 | $771,169 | $1,017 | 0.13% | | Allowance for loan losses | $(8,561) | $(8,271) | $(290) | 3.51% | | Net loans | $763,661 | $762,752 | $909 | 0.12% | - PPP loans classified as commercial loans decreased from **$66.2 million** (679 loans) at December 31, 2020, to **$28.2 million** (384 loans) at September 30, 2021, due to forgiveness[55](index=55&type=chunk) Delinquency Status of Loans (Dollars in thousands) | Status | Sep 30, 2021 | Dec 31, 2020 | Change ($) | Change (%) | | :-------------------- | :----------- | :----------- | :--------- | :--------- | | Current | $765,101 | $764,499 | $602 | 0.08% | | 30-59 Days Past Due | $719 | $3,471 | $(2,752) | -79.29% | | 60-89 Days Past Due | $656 | $278 | $378 | 135.97% | | 90 Days and Over and Accruing | $43 | $511 | $(468) | -91.58% | | Nonaccrual | $5,667 | $2,410 | $3,257 | 135.15% | | Total | $772,186 | $771,169 | $1,017 | 0.13% | [Note 8. Allowance for Loan Losses and Credit Quality](index=18&type=section&id=Note%208.%20Allowance%20for%20Loan%20Losses%20and%20Credit%20Quality) Explains the methodology and changes in the allowance for loan losses and credit quality metrics - The Allowance for Loan Losses (ALL) is maintained at **$8.6 million** at September 30, 2021, up from **$8.3 million** at December 31, 2020, the methodology for estimating ALL remained unchanged in Q3 2021[59](index=59&type=chunk)[175](index=175&type=chunk) - Economic qualitative factors for ALL were decreased by **5 bps** in Q3 2021 across several loan portfolios due to continued economic improvement and the majority of COVID-19 loan modifications no longer being active[64](index=64&type=chunk)[176](index=176&type=chunk) Changes in Allowance for Loan Losses (Dollars in thousands) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Balance at beginning of period | $8,505 | $6,888 | $8,271 | $6,122 | | Charge-offs | $(2) | $(3) | $(2) | $(60) | | Recoveries | $58 | $6 | $67 | $29 | | Net recoveries (charge-offs) | $56 | $3 | $65 | $(31) | | Provision for loan losses | $0 | $800 | $225 | $1,600 | | Balance at end of period | $8,561 | $7,691 | $8,561 | $7,691 | Impaired Loans (Dollars in thousands) | Metric | Sep 30, 2021 | Dec 31, 2020 | Change ($) | Change (%) | | :-------------------------------- | :----------- | :----------- | :--------- | :--------- | | Total Impaired Loans (Recorded Investment) | $6,961 | $4,621 | $2,340 | 50.64% | | Related Allowance | $46 | $58 | $(12) | -20.69% | | Government guaranties on impaired loans | $350 | $514 | $(164) | -31.91% | Troubled Debt Restructurings (TDRs) (Dollars in thousands) | Metric | Sep 30, 2021 | Dec 31, 2020 | Change ($) | Change (%) | | :-------------------- | :----------- | :----------- | :--------- | :--------- | | Number of TDR Loans | 37 | 45 | -8 | -17.78% | | Principal Balance | $2,352 | $2,864 | $(512) | -17.88% | [Note 9. Stock Based Compensation](index=24&type=section&id=Note%209.%20Stock%20Based%20Compensation) Outlines details of restricted stock units and stock options - As of September 30, 2021, **23,324** Restricted Stock Units (RSUs) remained unvested, with unrecognized compensation expense of **$319 thousand**, additionally, **2,500** incentive stock options granted in 2014 remained outstanding and exercisable, expiring in December 2021[86](index=86&type=chunk)[88](index=88&type=chunk) - In May 2021, the Board granted **1,220** RSUs to non-employee directors, vesting in May 2022, with **$27 thousand** in unrecognized compensation expense as of September 30, 2021[87](index=87&type=chunk) [Note 10. Subordinated Debentures and Notes](index=25&type=section&id=Note%2010.%20Subordinated%20Debentures%20and%20Notes) Describes the issuance and terms of subordinated debt - In August 2021, the Company completed a private placement of **$16.5 million** in fixed-to-floating rate subordinated notes due 2031, these notes bear an initial interest rate of **3.25%** until September 1, 2026, then reset quarterly to SOFR plus **263 basis points**[90](index=90&type=chunk) - The proceeds were used to provide additional capital to Union Bank for growth and general corporate purposes, the notes qualify as Tier 2 capital[91](index=91&type=chunk) [Note 11. Other Comprehensive Income](index=25&type=section&id=Note%2011.%20Other%20Comprehensive%20Income) Presents components of other comprehensive income and loss Accumulated Other Comprehensive Income (Loss), Net of Tax (Dollars in thousands) | Component | Sep 30, 2021 | Dec 31, 2020 | Change ($) | Change (%) | | :---------------------------------------- | :----------- | :----------- | :--------- | :--------- | | Net unrealized (losses) gains on investment securities AFS | $(188) | $2,636 | $(2,824) | -107.13% | Total Other Comprehensive (Loss) Income (Net-of-Tax, Dollars in thousands) | Period | 2021 | 2020 | | :-------------------------- | :----- | :----- | | Three Months Ended Sep 30 | $(1,189) | $(124) | | Nine Months Ended Sep 30 | $(2,824) | $1,607 | [Note 12. Fair Value Measurement](index=26&type=section&id=Note%2012.%20Fair%20Value%20Measurement) Explains the fair value hierarchy and valuation methods - The Company uses a three-level fair value hierarchy (Level 1: quoted prices in active markets; Level 2: observable inputs; Level 3: unobservable inputs), investment securities AFS are valued using Level 2 inputs, while mutual funds use Level 1 inputs[95](index=95&type=chunk)[96](index=96&type=chunk)[97](index=97&type=chunk) - There were no transfers between Level 1 and Level 2, nor any Level 3 assets, during the reported periods, certain other assets and liabilities are measured at fair value on a nonrecurring basis, but were not material[98](index=98&type=chunk) [Note 13. Subsequent Events](index=29&type=section&id=Note%2013.%20Subsequent%20Events) Reports significant events occurring after the reporting period - On October 20, 2021, the Company declared a regular quarterly cash dividend of **$0.33 per share**, payable November 4, 2021[104](index=104&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=30&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations.) This section provides management's perspective on the Company's financial performance and condition, highlighting key factors, trends, and significant changes for the periods presented, it includes an overview of operations, detailed analysis of income and expenses, and a review of financial health metrics [GENERAL](index=30&type=section&id=GENERAL) Establishes the scope and context for the management's discussion and analysis - The discussion and analysis focuses on material effects on financial position and results of operations for the periods ended September 30, 2021, and December 31, 2020, and should be read with the consolidated financial statements[107](index=107&type=chunk) [CAUTIONARY ADVICE ABOUT FORWARD LOOKING STATEMENTS](index=30&type=section&id=CAUTIONARY%20ADVICE%20ABOUT%20FORWARD%20LOOKING%20STATEMENTS) Warns readers about the inherent uncertainties and risks associated with forward-looking information - The report contains forward-looking statements subject to uncertainties and risks, including general economic conditions, competitive pressures, interest rate changes, regulatory changes, and the ongoing effects of the COVID-19 pandemic[110](index=110&type=chunk)[111](index=111&type=chunk)[112](index=112&type=chunk)[113](index=113&type=chunk) - Investors are cautioned not to place undue reliance on forward-looking statements, which speak only as of their date and are not updated unless required by law[113](index=113&type=chunk) [Non-GAAP Financial Measures](index=31&type=section&id=Non-GAAP%20Financial%20Measures) Explains the use and reconciliation of non-GAAP financial metrics for performance evaluation - The Company uses non-GAAP financial measures like tax-equivalent net interest income and net interest margin, believing they are useful for evaluating financial performance and comparisons, but they should be considered supplemental to GAAP measures[115](index=115&type=chunk) [CRITICAL ACCOUNTING POLICIES](index=31&type=section&id=CRITICAL%20ACCOUNTING%20POLICIES) Identifies key accounting policies that require significant management judgment and estimation - Critical accounting policies involve significant judgments and assumptions, including the Allowance for Loan Losses (ALL), evaluation of investment securities for OTTI, and valuation of intangible assets, no changes to these policies have occurred since the 2020 Annual Report[117](index=117&type=chunk)[118](index=118&type=chunk) [OVERVIEW](index=31&type=section&id=OVERVIEW) Provides a high-level summary of the company's financial performance and strategic initiatives - In August 2021, the Company completed a private placement of **$16.5 million** in fixed-to-floating rate subordinated notes due 2031 to support Union Bank's growth and for general corporate purposes[120](index=120&type=chunk)[121](index=121&type=chunk) - Consolidated net income decreased **5.4%** to **$3.9 million** for Q3 2021 YoY, but increased **8.7%** to **$9.8 million** for the nine months ended September 30, 2021 YoY[122](index=122&type=chunk)[127](index=127&type=chunk) - Total assets increased **5.9%** to **$1.16 billion** at September 30, 2021, from **$1.09 billion** at December 31, 2020, total capital increased **3.56%** to **$83.7 million**[127](index=127&type=chunk)[129](index=129&type=chunk) Key Financial Ratios | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Return on average assets | 1.39 % | 1.68 % | 1.17 % | 1.29 % | | Return on average equity | 18.50 % | 21.50 % | 15.93 % | 16.09 % | | Net interest margin | 3.44 % | 3.57 % | 3.39 % | 3.66 % | | Efficiency ratio | 63.47 % | 57.85 % | 66.30 % | 63.93 % | | Nonperforming assets to total assets | 0.50 % | 0.34 % | 0.50 % | 0.34 % | | Total capital to risk weighted assets | 16.16 % | 13.65 % | 16.16 % | 13.65 % | [RESULTS OF OPERATIONS](index=33&type=section&id=RESULTS%20OF%20OPERATIONS) Analyzes the company's revenues, expenses, and profitability over the reporting period [Net Interest Income](index=33&type=section&id=Net%20Interest%20Income) Examines the primary source of earnings from interest-earning assets and interest-bearing liabilities - Net interest income increased by **$961 thousand** (**11.74%**) to **$9.1 million** for Q3 2021 YoY, and by **$3.0 million** (**12.76%**) to **$26.5 million** for the nine months ended September 30, 2021 YoY[122](index=122&type=chunk)[123](index=123&type=chunk)[140](index=140&type=chunk) - The net interest margin decreased by **13 bps** to **3.44%** for Q3 2021 YoY and by **27 bps** to **3.39%** for the nine months ended September 30, 2021 YoY, primarily due to lower asset yields despite lower interest expense on deposits[139](index=139&type=chunk)[142](index=142&type=chunk) - Interest expense decreased due to lower rates paid on customer deposits, despite increases in average deposit balances, the average rate paid on interest-bearing liabilities decreased **30 bps** for Q3 2021 YoY and **31 bps** for the nine months ended September 30, 2021 YoY[138](index=138&type=chunk)[141](index=141&type=chunk) - PPP loans contributed **$777 thousand** in interest income and origination fees for Q3 2021 and **$2.5 million** for the nine months ended September 30, 2021[128](index=128&type=chunk) [Provision for Loan Losses](index=37&type=section&id=Provision%20for%20Loan%20Losses) Discusses the expense set aside for potential loan defaults - No provision for loan losses was recorded for Q3 2021, compared to **$800 thousand** in Q3 2020, for the nine months ended September 30, 2021, the provision was **$225 thousand**, down from **$1.6 million** in the same period of 2020[150](index=150&type=chunk) - The higher provision in 2020 was due to adjustments to economic qualitative factors at the onset of the COVID-19 pandemic[124](index=124&type=chunk)[150](index=150&type=chunk) [Noninterest Income](index=38&type=section&id=Noninterest%20Income) Details income from sources other than interest on loans and investments Noninterest Income (Dollars in thousands) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | Change ($) | Change (%) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :--------------------------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Trust income | $216 | $173 | $43 | 24.9% | $599 | $524 | $75 | 14.3% | | Service fees | $1,720 | $1,539 | $181 | 11.8% | $4,824 | $4,320 | $504 | 11.7% | | Net gains on sales of loans held for sale | $1,929 | $3,315 | $(1,386) | -41.8% | $3,974 | $5,354 | $(1,380) | -25.8% | | Income from MSRs, net | $256 | $297 | $(41) | -13.8% | $210 | $376 | $(166) | -49.1% | | Total noninterest income | $4,201 | $5,508 | $(1,307) | -23.7% | $9,961 | $11,014 | $(1,053) | -9.6% | - The decrease in noninterest income was primarily due to a **$1.4 million** decrease in net gains on sales of loans held for sale for both the three and nine-month periods, reflecting management's decision to slow sales to utilize excess liquidity[125](index=125&type=chunk)[151](index=151&type=chunk) - Service fees increased due to higher overdraft fees, ATM network fees, loan servicing fees, and merchant program fees[152](index=152&type=chunk) [Noninterest Expense](index=39&type=section&id=Noninterest%20Expense) Covers operating expenses not directly related to interest-earning assets Noninterest Expense (Dollars in thousands) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | Change ($) | Change (%) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :-------------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Salaries and wages | $3,918 | $3,718 | $200 | 5.4% | $10,554 | $9,668 | $886 | 9.2% | | Employee benefits | $1,192 | $1,204 | $(12) | -1.0% | $3,564 | $3,417 | $147 | 4.3% | | Equipment expense | $872 | $770 | $102 | 13.2% | $2,542 | $2,266 | $276 | 12.2% | | Professional fees | $191 | $185 | $6 | 3.2% | $709 | $526 | $183 | 34.8% | | FDIC insurance assessment | $221 | $121 | $100 | 82.6% | $577 | $328 | $249 | 75.9% | | Total noninterest expense | $8,548 | $7,995 | $553 | 6.9% | $24,390 | $22,278 | $2,112 | 9.5% | - Salaries and wages increased due to lower deferred loan origination costs (especially from PPP loan forgiveness), annual salary increases, and higher accruals for incentive plan payments[154](index=154&type=chunk) - Equipment expenses rose due to increased software license and maintenance costs[154](index=154&type=chunk) [Provision for Income Taxes](index=40&type=section&id=Provision%20for%20Income%20Taxes) Reports the expense related to federal and state income taxes Provision for Income Taxes (Dollars in thousands) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | Change ($) | Change (%) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :-------------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Net provision for income taxes | $874 | $751 | $123 | 16.38% | $2,018 | $1,594 | $424 | 26.60% | | Effective federal corporate income tax rate | 17.9% | 15.8% | 2.1% pts | 13.29% | 16.6% | 15.1% | 1.5% pts | 9.93% | - Amortization expense related to limited partnership investments and low-income housing/rehabilitation tax credits are included as components of income tax expense[156](index=156&type=chunk) [FINANCIAL CONDITION](index=40&type=section&id=FINANCIAL%20CONDITION) Assesses the company's financial health, including its asset quality, liquidity, and capital [Loans Held for Sale and Loan Portfolio](index=41&type=section&id=Loans%20Held%20for%20Sale%20and%20Loan%20Portfolio) Analyzes the composition and changes in the company's loan portfolio - Total loans (including loans held for sale) decreased by **$13.4 million** (**1.7%**) to **$790.0 million** at September 30, 2021, from **$803.4 million** at December 31, 2020[161](index=161&type=chunk) - The loan portfolio composition shifted, with a decrease in commercial loans (due to PPP forgiveness) and municipal loans, offset by an increase in residential loans[161](index=161&type=chunk) - The Company sold **$164.2 million** of qualified residential real estate loans to the secondary market in the first nine months of 2021, down from **$187.5 million** in 2020, to manage long-term interest rate risk and generate fee income[163](index=163&type=chunk) - Government-guaranteed loans, including **$28.2 million** in PPP loans, totaled **$31.8 million** at September 30, 2021[164](index=164&type=chunk) [Asset Quality](index=42&type=section&id=Asset%20Quality) Evaluates the credit risk and performance of the company's assets Nonperforming Assets (Dollars in thousands) | Metric | Sep 30, 2021 | Dec 31, 2020 | Sep 30, 2020 | | :--------------------------------------- | :----------- | :----------- | :----------- | | Nonaccrual loans | $5,667 | $2,410 | $2,451 | | Accruing loans 90+ days delinquent | $43 | $511 | $964 | | Total nonperforming loans | $5,710 | $2,921 | $3,415 | | OREO | $47 | $50 | $0 | | Total nonperforming assets | $5,757 | $2,971 | $3,415 | | Nonperforming assets to total assets | 0.50 % | 0.27 % | 0.34 % | - Nonaccrual loans increased by **$3.3 million** (**135.1%**) since December 31, 2020, primarily due to a CRE hospitality relationship, accruing loans 90+ days delinquent decreased by **$468 thousand** (**91.6%**)[171](index=171&type=chunk) - The Vermont unemployment rate was **2.4%** in September 2021 (vs. **4.2%** in Sep 2020), and New Hampshire was **2.9%** (vs. **6.0%** in Sep 2020), both favorable compared to the national rate[169](index=169&type=chunk) [Allowance for Loan Losses](index=43&type=section&id=Allowance%20for%20Loan%20Losses) Discusses the reserve established to cover potential loan losses - The ALL was **$8.6 million** at September 30, 2021, up from **$8.3 million** at December 31, 2020, management believes the ALL is appropriate to cover probable credit losses[175](index=175&type=chunk)[181](index=181&type=chunk) - The specific reserve allocated to individually identified impaired loans decreased by **$12 thousand** following the September 30, 2021 impairment evaluation[177](index=177&type=chunk) ALL to Loans Not Held for Sale and Nonperforming Loans | Metric | Sep 30, 2021 | Dec 31, 2020 | Sep 30, 2020 | | :--------------------------------------- | :----------- | :----------- | :----------- | | ALL to loans not held for sale | 1.11 % | 1.07 % | 1.00 % | | ALL to nonperforming loans | 149.93 % | 283.16 % | 225.21 % | [Investment Activities](index=44&type=section&id=Investment%20Activities) Reviews the company's investment portfolio and strategies - Investment securities AFS increased by **$78.4 million** to **$184.2 million** at September 30, 2021, representing **15.9%** of total assets, as the Company used excess liquidity to seek higher yields[182](index=182&type=chunk) - Net unrealized losses on AFS investment securities were **$238 thousand** at September 30, 2021, a shift from net unrealized gains of **$3.3 million** at December 31, 2020[182](index=182&type=chunk) [Deposits](index=45&type=section&id=Deposits) Analyzes the sources and types of customer deposits - Average total deposits grew by **$199.0 million** (**24.3%**) for the nine months ended September 30, 2021 YoY, driven by PPP loan proceeds, government stimulus, and reduced customer spending[184](index=184&type=chunk) - Time deposits decreased as higher-rate accounts matured, with customers shifting funds to other deposit accounts[184](index=184&type=chunk) Average Deposits by Account Type and Rate (9 Months Ended Sep 30, 2021 vs 2020) | Deposit Type | Average Amount (2021) | Average Rate (2021) | Average Amount (2020) | Average Rate (2020) | | :-------------------------- | :-------------------- | :------------------ | :-------------------- | :------------------ | | Noninterest bearing deposits | $234,243 | — | $167,845 | — | | Interest bearing checking accounts | $247,455 | 0.24 % | $188,286 | 0.38 % | | Money market accounts | $251,149 | 0.67 % | $197,637 | 1.05 % | | Savings accounts | $162,933 | 0.07 % | $119,105 | 0.12 % | | Total nontime deposits | $895,780 | 0.27 % | $672,873 | 0.44 % | | Total time deposits | $121,639 | 0.86 % | $145,574 | 1.35 % | | Total deposits | $1,017,419 | 0.34 % | $818,447 | 0.60 % | - The Company participates in CDARS and ICS programs, with **$116.1 million** in exchanged ICS deposits at September 30, 2021, retail brokered deposits of **$15.0 million** at December 31, 2020, were eliminated by September 30, 2021[185](index=185&type=chunk)[186](index=186&type=chunk)[187](index=187&type=chunk) [Borrowings](index=46&type=section&id=Borrowings) Details the company's short-term and long-term debt obligations - Borrowed funds from FHLB were **$7.0 million** at September 30, 2021, at a weighted average rate of **3.13%**, slightly down from **$7.2 million** at December 31, 2020[190](index=190&type=chunk) - FHLB letters of credit totaling **$32.7 million** were used to collateralize municipal deposits at September 30, 2021[191](index=191&type=chunk) - The Company issued **$16.5 million** in subordinated notes in August 2021, presented net of **$336 thousand** in unamortized issuance costs[192](index=192&type=chunk) [Commitments, Contingent Liabilities, and Off-Balance-Sheet Arrangements](index=46&type=section&id=Commitments%2C%20Contingent%20Liabilities%2C%20and%20Of%20-Balance-Sheet%20Arrangements) Describes contractual obligations and potential liabilities not on the balance sheet Contractual or Notional Amount of Financial Instruments Representing Credit Risk (Dollars in thousands) | Instrument | Sep 30, 2021 | Dec 31, 2020 | Change ($) | Change (%) | | :------------------------------------------------------ | :----------- | :----------- | :--------- | :--------- | | Commitments to originate loans | $93,629 | $61,431 | $32,198 | 52.41% | | Unused lines of credit | $151,287 | $132,502 | $18,785 | 14.18% | | Standby and commercial letters of credit | $2,364 | $3,115 | $(751) | -24.11% | | Total | $251,389 | $200,084 | $51,305 | 25.64% | - The increase in commitments to originate loans is primarily due to a **$28.8 million** increase in commercial real estate and commercial construction loan commitments[196](index=196&type=chunk) - The Company did not hold any derivative or hedging instruments at September 30, 2021, or December 31, 2020[197](index=197&type=chunk) [Liquidity](index=47&type=section&id=Liquidity) Assesses the company's ability to meet its short-term financial obligations - The Company maintains access to significant liquidity sources, including unused FHLB lines of credit (**$98.8 million**), an IDEAL Way Line of Credit (**$551 thousand**), and a federal funds line of credit (**$15.0 million**)[199](index=199&type=chunk)[200](index=200&type=chunk)[201](index=201&type=chunk) - Management believes the Company has sufficient liquidity to meet all reasonable borrower, depositor, and creditor needs[202](index=202&type=chunk) [Capital Resources](index=47&type=section&id=Capital%20Resources) Reviews the company's equity and regulatory capital adequacy - Stockholders' equity increased from **$80.9 million** at December 31, 2020, to **$83.7 million** at September 30, 2021, driven by net income and stock-based compensation, partially offset by AOCI decrease and cash dividends[205](index=205&type=chunk) - The Company's Board reauthorized a limited stock repurchase plan for 2021, allowing repurchases of up to **2,500 shares** per quarter, **97 shares** were repurchased for **$2 thousand** in the first nine months of 2021[207](index=207&type=chunk) Capital Adequacy Ratios (as of September 30, 2021, Dollars in thousands) | Metric | Company Actual Ratio | Company Minimum for Adequacy | Union Actual Ratio | Union Minimum for Adequacy | Union Minimum for Well Capitalized | | :--------------------------------------- | :------------------- | :--------------------------- | :----------------- | :--------------------------- | :--------------------------------- | | Total capital to risk weighted assets | 16.16 % | 8.00 % | 15.91 % | 8.00 % | 10.00 % | | Tier I capital to risk weighted assets | 12.45 % | 6.00 % | 14.65 % | 6.00 % | 8.00 % | | Common Equity Tier 1 to risk weighted assets | 12.45 % | 4.50 % | 14.65 % | 4.50 % | 6.50 % | | Tier I capital to average assets | 7.26 % | 4.00 % | 8.54 % | 4.00 % | 5.00 % | - Both the Company and Union met all capital adequacy requirements, and Union exceeded the 'well capitalized' thresholds under FDIC's Prompt Corrective Action framework[213](index=213&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=49&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk.) This item is omitted in accordance with regulatory relief available to smaller reporting companies - This section is omitted as permitted by SEC Release Nos. 33-10513 for smaller reporting companies[216](index=216&type=chunk) [Item 4. Controls and Procedures](index=49&type=section&id=Item%204.%20Controls%20and%20Procedures.) This section details the evaluation of the Company's disclosure controls and procedures and confirms no material changes to internal controls over financial reporting during the quarter [Evaluation of Disclosure Controls and Procedures](index=49&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) Confirms the effectiveness of the company's disclosure controls - The CEO and CFO, with the Disclosure Control Committee, concluded that the Company's disclosure controls and procedures were effective as of September 30, 2021[217](index=217&type=chunk) [Changes in Internal Controls over Financial Reporting](index=49&type=section&id=Changes%20in%20Internal%20Controls%20over%20Financial%20Reporting) Reports any material changes to internal controls during the quarter - There were no material changes in the Company's internal control over financial reporting during the most recent fiscal quarter[218](index=218&type=chunk) [PART II OTHER INFORMATION](index=50&type=section&id=PART%20II%20OTHER%20INFORMATION) Covers legal proceedings, risk factors, equity sales, and exhibits [Item 1. Legal Proceedings](index=50&type=section&id=Item%201.%20Legal%20Proceedings.) Management's opinion on the materiality of legal proceedings - Management believes that any liability from various legal and other proceedings in the normal course of business is not expected to have a material adverse effect on the Company's consolidated financial condition or results of operations[220](index=220&type=chunk) [Item 1A. Risk Factors](index=50&type=section&id=Item%201A.%20Risk%20Factors.) No material changes to previously discussed risk factors - There have been no material changes in the risk factors discussed in the Company's 2020 Annual Report on Form 10-K[221](index=221&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=50&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds.) No unregistered sales or repurchases of equity securities during the quarter - The Company did not issue any unregistered shares or repurchase any equity securities during the quarter ended September 30, 2021[222](index=222&type=chunk) [Item 6. Exhibits](index=50&type=section&id=Item%206.%20Exhibits.) This section lists the exhibits filed as part of the Form 10-Q, including certifications and interactive data files - Exhibits include certifications from the CEO and CFO (Sections 302 and 906 of Sarbanes-Oxley Act) and Inline eXtensible Business Reporting Language (iXBRL) formatted financial statements[226](index=226&type=chunk)[228](index=228&type=chunk) [Signatures](index=50&type=section&id=Signatures) Official signatures of the Chief Executive Officer and Chief Financial Officer - The report is signed by David S. Silverman, Director, President and Chief Executive Officer, and Karyn J. Hale, Chief Financial Officer, on November 15, 2021[225](index=225&type=chunk)[226](index=226&type=chunk)