Union Bankshares(UNB) - 2023 Q3 - Quarterly Report

PART I FINANCIAL INFORMATION 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 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 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][163] - 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][132][207] Consolidated Statements of Income 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][129] - 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][152] Consolidated Statements of Comprehensive Loss 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] Consolidated Statements of Changes in Stockholders' Equity 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][132][207] Consolidated Statements of Cash Flows 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] - 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] - 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] Notes to Unaudited Interim Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the interim consolidated financial statements Note 1. Basis of Presentation 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][27][31] 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][43] Note 2. Legal Contingencies 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] Note 3. Per Share Information 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] Note 4. Recent Accounting Pronouncements 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][50][51] - ASU No. 2020-04 (Reference Rate Reform) is not expected to have a material impact on the Company's financial statements[49] - 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] Note 5. Investment Securities 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][183] - 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][57][184] Note 6. Loans 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][164][165] - 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] Note 7. Allowance for Credit Losses on Loans and Off-Balance Sheet Credit Exposures 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][178][180] 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][197] 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][174] Note 8. Stock Based Compensation 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] - 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] Note 9. Subordinated Notes 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] - 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][92][206] - Unamortized issuance costs were $270 thousand at September 30, 2023, down from $295 thousand at December 31, 2022[93] Note 10. Other Comprehensive Income (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][132][207] Note 11. Fair Value Measurement 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][102] - 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] Note 12. Subsequent Events 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] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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] Cautionary Advice About Forward Looking Statements 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] - The banking industry experienced significant volatility in 2023, with concerns related to liquidity, deposit outflows, unrealized securities losses, and interest rates[116] Non-GAAP Financial Measures 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][120] Critical Accounting Policies 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] - The adoption of CECL effective January 1, 2023, is a significant update to the Company's accounting policies[123] 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] 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][133] Results of Operations This section analyzes the Company's financial performance, focusing on net interest income, credit loss expense, noninterest income, and expenses Net Interest Income 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][152] - 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][145] 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) 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] Noninterest Income 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] - Wealth management income increased due to growth in managed fiduciary accounts and asset values[154] - 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] Noninterest Expenses 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] - 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] Provision for Income Taxes 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] - Amortization expense and tax credits from limited partnership investments are included in income tax expense, providing tax benefits[161] Financial Condition 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 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][166] - Real estate secured loans constituted 87.9% of total loans at September 30, 2023[165] - 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][171] Asset Quality 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] - The ACL on loans to total loans outstanding decreased to 0.67% at September 30, 2023, from 0.87% at December 31, 2022[175] Allowance for Credit Losses on Loans 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] - Management believes the ACL on loans is appropriate to cover expected credit losses, but future losses could exceed the current ACL[181] Investment Activities 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] - 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] - No declines in value were deemed impairment related to credit losses at September 30, 2023[184] 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] - 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][185] - Uninsured deposits totaled $362.7 million (29.7% of total deposits) at September 30, 2023[189] 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] - FHLB letters of credit totaling $42.4 million were used as collateral for public unit deposits at September 30, 2023[191] Commitments, Contingent Liabilities, and Of -Balance-Sheet Arrangements 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] - An ACL on off-balance sheet credit exposures of $1.2 million was recorded at September 30, 2023, following CECL adoption[197] 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] - 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] - The Company has not yet utilized the Federal Reserve's Bank Term Funding Program, which allows pledging investment portfolios at par[202][203] Capital Resources 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] - 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] 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][214] - 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][128] - 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][130] - 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] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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] Item 4. Controls and Procedures 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] - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[218] PART II OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal proceedings, risk factors, and equity transactions Item 1. Legal Proceedings 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] Item 1A. Risk Factors 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] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company did not issue any unregistered shares during the quarter ended September 30, 2023. The 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] 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] Item 6. Exhibits 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][226] - Unaudited consolidated financial statements for the quarter ended September 30, 2023, are provided in Inline eXtensible Business Reporting Language (iXBRL) format[222][226]