Union Bankshares(UNB) - 2021 Q3 - Quarterly Report

PART I FINANCIAL INFORMATION This section presents the company's interim consolidated financial statements, management's analysis, market risk disclosures, and internal controls Item 1. Financial Statements 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 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 | $2,881 | 3.56% | Consolidated Statements of Income Reports the company's revenues, expenses, and net income over defined periods Consolidated Statements of Income Highlights (Dollars in thousands, except per share data) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | Change ($) | 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 | $0.03 | 3.13% | Consolidated Statements of Comprehensive Income Presents net income alongside other comprehensive income and loss components Consolidated Statements of Comprehensive Income Highlights (Dollars in thousands) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | Change ($) | 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 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) | $83,748 | Consolidated Statements of Cash Flows Categorizes cash inflows and outflows from operating, investing, and financing activities Consolidated Statements of Cash Flows Highlights (Dollars in thousands) | Metric | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change ($) | 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 Provides essential explanatory details and disclosures for the interim financial statements Note 1. Basis of Presentation 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] - 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] Note 2. Risks and Uncertainties 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] - 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][32][38] - 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][34] - 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] Note 3. Legal Contingencies 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] Note 4. Per Share Information 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 | $2.01 | Note 5. Recent Accounting Pronouncements Discusses the expected impact and adoption status of new accounting standards - The Company, as a smaller reporting company, will delay the adoption of ASU No. 2016-13 (CECL) until fiscal years beginning after December 31, 2022, and has an implementation team in place[43] - ASU No. 2020-04 provides temporary optional guidance for reference rate reform (LIBOR transition), which is not expected to materially impact the Company's financial statements[44] - Interagency guidance on COVID-19 related loan modifications clarifies that short-term modifications (six months or less) for current borrowers are not considered Troubled Debt Restructurings (TDRs), with no material impact expected on financial statements[45] Note 6. Investment Securities Provides a breakdown of investment securities and their fair value measurements Debt Securities Available-for-Sale (AFS) (Dollars in thousands) | Category | Sep 30, 2021 Fair Value | Dec 31, 2020 Fair Value | Change ($) | 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) | $(2,595) | 1253.62% | - The Company evaluates investment securities quarterly for other-than-temporary impairment (OTTI), no declines in value were deemed OTTI at September 30, 2021, as the decline was due to market conditions, not credit quality, and the Company has the ability to hold these securities[49][50] Note 7. Loans Details the composition and delinquency status of the company's loan portfolio Composition of Net Loans (Dollars in thousands) | Loan Class | Sep 30, 2021 | Dec 31, 2020 | Change ($) | 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 $28.2 million (384 loans) at September 30, 2021, due to forgiveness[55] Delinquency Status of Loans (Dollars in thousands) | Status | Sep 30, 2021 | Dec 31, 2020 | Change ($) | 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 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][175] - 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][176] 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 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][88] - 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] Note 10. Subordinated Debentures and Notes Describes the issuance and terms of subordinated debt - In August 2021, the Company completed a private placement of $16.5 million in fixed-to-floating rate subordinated notes due 2031, these notes bear an initial interest rate of 3.25% until September 1, 2026, then reset quarterly to SOFR plus 263 basis points[90] - The proceeds were used to provide additional capital to Union Bank for growth and general corporate purposes, the notes qualify as Tier 2 capital[91] Note 11. Other Comprehensive Income Presents components of other comprehensive income and loss Accumulated Other Comprehensive Income (Loss), Net of Tax (Dollars in thousands) | Component | Sep 30, 2021 | Dec 31, 2020 | Change ($) | 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 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][96][97] - 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] Note 13. Subsequent Events 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] 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 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 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] CAUTIONARY ADVICE ABOUT FORWARD LOOKING STATEMENTS 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][111][112][113] - 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] Non-GAAP Financial Measures 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] CRITICAL ACCOUNTING POLICIES 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][118] 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][121] - 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][127] - 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][129] 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 Analyzes the company's revenues, expenses, and profitability over the reporting period Net Interest Income 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][123][140] - 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][142] - 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][141] - 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] Provision for Loan Losses 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 $1.6 million in the same period of 2020[150] - The higher provision in 2020 was due to adjustments to economic qualitative factors at the onset of the COVID-19 pandemic[124][150] Noninterest Income Details income from sources other than interest on loans and investments Noninterest Income (Dollars in thousands) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | Change ($) | 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 $1.4 million decrease in net gains on sales of loans held for sale for both the three and nine-month periods, reflecting management's decision to slow sales to utilize excess liquidity[125][151] - Service fees increased due to higher overdraft fees, ATM network fees, loan servicing fees, and merchant program fees[152] Noninterest Expense Covers operating expenses not directly related to interest-earning assets Noninterest Expense (Dollars in thousands) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | Change ($) | 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 | $2,112 | 9.5% | - Salaries and wages increased due to lower deferred loan origination costs (especially from PPP loan forgiveness), annual salary increases, and higher accruals for incentive plan payments[154] - Equipment expenses rose due to increased software license and maintenance costs[154] Provision for Income Taxes Reports the expense related to federal and state income taxes Provision for Income Taxes (Dollars in thousands) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | Change ($) | 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] FINANCIAL CONDITION Assesses the company's financial health, including its asset quality, liquidity, and capital Loans Held for Sale and Loan Portfolio 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] - 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] - 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] - Government-guaranteed loans, including $28.2 million in PPP loans, totaled $31.8 million at September 30, 2021[164] Asset Quality 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] - 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] Allowance for Loan Losses 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][181] - The specific reserve allocated to individually identified impaired loans decreased by $12 thousand following the September 30, 2021 impairment evaluation[177] 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 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] - 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] 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] - Time deposits decreased as higher-rate accounts matured, with customers shifting funds to other deposit accounts[184] 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][186][187] 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] - FHLB letters of credit totaling $32.7 million were used to collateralize municipal deposits at September 30, 2021[191] - The Company issued $16.5 million in subordinated notes in August 2021, presented net of $336 thousand in unamortized issuance costs[192] Commitments, Contingent Liabilities, and Off-Balance-Sheet Arrangements Describes contractual obligations and potential liabilities not on the balance sheet Contractual or Notional Amount of Financial Instruments Representing Credit Risk (Dollars in thousands) | Instrument | Sep 30, 2021 | Dec 31, 2020 | Change ($) | 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] - The Company did not hold any derivative or hedging instruments at September 30, 2021, or December 31, 2020[197] 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][200][201] - Management believes the Company has sufficient liquidity to meet all reasonable borrower, depositor, and creditor needs[202] Capital Resources 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] - 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] 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] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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] Item 4. Controls and Procedures 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 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] Changes in Internal Controls over Financial Reporting 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] PART II OTHER INFORMATION Covers legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings 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] Item 1A. Risk Factors 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] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] Item 6. Exhibits 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][228] 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][226]